Tuesday, April 10, 2012

How the JOBS Act Helps Startups With Crowdfunding

President Obama recently signed the Jumpstart Our Business Startups (JOBS) Act which makes it easier for startups and SMB/SME to raise funds online.

Main highlights:

  • Small companies can increase their number of shareholders to1,000. This is double the amount that was allowed under the old regulations dating from the 1960s. Small businesses must now file with SEC when they reach 999 shareholders.
  • SEC regulations are also loosened to encourage crowdfunding. Small businesses can generate up to $2 million from various small investors.
  • Small businesses that want to go public also have it easier now. The ceiling for exception was raised from $5 million to $50 million. The logic behind this change is, that more investments will be made and more jobs will be created.
  • Companies are allowed to use advertisements to solicit investors; this was previously forbidden under an SEC regulation.
  • Is has become easier for companies to go public sooner. Furthermore, as an “Emerging Growth Company,” a SMB/SME can avoid the bulk of SEC regulations and fees in the first few years of being public.
  • Last but not least, the number of shareholders investing in a community bank is increased from 500 to 2,000.

JOBS Act allows companies that raise funds through crowdfunding to sell parts of their company or pay back the money. Before, they had to compensate investors by giving away rewards for different levels of investing. They would give investors a free copy of their product or free use of their software app for a certain period of time. Other companies opted for more creative compensation, such as dinner with the inventors.

With the new legislation, we can expect a slew of new crowfunding portals. If JOBS Act will also be a powerful instrument for creating new jobs remains to be seen.

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