Join the Crowd? JOBS Act Opens Door to Capital — and Potential Risk– August 29, 2012

Signed into law earlier this year, the Jumpstart Our Business Startups Act (the Act) aims to provide entrepreneurs and growing businesses with access to more capital, ultimately spurring job growth. The Act will, conceptually at least, make it easier for private companies to either go public or stay private longer using the “crowdfunding” approach to investing.

Crowdfunding allows businesses to attract small investments from a larger pool of investors, providing more capital to grow their businesses. The Act will require the use of either an SEC-licensed intermediary or third-party platform, such as an online portal, through which investments must be made.

Below are a few of the pros and cons private companies need to consider:

Pros

The Act:

  • Reduces the amount of SEC regulation required to offer company shares to the public.

  • Offers small business owners liquidity through the ability to recapitalize.

  • Makes it easier to raise seed capital for a new business. Companies can raise up to $1 million in aggregate within a 12-month period.

  • Expands the pool of potential advisors. Private companies qualifying under the Act can have up to 2,000 accredited investors (up from 500 previously) or 500 unaccredited investors.

  • Allows businesses to advertise/solicit for new investors.

Cons

The Act:

  • Provides increased potential for fraud and abuse. Business owners will need to implement tight controls associated with the investment process; investors will need to conduct thorough due diligence on each opportunity.

  • Will require more compliance in certain areas due to an increased number of investors along with additional communication requirements, both of which may lead to increased compliance and professional costs.

  • Provides investment limits based on the investor’s annual income or net worth. An investor making an annual income, or with a net worth, of less than $100,000 can only invest $2,000 or 5% of his or her net worth or income, whichever is greater. An investor making or worth more than $100,000 can only invest up to 10%, subject to certain limitations.

Next Steps
The SEC likely won’t issue final compliance regulations to implement the Act until late this year. But tread carefully. The details of the opportunity can make a big difference if not carefully examined upfront. If you are approached about investing in a qualifying company using crowdfunding, or if you are a company looking to gain additional investors via the provisions of this Act, contact us first to discuss and evaluate your options.

Contact Rob MacKinlay at rmackinlay@cohencpa.com for more information.

 

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.