Crowdfunding: rewriting the investment rules

Dear Mary, I’d like to start a new business, but I need money. I don’t know any big investors, but I have a lot of friends who believe in my idea and can invest a little. Is there a way for me to have a lot of little investors, instead of a few big ones?

You are not alone. In fact, there are so many other entrepreneurs in similar circumstances that earlier this year, Congress passed a law to address your situation. The Jumpstart Our Business Startups (JOBS) Act of 2012 allows for a wider pool of small investors, known as “crowdfunding.”

You may have already heard of websites like Kickstarter.com, where people can support business ideas by making small donations in exchange for something of value. The difference between these websites and the crowdfunding concept boils down to whether you’re getting a T-shirt or equity in the supported company. Under the JOBS Act, you could invest in a company for a relatively small amount of money, and receive an ownership stake.

Why isn’t everyone doing it? Well, it’s not quite legal (yet). The Securities and Exchange Commission (SEC) has until the end of the year to draft the crowdfunding regulations, but they’ve already requested more time.

We don’t know exactly what the final rules will look like, but there are some things we’re pretty sure about. Crowdfunded offerings will be limited to $1 million.

Under the new rules, crowdfund investors won’t have to qualify as “accredited investors,” which will allow these investors to invest in “the next Facebook” (or neighborhood food truck) without satisfying the $200,000 income or $1 million net worth accredited investor tests.

Investors with less than $100,000 in net assets or annual income will likely be limited to investing the greater of $2,000 or 5 percent of their annual income.

One of the big unknowns is how the SEC will regulate “solicitation,” which really just means securities advertising. If the regulations are liberal, we may see television commercials for the “next big thing,” or magazine ads offering investment opportunities.

Crowdfunding is very exciting — for businesses as well as for people who just want to make small investments in innovative businesses and ideas. Potentially, it could open up the previously secretive venture capital markets and level the playing field.

Of course, any time we have a new regulation, there are people who will abuse it. As an investor, be on the lookout for potential scams. And as a business, remember that you may be held liable for fraudulent offers posted on a crowdfunding portal.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached atmary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.