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April 19, 2012

CROWDFUNDing: Coming to a startup near you?

The Jumpstart Our Business Startups (or JOBS) Act, signed into law by President Obama on April 5, 2012, aims to reduce securities law paperwork encountered by start-ups and early-stage companies that need investment capital to grow.

Title III of the JOBS Act, called the "CROWDFUND Act,"* will allow a start-up business to advertise by the internet to the general public to solicit small investments from a large number of people. At present, the Federal and state securities laws generally prohibit any company from publicly advertising any kind of investment securities for sale unless the company first files a draft prospectus with the U.S. Securities and Exchange Commission (the "SEC") and goes through the SEC registration process or otherwise fits within an exemption. The goal of the CROWDFUND Act is to provide an exemption from SEC registration for start-ups that fit within the limits described in the Act.

Dollar limits for issuer and investors. The exemption is limited to small companies. The total amount of securities sold to all investors during any 12-month period cannot exceed $1,000,000, including securities that are sold under other exemptions. Under the Act there is a cap on the amount that any one investor can purchase from the issuer: 

  • If the investor has annual income or net worth of less than $100,000, then the cap is the greatest of $2,000, or 5% percent of the investor's annual income or net worth.
  • If the investor's annual income or net worth is at least $100,000, then the cap is the greater of 10% of the investor's annual income or net worth, but no more than $100,000.

These caps are supposed to apply to the aggregate total of all securities that an investor purchases from all issuers during any 12-month period under the crowdfunding exemption. For example, if an investor's cap is $4,000, and the investor's initial purchase of crowdfund securities is $2,000 from Company A, then during the next 12 months the investor can purchase only $2,000 more in crowdfund securities, whether from Company A or from any other company.

Brokers and funding portals. The crowdfunding exemption requires that the securities be sold by a broker registered with the SEC, or by a "funding portal." A broker or a funding portal must register with the SEC and take certain delineated steps to assure that the crowdfund offering complies with law.

In the case of a funding portal, no director, officer, or partner of the funding portal, or any person occupying a similar position, is allowed to have any financial interest in the company being crowdfunded. Therefore, a company cannot be its own funding portal.

Company Information. One of the foremost goals of the securities laws is to make investors fully informed. In a crowdfund offering, at least 21 days before the first sale, the issuer and the broker or funding portal will be required to make available certain information to potential investors.

After the offering. Once the securities have been sold under the crowdfund exemption, they generally may not be re-sold by the purchaser for a period of one year following the date of purchase.

In lieu of becoming a traditional SEC reporting company under the Securities Exchange Act of 1934, with obligations to file SEC reports on Form 10-K, 10-Q and so forth, the SEC has been authorized to adopt rules that may require a crowdfunded company to file reports, at least annually, containing financial statements and results of operations.

State law. The CROWDFUND Act exempts crowdfunding from state securities laws, except for notice filings in the state where the company has its principal place of business and the state (if any) where purchasers of 50% or more of the securities reside.

When effective. The JOBS Act, including the CROWDFUND Act, was signed into law on April 5, but the crowdfunding exemption will not be available until the SEC adopts Rules under the Act. Congress directed the SEC to adopt Rules within 270 days after enactment. The Rules will need to cover how a "funding portal" registers itself with the SEC and what additional disclosures a crowdfunding company needs to make to prospective investors, as well as various other items. Although the SEC has not yet had time to adopt rules, the SEC is encouraging the public to comment in advance, by e-mail at:

For more information. Please contact Chris Bonner at (315) 425-2708, or by e-mail at, if you would like more information about crowdfunding.

 *"CROWDFUND" is an acronym for "Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure."


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