K
  • January Article: Financial Planning

    By Broderick Martinez, Full-Time Faculty, Full-Time Faculty 
    Published January 2014

     

     

    The Jumpstart Our Business Startups (JOBS) Act is a legislative package designed to jumpstart the economy and restore opportunities for America’s primary job creators, such as small businesses, startups, and entrepreneurs. The act was passed in April 2012 with huge bipartisan congressional majorities and was designed to substantially reduce the regulatory burden on entrepreneurs seeking to raise capital to start and grow their businesses. Also, Congress required the Securities and Exchange Commission (SEC) to issue the final regulations allowing investment crowdfunding.

    The JOBS Act establishes the foundation for a regulatory structure for startups and small businesses to raise capital through securities offerings using the Internet through crowdfunding. In this sense, crowdfunding serves as an alternative source of capital to support a wide range of ideas and ventures. An entity or individual raising funds through crowdfunding typically seeks small individual contributions from a large number of people. A crowdfunding campaign generally has a specified target amount for funds to be raised and an identified use of those funds. Individuals interested in the crowdfunding campaign may share information about the project, cause, idea, or business with each other and use the information to decide whether to fund the campaign based on the collective judgment of the crowd.

    On October 23, 2013, the SEC voted unanimously to propose rules under the JOBS Act that will enable companies to offer and sell securities through crowdfunding. These proposed rules would permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions. According to the SEC, the proposed rules would stipulate the following:

    • A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
    • Investors would be permitted to invest up to $2,000, or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000; or 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.
    • Transactions must be conducted through an intermediary that either is registered as a broker or is registered as a new type of entity called a “funding portal,” which is defined as any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to the crowdfunding exemption under this act.

    The proposed rules would also require companies conducting a crowdfunding offering to file certain information with the SEC, provide it to investors and the relevant intermediary facilitating the crowdfunding offering, and make it available to potential investors.

    Broderick Martinez is a full-time faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University. 

     

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