As is often discussed, the Jumpstart Our Business Startups Act (JOBS Act) has created a lot of positive buzz with innovators and creators looking to equity crowdfund their ideas to avoid traditional forms of funding. There is no question that the government mandated crowdfunding process will save entrepreneurs the hassle of dealing with complex SEC…
Tag: JOBS Act
Risky Investment for the Fantasy Football Guru
On October 17, 2013, Fantex Holdings launched an “all-new marketplace that allows investors to buy and sell Fantex, Inc. stock linked to the value and performance of the brand of a professional athlete.”1 The Initial Public Offering will be called a “Fantex Series Arian Foster Convertible Tracking Stock.”2 The offering has been subject some confusion….
This Isn’t What We Voted For: Will the JOBS Act Spur Fraud?
In an era of oversight, regulations are being reigned in to help startups obtain funding. The JOBS Act, signed into law in 2012, increases investment opportunities. Specifically, the Act permits “crowdfunding” through a provision allowing sales of certain unregistered securities in small amounts. Effective crowdfunding depends on a startup company’s ability to target the right…
Not Just Another Face in the Crowd: OurCrowd’s Equity Crowdfunding Success
Crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”1 One of the most recognizable names in crowdfunding is Kickstarter. Kickstarter allows any person to create an account and donate any amount of money to a project they…
SEC – Roadblock to Equity Crowdfunding?
With such a promising name, what’s not for entrepreneurs, small businesses and venture capitalists to love about the Jumpstarting Our Business Startups Act (JOBS Act)?[1] Indeed, the Act was passed with bipartisan support in both houses and signed into legislation by President Obama on April 5, 2012. At its passage, the JOBS Act was widely proclaimed as a promise for growth for small businesses and start-ups because of the Act’s capacity to increase access to capital.[2] Despite this initial phase of promise, the JOBS Act has gotten off to a rather slow start in the realm of equity-crowdfunding.
One of the ways in which the Act is designed to help startups is by making it easier to obtain additional capital through equity crowdfunding. Although it has been a buzzword for the last few years, crowdfunding is not a new phenomenon. Traditional crowdfunding is defined as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”[3] In the United States, the Securities Act of 1933[4] and the Securities Exchange Act[5] restrict the potential means of generating funds via crowdfunding. These Acts prohibit entities from offering or selling securities to the public unless the offering is registered with the SEC, or unless there is an exemption from registration. Thus, the SEC registration requirements have limited crowdfunding to a means of generating capital from contributors without the prospect of financial return on investment (i.e., no equity offerings for funders). Accordingly, crowdfunding enterprises solicit funds by means such as offering prizes for donations or by offering funders the option to purchase a product prior to the product’s release on the market.[6] But even with the availability of numerous crowdfunding platforms[7] to incentivize offerings, many enterprises currently find it difficult to access substantial capital using traditional means of crowdfunding.
Equity crowdfunding in the United States, however, would enable enterprises to issue equity in return for crowdfunders’ contributions. The prospect of return on investment would entice many would-be-funders to take the financial leap-of-faith and support startups. Equity crowdfunding can also be particularly useful to small-business owners who have been unable to secure adequate funding through more traditional means like small business loans. To date, many foreign countries, particularly member states of the European Union and Hong Kong, have already capitalized on the potential of crowdfunding by permitting startups to issue equity to investors.[8]
The JOBS Act recognizes the potential for equity crowdfunding and amends the provisions of the Securities Act of 1933 and the Securities Exchange Act that foreclose the opportunity to crowdfund due to SEC registration requirements.[9] The “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,”[10] in particular, addresses the conflict by creating an exemption for unregistered securities offered by private companies via the “crowdfunding exemption”[11].
But still, further government action is necessary before the crowdfunding exemption can go into effect. In an effort to protect investors from the potential of fraud that equity crowdfunding entails, the Act requires the SEC to issue rules governing the crowdfunding provisions.[12] The Act provides a period of 270 days from the date of enactment[13] in which the SEC is to issue these rules. On December 31, 2012, this 270-day period expired without any such rules having been announced.
Although it has been nearly a year since the legislation was enacted and three months since the expiration of the deadline, there is no indication the rules will be issued any time soon. Factors that may be contributing to this delay include a rulemaking-backlog (created largely from the 2010 Dodd-Act mandates) and a still-pending change in chairmanship at the SEC.
So when can we expect equity-crowdfunding to go into effect? It depends on whom you ask, but the prognosis generally is not good. Many fear it will not be any time soon,[14] while others claim at earliest next year.[15] Even worse, some believe that even if the SEC does issue rules, the rules may be so complicated as to preclude the opportunity to equity crowdfund in practice.[16]
In the meantime, small businesses and would-be entrepreneurs are feeling the hit. But they are hardly waiting idly by. Crowdfunding organizations are seeking the media’s attention through venues such as the National Press Club in Washington DC, as well as speaking with the SEC directly to inform the Commission of the industry’s current investor protection mechanisms.[17] Members of the Crowdfunding Professional Association, for example, have already met with the SEC more than thirty times.[18] Despite the industry’s efforts to push-start the crowdfunding exemption into action, the wait continues. If and when the SEC finally issues the rules, the crowdfunding exemption has enormous potential to help small businesses.
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[1] Jumpstart Our Business Startups Act (JOBS Act), Pub. L. No. 112-106 (2012).
[2] See, e.g., JOBS Act Promises to Improve Access to Capital, Husch Blackwell (Apr. 5, 2012), http://www.huschblackwell.com/jobs-act-promises-to-improve-access-to-capital/.
[3] Tanya Prive, What Is Crowdfunding and How Does it Benefit the Economy? Forbes (Nov. 27, 2012, 10:50AM) http://www.forbes.com/sites/tanyaprive/2012/10/12/top-10-benefits-of-crowdfunding-2/.
[4] Securities Act of 1933 §5, 15 U.S.C. §77e (2006).
[5] Securities Exchange Act 15 U.S.C. §78d.
[6] See generally Thaya Brook Knight et. al., A Very Quiet Revolution: A Primer on Securities Crowdfunding and Title III of the JOBS Act, 2 Mich. J. Private Equity & Venture Captial L. 135, 135-36 (describing four current methods of crowdfunding in the United States).
[7] See generally Devin Thorpe, Eight Crowdfunding Sites for Social Entrepreneurs, Forbes, http://www.forbes.com/sites/devinthorpe/2012/09/10/eight-crowdfunding-sites-for-social-entrepreneurs/ (providing an overview of top crowdfunding platforms).
[8] Ralf Hooijschuur, Crowdfunding in Different Countries – Legal or Not? Squidoo http://www.squidoo.com/crowdfunding-in-different-countries2 (last visited Mar. 18, 2013).
[9] Securities Exchange Act 15 U.S.C. §78d.
[10] JOBS Act, Pub. L. No. 112-106 §301 “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012.”
[11] Id. at §302
[12] Id.
[13] Id.
[14] See, e.g., Destiny Bennett, SEC Stalls in Setting Rules for Crowdfunding, AGBeat (Feb. 21, 2013), http://agbeat.com/finance/sec-continues-stalling-in-setting-rules-for-crowdfunding/.
[15] Kathleen Pender, Crowdfunding Awaits Key Rules from SEC, SFGate (Feb. 8, 2013, 6:58PM), http://www.sfgate.com/business/networth/article/Crowdfunding-awaits-key-rules-from-SEC-4264631.php
[16] Marco Santana, Entrepreneurs Await Rules for Crowd-Funding Clause, USA Today (Jan. 20, 2013, 10:03PM), http://www.usatoday.com/story/money/business/2013/01/20/crowd-funding-clause-startups/1566496/ (worrying that the rules the SEC ultimately provides will render the crowdfunding clause impracticable.).
[17] Catherine Clifford, Crowdfunders Step Up Lobbying for SEC Rules, Entrepreneur (Feb. 19, 2013), http://www.entrepreneur.com/article/225863.
[18] Id.
JOBS Critics
As the JOBS Act awaited President Obama’s signature this week, critics, emboldened by accounting issues at the recently public Groupon, continued to take aim at provisions alleged to roll back crucial investor protections. Passed by strong majorities in both the House and Senate, the principle purpose of the JOBS Act is to promote capital raising among startups by easing their paths toward an IPO. Opponents of the Act, however, claim that its relaxed financial disclosure standards invite a reemergence of Enron-era accounting fraud.
Recent news on internet startup Groupon has stoked much of that criticism. Last Friday, in response to an auditor’s determination of a “material weakness in internal controls over financial reporting,” the company revised fourth-quarter earnings down by $14.3 million.1 Had the Act been in place, Groupon’s revisions would not have been a product of adjusted reporting requirements; the relevant JOBS provisions apply only to companies with less than $1 billion in annual revenue and $700 million in market cap, while Groupon earned 1.6 billion in 2011.2 Nonetheless, critics contend that events at Groupon highlight the risks associated with easing financial disclosure requirements, generally. Had the Act been law before Groupon went public last year, some point out, its annual revenue of less than $1 billion would have made it eligible for relaxed reporting requirements and the company’s questionable accounting methods may not have drawn the attention that they are getting now.3
Among the specific provisions targeted by the Act’s opponents is that which allows emerging companies on the verge of an IPO to have “private conversations with the S.E.C. about planned disclosures,” not to be made public until 21 days prior to an offering.4 Andrew Ross Sorkin of NYTimes Dealbook wrote recently that the provision, which allows companies to avoid “embarrassing public gaffes,” may benefit those seeking to go public who would otherwise be discouraged by accounting scrutiny, but is “awful for the investors, who rely on the transparency of the process.”5 Had the Act applied to Groupon’s public offering, Sorkin explained, “it is unlikely the public would have found out in time about a series of questionable accounting gimmicks and metrics that the company had hoped to employ to bolster its numbers investors.”6
The same day that Sorkin’s comments were published, The Wall Street Journal’s Michael Rapoport weighed in on the 21-day provision, characterizing it as permitting companies to “iron out disagreements with regulators behind closed doors before they go public.”7 This practice, Rapoport agreed, “might have prevented investors from finding out about Groupon’s early accounting questions until after they had been resolved.”8
Others, however, are less concerned. Joel Trotter, a Latham & Watkins attorney on the task force responsible for devising ways to make it easier for companies to file publicly, was quoted by Rapoport claiming that “three weeks is an extremely long time in assessing information relevant to an investment decision.”9 AOL Founder Steve Case has similarly responded that, while the bill is “not perfect,” it will ultimately “strike the right balance” between encouraging IPOs and maintaining appropriate disclosure standards.10
Opinions are clearly divided and the debate surrounding a 21-day notice provision barely scratches the surface of that division. If the last major adjustment to financial disclosure standards (See SOX 2002) provides any indication, it does not appear that the debate will be ending anytime soon.
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1. http://dealbook.nytimes.com/2012/04/02/jobs-act-jeopardizes-safety-net-for-investors/
2. http://online.wsj.com/article/SB10001424052702304023504577317932455874856.html?mod=googlenews_wsj
3. Id.
4. http://dealbook.nytimes.com/2012/04/02/jobs-act-jeopardizes-safety-net-for-investors/
5. Id.
6. Id.
7. http://online.wsj.com/article/SB10001424052702304023504577317932455874856.html?mod=googlenews_wsj
8. Id.
9. Id.
10. http://dealbook.nytimes.com/2012/04/02/jobs-act-jeopardizes-safety-net-for-investors/