Crowdfunding Approved; But Not Yet in Theaters

As part of President Obama’s broader jobs legislation, Congress has passed the  Jumpstart Our Business Startups Act. Once signed, the legislation will create a new federal exemption for crowd funding from Securities and Exchange Commission registration requirements as well as state blue sky laws. The new law will enable entrepreneurs, filmmakers, musicians and other artist to raise annually up to $1,000,000 (or $2,000,000 if the company provides audited financials).

Sites such as Kickstarter, IndieGoGo and RocketHub are providing variations on this service already but none of the sites are able to comply with the new law yet. The sale of securities without an exemption from registration is a violation of U.S. law, which is why the new law will be so helpful.

The legislation follows the financially stingy Senate version that caps the amounts lower than the bill originally proposed in the House. The amounts represent a sliding scale, however that can range from $1.00 to $100,000 depending on the investor so with good planning, significant assistance will be forthcoming from these sources.

‘(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and ‘‘(ii) 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000

The sales must occur through a broker or funding portal. The rules for the funding portals have not yet been established and the disclosure requirements are likely to surprise some innovators who expect the new model to look like the existing crowd-sourcing sales and donation model.  Equally importantly, the rules will continue to bar the compensation of commissions for non-brokers.

It is likely that the disclosure documents will look more like the types of private placement memoranda presently used by film companies and other small entrepreneurs who seek small angel funding from accredited investors.  Still, the portal and the growth of the potential investor pool should result in a growing use – and increasing standardization of such documents.

The portal and the ability to reach beyond accredited investors should help to greatly expand the pool of funds and simplify the creation of these documents, vastly reducing the cost and empowering a broad spectrum of new creative artists.

Sites that accept donations on behalf of projects or sell goods (even movie frames, DVDs or tee-shirts) in lieu of providing investments will not need to comply with the new law. Similarly, the new law does not affect crowdsourcing in which people come together to provide services or donate towards worthy projects.