CROWDFUNDING: THE FUTURE OF CAPITAL-RAISING IN A DIGITAL ERA

Crowdfunding is a way for businesses to raise capital by collecting smaller investment amounts from large groups of investors through the internet. The Jumpstart Our Business Startup Act (JOBS Act), which was passed in April 2012, contains several provisions relating to crowdfunding. Pursuant to the JOBS Act, intermediaries that wish to provide crowdfunding services must register with the SEC and with a self-regulatory organisation, such as the Financial Industry Regulatory Authority (FINRA), as a broker or a ‘funding portal’. A funding portal is a new entity established by the crowdfunding provisions of the JOBS Act. The JOBS Act defines a funding portal as “any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others”, and limits the scope of activities a funding portal may perform.  Typically, a funding portal will utilise an online platform that allows for companies to collect and aggregate smaller investment amounts. 

Prior to the passage of the JOBS Act in 2012, regulations prevented crowdfunding from being a viable option for businesses. With the passage of the JOBS Act, the limit on the number of shareholders of record a company may have without requiring registration pursuant to the  Securities Exchange Act of 1934 was raised from 500 to 2,000, or up to 500 shareholders of record who are not accredited investors, and there is no limit to the number of individuals that can invest through crowdfunding. The crowdfunding provisions of the JOBS Act allow for an exemption from registration under the Securities Act of 1933.

Apr-Jun 2013 Issue

Berkeley Research Group