Equity Crowd Funding 101

  Crowd funding generally is the collective practice of people using the Internet to network and pool their money for a variety of purposes, including funding a startup company. The JOBS Act adds an equity crowd funding exemption to the registration requirements of the Federal securities law, so that you will be able to use the Internet to raise money for your company through the sale of securities. The JOBS Act and Equity Funding

• • Dollar Limit. Your company will be unable to sell securities with a total dollar value greater than $1 million during any 12-month period. This limit applies to securities sold to all investors, including those amounts sold under the crowd funding exemption.

• • Small Investors. If your company sells securities to an investor whose annual income or net worth is less than $100,000, then the total dollar value of securities sold to the investor during any 12-month period cannot be more than the greater of $2,000 or 5 percent of the investor’s annual income or net worth.

• • Large Investors. If your company sells securities to an investor whose annual income or net worth is $100,000 or higher, then the total dollar value of securities sold to the investor during any 12-month period cannot be more than the lower of $100,000 or 10 percent of the investor’s annual income or net worth.

• • Intermediary. Each crowd funding financing transaction will need to be run through a registered broker or “funding portal” intermediary that complies with various regulatory requirements, including registration, disclosure, anti-fraud and other obligations.

• • Issuer. Your company also will have various disclosure and filing requirements, including the filing and disclosure of information about the company and its officers, directors, financial condition and ownership structure. Your company cannot advertise the terms of the crowd funding offering, but it can have notices that direct investors to the intermediary. Your company also will have ongoing financial and other disclosure obligations.

• • Transfer Restrictions. An investor who purchases securities in one of these crowd funding transactions may not transfer the securities until the first anniversary of their purchase, except under limited situations such as to family members or accredited investors.

Key Considerations Preparation and cost will be critical factors if you plan to use equity crowd funding to attract investment capital for your business. Questions to ask yourself include:

• • Is equity crowd funding right for your business? Is equity crowd funding a better source of investment capital than more traditional ways of raising money? Does your business have a solid corporate structure and platform that will allow you to take in investment from multiple investors over the Internet? You should consider a corporate tune-up to get ready to take in money and to manage the process post-investment. You also will need to consider the corporate governance and administrative requirements of having a larger number of stockholders or other investors.

• Upcoming Webinar: Equity Crowd Funding Is Coming.