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Securities Regulation Update: JOBS Act Loosens Restrictions On Crowdfunding Investments

By George Miller  of Shustak Reynolds & Partners, P.C. posted on Tuesday, October 1, 2013.

In April 2012, as part of a broad change to the securities regulations, President Obama signed into law the “Jumpstart Our Business Startups Act”, or “JOBS Act”. Part of the government’s broader stimulus package, the Act was intended to encourage small business growth by loosening decades-old rules prohibiting the solicitation and sale of private placement investments to the general public. Once barred from soliciting investments from everyday investors, start-up companies now can raise up to $1 million in capital per 12 month period through the “crowdfunding exemption”.

Crowdfunding is the process of raising capital through a series of small investments from a large number of people, typically through the internet and social media. Title III of the JOBS Act specifically exempts crowdfunding activities from the Securities and Exchange Commission’s (SEC) stringent registration and disclosure requirements and allows start-up companies to solicit investments from the general public. Previous restrictions only allowed “private placement” investments to be offered to wealthy and sophisticated accredited investors, or investors who met certain income and net worth thresholds. Private placements are riskier, non-traditional investments (e.g., investments in start-up companies and hedge funds) that are not required to be registered with the SEC.

Given the new relaxed disclosure rules, crowdfunding investors will not have access to financial and other information about the company they otherwise would have in a traditional investment scenario. They also may be more vulnerable to fraud or misrepresentations in connection with the investment. Unlike other private placement investments, however, an investment under the crowdfunding exemption cannot exceed $100,000.

While there is no question crowdfunding is on the rise and will allow small start-up companies easier access to capital, not everyone supports the new trend. According to Luis Aguilar, the sole SEC commissioner who objected to the rule change, “general solicitation will make fraud easier by allowing fraudsters to cast a wider net for victims.” A large group of investors who lose less money also may be less likely to pursue claims against a start-up company or its intermediary.

Before considering a crowdfunding investment in a start-up company, investors should do their due diligence; learn as much about the start-up company as possible and understand the inherently risky nature of the investment. If you have been the victim of misrepresentations or fraud in connection with a private placement or crowdfunding investment, you may contact our firm’s managing partner, Erwin Shustak, at (619) 696-9500.

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