Companies like Kickstarter, Kiva, and RocketHub had a fantastic weekend. A recent ruling by the SEC now allows equity crowdfunding through internet intermediaries. These rules provide greater flexibility for both startup firms and hosting entities like Kickstarter, and create a greater incentive to request funding and fund new ideas. The recent ruling is the last milestone in the JOBS Act signed in April 2012.Do the company names Kickstarter or RocketHub ring a bell? How about Kiva? These entities are growing rapidly and gaining popularity as new companies seek crowdsource funding for their new ideas. Prior to this weekend's ruling by the SEC, these companies were used as an intermediary to request funding for a return of service, rather than equity in the startup company. The SEC ruling now allows startup companies to sell company securities via crowdfunding sites, subject to certain rules and regulations.According to Forbes, "Crowdfunding was already expected to surpass VC in 2016 at $34B a year in total crowdfunding online, across all types of crowdfunding. By bringing in a new class of investors with Title III, we can expect further growth of the equity market as venture capital continues to move online" (Forbes.com, October 2015).The most recent ruling is the latest milestone ruling of the Jumpstart Our Business Startups (JOBS) Act, signed in April 2012. The purpose of the Act was to remove certain barriers from raising capital via internet crowdfunding sites. The Act received bipartisan support and support from several technology companies, and was signed into law by President Obama in April 2012. The rules adopted this weekend "are designed to assist smaller companies with capital formation and provide investors with additional protections" (SEC.com Press Release, 2015). Here are a few key take-aways from the SEC ruling:
3. An investor may be sold up to $100,000 of securities in a 12-month period.Certain companies are not allowed to use this avenue, including companies with no clear business plan, companies that have not met annual financial reporting requirements, or companies that plan to take part in a merger or acquisition.The ruling requires that all transactions take place through an SEC-approved intermediary, and that all financial information be filed correctly. To read the full press release, click here.
We think this ruling is a big win for Utah, especially as Utah Valley is a choice location for many new tech startups. Companies that sell through internet crowdfunding sources now have a new avenue to raise additional capital. The ruling also provides ample protection for investors by raising the bar for company disclosure. All information about company executives and stakeholders is required to be disclosed to investors, as well as financial data.
At Sumsion Business Law, we focus on staying current in order to provide you with up-to-date information and advice. If you have questions about the new ruling, we recommend you consult with your attorney and/or financial advisor.