President Obama will be signing the Jump Start Our Business Startups (JOBS) Act today. The act will make it legal for non-accredited investors to use crowdfunding to invest in startups. What this translates to is people who are non-accredited investors e.g. people with a net worth of less than $1 million or make less than $200,000 per year, can use an equity-based crowdfunding site like Crowdfunder.com to invest in starups with revenues less than $1 billion. These companies are being called ‘emerging growth’ companies.
Entrepreneurs who use crowdfunding to raise funds are limited to raising $1 million per year. Investors who’s income is less than $100,000 per year will be limited to investing 5% of their income or $2,000. Investors who’s income is over $100,000 are limited to investing 10% or $10,000.
The hope is that the law will spur innovation and create many, many new startups who will in turn create jobs. I’m sure this will happen over time but there are some risks as well. The biggest downside is the amount of unsuccessful businesses or half-baked businesses that will receive funding only to go belly-up months later because of lack of experience, bad execution or just plain dumb ideas.
There is also concern among financial regulators about the relaxing of some restrictions for emerging growth companies the law provides. For instance emerging growth companies will be free from the requirement “to hire an independent outside auditor to attest to a company’s internal financial controls, and restrictions on how financial analysts interact with investment bankers in promoting a company’s stock” for their first five years as a public company. This is more of a concern for later stage startups. Learn more about risks to investors the law creates here and here.
We’re excited about the law because of the attention the today’s signing will bring to crowdfunding. TuneFund is not an equity-based platform, we are a donation/reward based platform, however we are hoping for some halo effect from the media attention.