Biggest Change In 80 Years

On September 24th, there will be a sea change in how entrepreneurs can seek money from early stage investors - one of the largest changes to securities laws in 80 years.  On September 24th, Title II of the JOBS Act (a seven-part Act signed into law by President Obama on April 5, 2012) goes into effect.  Here are the key questions to be asking.

Question: What is the change is that is going into effect?

 Effective as of September 24, 2013, Issuers of shares (under New Rule 506c) may use general solicitations and general advertising to effect a private placement. Prior to this any public means of communication like magazines and television were excluded from avenues for raising money for companies unless they were public. You really needed to know someone who was raising money in order to invest. There must have been a pre-existing relationship. Now that pre-existing relationship doesn’t have to be there. So businesses can reach more potential investors, faster, via the Internet and social media.

Now private companies can use those mediums as well as the Internet and the social network to reach millions of potential investors.  This reverses an eight-decade-old law. 

Question: Can anyone invest?  Is this crowdfunding for unaccredited investors that we’ve been hearing about?

No, not anyone can invest. While anyone can see the solicitation for funds, the completed sales, must only be to “accredited investors” and the Issuer (the company, broker/dealer or 3rd party Web platform) has the burden to verify that the investor is “accredited.” An accredited investor is someone who makes over $200,000 for the last 2 years or has a liquid net worth of $1M.  Crowdfunding for unaccredited investors is still waiting on the SEC to come out with the proposed rules. Unaccredited investors that might see these solicitations cannot invest in these offerings. Companies accepting funds must be careful to verify accreditation.

Question: What is the maximum amount that can be raised?

Unbeknownst to many people there is no cap on the amount that can be raised.  While this has always been there, the ability to use the Internet to reach more investors has the potential to lead to a lot more investment money. This influx into the economy could be a boon for businesses and jobs. This can be beneficial for startups, small businesses and even Venture funds.

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