Crowdfunding FAQ

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On April 5, 2012, President Obama signed into law the Jumpstart Our Business Start-ups Act (JOBS Act).  In an unusual act of cooperation in Washington, this legislature was eagerly supported by Democrats and Republicans.  While the JOBS Act will result in significant changes to U.S. securities law, the impact on small businesses and start-ups will be revolutionary.  For the first time, entrepreneurs will be able to Crowd Fund – that is raise equity by selling shares of their businesses through dedicated internet portals.

You’ve heard of Crowd Sourcing websites like Kickstarter and Indiegogo.  The intention of these portals is also to bring capital to investors, but business owners are limited to offering goods, services and intentions in exchange for investment.  Business funding opportunites are offered among artistic, charitable and sometimes uncategorizable projects.   Some amazing ventures have been funded through Crowd Sourcing, but many investors are looking for returns on their money and would rather own shares of a business than receive a pre-order for a product.  From the perspective of the business owner, selling shares of their company creates a long term relationship that may lead to access to ideas and additional capital.

Although the JOBS Act is now law, the specifics of the rules, regulations and the funding process are slated to be finalized by January 1, 2013.  However, there are a number of assumptions that have been publicly disclosed.

  • Entrepreneurs or small businesses may raise up to $1 million per year through an SEC-registered crowdfunding intermediary.
  • Intermediaries seeking to help companies raise money through crowdfunding must register with the SEC, make sure investors are advised of the risks they are taking, and take measures to prevent fraud.
  • Individuals with an income of less than $100,000 per year are allowed to invest the greater of $2,000 or five percent of their income.
  • Individuals with an income of more than $100,000 can invest up to ten percent of income, with a cap of $100,000.
  • Companies that use crowdfunding must provide financial statements to investors. Companies seeking to raise $100,000 or less would have to provide tax returns and a financial statement certified by a company principal.
  • Companies seeking between $100,000 and $500,000 in capital would have to get independent accountants to review these statements.
  • Audited financial statements would be required for companies seeking more than $500,000 in capital.