As with so many things in life, the devil has proven to be in the details of implementing the provisions of the Jumpstart Our Business Startups Act, the JOBS Act, directed at enhancing capital access for small businesses, i.e., crowdfunding and relief of the general solicitation rules for securities offerings.
Concerns about potential fraud perpetrated against crowdfunding investors have complicated attempts to write implementing regulations to the point that those regulations are now delayed until at least September 2013. Entrepreneurs expecting to use crowdfunding (see 7 Cautions for Considering Crowdfunding) for their seed financing should plan accordingly.
Much of the concern has focused on the perceived lack of sophistication in crowdfunding investors. Because of this, regulators are under pressure to shift the burden of performing due diligence on target companies to crowdfunding intermediaries. Intermediaries are naturally concerned about potential liability associated with due diligence requirements and are pushing regulators to provide safe harbors, creating a tug-of-war in the rulemaking process.
As for the implementation of regulations to provide for general solicitation (e.g., ads, blast email and website notices) in connection with securities offerings, the solution to fraud concerns seemed simple enough - restrict sales to “accredited investors,” as defined in the securities regulations. Accredited investors, loosely defined as those having a net worth in excess of $1,000,000 or meeting certain annual income tests, are assumed to be sophisticated enough to assess risks and bear possible investment losses. Simple enough, right? Not so fast. In this case fraud concerns have led to proposed investor verification requirements so onerous that general solicitation may prove impractical.
The battle between those seeking to improve capital access will be fought out over the coming months. In the meantime, it is business as usual for entrepreneurs raising money, as neither crowdfunding nor general solicitation are available as of the date of this post.
You can contact Mike Drzal at 540-961-2600.
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LeClairRyan is an entrepreneurial law firm with offices from Virginia to New York to California, providing business counsel and client representation in matters of corporate law and high-stakes litigation. The Blacksburg, Virginia-based office of LeClairRyan offers venture capital, angel investor funding, and intellectual property law services for startups, entrepreneurs, and technology-based companies. It also offers Outside General Counsel services covering the full gamut of clients' corporate, employment and business litigation needs. For more information, please contact Jim Cowan or Mike Drzal at 540-961-2600.
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