New JOBS Act Regulations, Equity Crowdfunding, and Alternatives

February 22nd, 2017

Looking to invest in a startup online?  Have your own entrepreneurial idea that may require additional funding?  There have been recent changes in the law that may affect just that.

Certain provisions of the Jumpstart Our Business Startups (JOBS) Act recently came into effect as of May 2016.  Most importantly, Title III of the Act reduced restrictions around equity crowdfunding.  Small businesses are now able to raise more capital through online investments by being accessible to all potential investors.  Now, any individual can invest their money in these early-stage businesses, with the only caveat being that the amount they can invest ultimately depends on their net worth.  This is different than prior rules because it used to be prohibited for any individuals with a net worth of under a certain standard to invest at all, whereas now there are, in essence, tiered amounts permissible for all.  Conversely, if you’re going to be on the other side of the transaction and are looking for investors in your company, it’s important to note that the company itself is subject to minimum disclosure requirements as they pertain to the totality of cash raised.

Equity crowdfunding, however, also involves a great deal of risk.  In addition to the possibility that an investment may be significantly, if not entirely, lost due to the venture failing, it likewise is seen as a more expensive option in general.  It also may be difficult to read and understand all available information and data provided without the assistance of a financial or legal professional.  Such an endeavor may also take up a lot of company bandwidth, and there may be unforeseen pressures associated with the venture.  Due to these factors, it’s possible that such an extensive legal undertaking may not necessarily be for you.  If that’s the case, many alternatives are available:

  1. Borrowing from a bank is likely the most common scenario one imagines when building out his or her company.  Banks may grant loans to individuals or companies at a pre-determined rate of interest, oftentimes offset by a security interest or collateral.  There are many loan options but not all business can qualify for a loan.  Working with an experienced business attorney and business banker will be key if you go this route.  Sometimes, however, the company is too new or has some unique aspect which prevents it from getting a loan, and so another option may be private investors.
  2. Borrowing from private investors, such as friends and family, is another viable option.  One should decide at the outset whether this kind of payment is structured like debt or equity, and treat it as such.  Putting the parameters of the agreement in writing is also highly encouraged.
  3. Active partners may help contribute financially to a business while also taking on some of the work associated with it.  This option may benefit a business by growing the expertise within it while freeing up time, however, the control and overall dynamic of the business may change and future profits may need to be aptly divided.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.