The recently signed Jumpstart Our Business Startups (JOBS) Act allows a simplified process for small startup firms to obtain early stage funding. Under the JOBS Act, investors can pool their assets to fund a startup by buying a small equity stake in the company. The JOBS Act places much fewer restrictions on these types of investments including the types of investors that can participate.
Prior to the JOBS Act only certain “accredited investors” could make these types of high-risk investments. “Accredited investors,” because of their higher than average net worth (excess of $1mm excluding the primary residence) OR higher than average annual income ($200,000 individual or $300,000 for a couple) are assumed to be able to better understand the inherent risks in unregulated startup investing.
It is expected that small investors will flock to these investment opportunities with resulting benefits to investors and the start up companies.
Under the JOBS Act, in order to gather new investors, companies must use the services of an approved intermediary. The SEC recently released proposed rules regulating the ability of these intermediaries to use “mass marketing” of crowdfunding opportunities. Generally speaking, an intermediary can use mass marketing so long as it has reason to believe the person being asked to investis an accredited investor. The proposed rule lays out a number of factors an intermediary can use to justify its reasonable belief that who they are dealing with is an accredited investor. However, the realities of the selling of investments is,that if left unchecked, the JOBS Act leaves open a great possibility for unscrupulous brokers to solicit unsuitable investments to unsophisticated investors.
If you have been contacted regarding crowdfunding opportunities or have lost money by crowdfunding, please e-mail the USF Investor Justice Clinic at firstname.lastname@example.org for your FREE case evaluation.