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JOBS Act Makes ‘Crowd Funding’ Legal

Newly signed law cuts red tape for small businesses.

Though more than 400 “crowd funding” platforms have reportedly been operating in recent years, it has essentially been an illegal process until last week.

On April 5, President Barack Obama signed the JOBS Act, which will allow many entrepreneurs to sell shares to the general public, and tap into the pool of investors with fewer restrictions under the Securities and Exchange Commission.

Under the JOBS Act, growing businesses—including mom-and-pop shops—can advertise equity shares without being required to hire brokers. However, crowd funding platforms—which enable people to pool their money to support an initiative or organization—must be registered with the SEC and comply with certain regulations, though they will not need to be registered as broker-dealers.

Businesses can raise up to $1 million a year from approved investors through these crowd funding platforms. The investors will also have regulations to help protect their vested interests. Those whose net worth is less than $100,000 can invest up to $2,000 or 5 percent of their yearly income, whichever is higher. Those whose income is above that mark can invest up to 10 percent.

Relaxing restrictions

Laws and regulations were enacted in the 1930s that prevented many potential investors from purchasing shares of growing businesses because the government was concerned the middle class and poor would fall prey to investment scams. Small-time entrepreneurs couldn’t sell shares in privately held companies to the general public without registering with the SEC, which is a costly undertaking.

Businesses that had 500 or more investors, or raised $5 million in investments, were required to register with the SEC. Under the new law, a business must register when it obtains $10 million through 2,000 or more investors, including 500 who don’t meet the accredited wealth requirement. If a business has less than $1 billion in annual revenue, it will be able to register with the SEC under a five-year phase-in plan.

Supporters of the new bill expect small businesses in America to use this opportunity to gain new investors under fewer regulatory burdens and grow their companies for the good of the economy. Crowd funding sources that are donation-based, such as Kickstarter, do not fall under the new regulations because they are intended for limited-time projects, as opposed to business growth.

About the author

Sarah Brown
Sarah Brown is a freelance writer who writes about e-commerce and small businesses. She recently graduated from Chico State with a journalism degree and is also a budding online entrepreneur, having launched two Web businesses and her own line of handmade products. Opinions expressed here may not be shared by The Online Seller and/or its principals.

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