Legislation allowing entrepreneurs to access capital through crowdfunding took a step forward yesterday when the JOBS (Jumpstart Our Business Startups) Act was passed with bipartisan support in the House of Representatives (see here for NYTimes article). A version of the JOBS act is expected from the Senate sometime next week. As written, the “Entrepreneur Access to Capital Act” portion of the JOBS Bill would allow for the following:
- Equity Capital Raise of up to $1,000,000.00 from either unaccredited or accredited investors if the company does NOT provide investors with audited financial statements.
- Equity capital raise of up to $2,000,000.00 from either unaccredited or accredited investors if the company provides investors with audited financial statements.
- Individual Contributions are limited to $10,000.00 or 10% of the investor’s annual income–whichever is less.
Currently, crowdfunding is only permissible on sites, such as Kickstarter, where companies or individuals are allowed to solicit donations, and in return they are allowed to provide freebies back to donors (see our earlier post). Debt and equity in a company could not be offered as investments. There are still legitimate concerns about scams and internet fraud and how to prevent them while at the same time not undermine the purpose of the legislation: enabling entrepreneurs to access money outside of friends and family. I’m not sure what the solution is to the potential fraud problem, maybe a verification process for fundraising sites that includes a background checks for company owners?