The recently enacted JOBS Act is being heralded as an unprecedented way to let companies raise money from ordinary folks (i.e. unaccredited investors). For technology companies who often rely on friends and family to provide the seed capital for their ventures – this legislation, which enables entrepreneurs to “crowd-fund” – appears to be just what the doctor ordered. The basic framework of the law permits companies to raise up to $1 million from unaccredited investors in any 12-month period so long as they comply with certain SEC requirements.
A deeper dive into the SEC requirements, however, shows that this newfound fundraising tool does not come without strings. Companies must submit to the SEC (among other things) the material terms of the financing, potential risks of investment and their business plan. Additionally, there are annual reporting obligations on the Company.
These requirements have been put in place as evidence that the SEC is still focused on protecting the non-institutional investor. However, well-intentioned companies may be understandably frightened with the prospect of having to supply such detailed information to a governmental entity. Often, start-up companies in need of early capital will pivot from their initial business model as the result of trial and error or changing market conditions. Further, the company-specific risks of investment may not be fully understood by the founders — let alone the investors at the time of the initial funding. In view of all of these additional regulatory requirements, founders may wonder if an investor with buyer’s remorse might seek a remedy via the SEC by pointing to the Company’s filing requirements in the event things go south.
As with most things, time will tell how useful the new JOBS Act will be in attracting capital from non-institutional investors. In the meantime, before the money starts to flow, companies should still ask the classic question – “what’s the catch?”