Julie Jason: Crowdfunded securities are here

Small-business owners, would you like to raise money from the public, just like large corporations do? Your time has come. Rules took effect May 16 to implement the 2012 Jumpstart Our Business Startups Act (JOBS Act).

Under the act, you'll be able to raise money online through a low-cost, crowdfunded securities offering without hiring a major investment bank. That is big news. But because investors will have less information than they would in a typical public offering, the U.S. Securities and Exchange Commission wants you to follow a specific set of rules (685 pages) when making the offering, all with the view of protecting investors.

For those who are not avid readers of SEC regulations, here's a tip: The CliffsNotes version ("Analysis of Final Rules") is only 100 pages, beginning on Page 381 of the final rule, which you can find at tinyurl.com/gwdmcu6.

The SEC calls these rules "Regulation Crowdfunding."

This type of crowdfunding is different from the "reward-based" crowdfunding that you may be familiar with. Through portals such as Kickstarter and Indiegogo, individuals raise small amounts of money from a large number of people in exchange for a gift or a product. The most successful campaigns have raised millions — for example, Pebble E-Paper Watch and Pono Music.

Another type of crowdfunding takes place on portals such as AngelList and CircleUp, according to attorney Anthony J. Zeoli of Freeborn and Peters LLP. Those portals are limited to "accredited" (high-net-worth) investors.

Under the new regulations, nonaccredited investors can invest, but the amount is limited based on the investor's finances.

If the investor's annual income (or net worth) is less than $100,000, he or she will be limited to the greater of $2,000 or 5 percent of annual income (or net worth). If income (or net worth) is $100,000 or more, the limit is the greater of 10 percent of annual income (or net worth), with a cap of $100,000.

There also is a restriction on the amount the company can raise through an offering: up to $1 million in a 12-month period. Zeoli points out that more can be raised in an intrastate offering. For example, if you limit the offering to Illinois residents, the cap is $4 million.

The other element is how the issue is brought to the public.

There is no requirement that funding portals be registered as broker-dealers or have any investment expertise, explained Daniel Mulcahy, managing director of ZacksInvest (zacksinvest.com), a funding portal.

"By design, most portals will be advertorial in nature, and will simply showcase companies willing to pay to be listed on the portal," explained Mulcahy. "The level of due diligence conducted by the portals will range widely and at the discretion of each portal operator."

By the way, if you are just starting out in your research about how an offering could benefit your company, you'll find the zacksinvest.com website quite useful.

Companies thinking about raising money can submit their potential offerings for review. After a company submits an application (there is no charge), it is carefully evaluated based on its risk profile. Once approved, ZacksInvest "will help you build a compelling offering page on this site" and "show you how to link it to social media accounts, how to use our tools and processes to raise capital more efficiently and effectively."

As a potential investor, you need to think of crowdfunded securities as long-term holdings for one very good reason. As Mulcahy explains: "Until secondary markets develop, investors are in for the long haul, most likely waiting for a buy-out or possibly an IPO. Crowdfunded securities will have limited transferability, which means getting fair market value will be challenging."

I'll post a few follow-up stories on the subject on my blog at juliejason.com/blog.

If you would like me to send you copies of my previous columns on the subject, email me at readers@juliejason.com.

Julie Jason is a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author.