How exactly is this bill different from just normal contract law? Is it not already super common for small businesses to solicit money from friends/family in exchange for a share of the new company?
There is a lot of regulation around raising money for businesses of any size. In general if the investors are accredited you can raise the money, if the investors are non-accredited you cannot.
In order for an investor to be accredited, they must make over $200,000/year or have a liquid net worth of over $1m.
This bill builds in an exception for non-accredited investors to invest in much riskier companies. Before this bill, the only way for non-accredited investors to invest would be if the company went public which is very expensive.
My understanding is that SEC Rule 506[1] allows you to have up to 35 "sophisticated" but non-accredited investors. The catch is that you "cannot use general solicitation or advertising to market the securities" - which means friends and family who you approach directly are fine, but a public crowdfunding campaign is not.
The new crowdfunding rules will allow companies to publicly solicit a much larger number of investors, as long as the company is raising <$1 million, and each investor is investing <$10k or 10% of their annual income, whichever is lesser.
Disclaimers: This is an oversimplification, the law has been passed but the SEC rules have yet to be written and enacted, IANAL and really don't know what I'm talking about.
No it is not, you just have to provide additional disclosure and follow your state's "blue sky" laws. These are just a headache to keep up with which is why it can make an exit or VC raise down the line a bit harder.
Blue Sky laws typically require investors to be accredited unless there are exceptions. Some states may allow for non-accredited investors to invest in startups, but I don't know of any.
One area that may or may not work would be if your family member loaned you the money personally. That isn't considered an investment since it is a personal loan.
But, in a personal loan, they couldn't ask for equity since that would be an investment.
Technically it often is. The SEC never really cared because historically friends+family funded businesses didn't end up on the market.
Your typical neighborhood Italian restaurant doesn't IPO. If it did, and grandma who gave you her famous meatball recipe, turns up with her team of IP lawyers things will get interesting
The difference here is that you are inviting 1000s of random people to invest. Then even assuming you are totally honest and above board - once you are marginally succesfull the same VCs will come and screw these investors in the same way that they screw foudners.
It's common, but there actually is no exemption for friends and family. Those offerings should technically be done under the 506 exemption which require investors to be accredited.
It was also illegal, before the JOBS Act, to engage in "general solicitation," which is what raising money via a publicly-viewable crowdfunding page would amount to.
That's what I was wondering -- I've heard of the accredited investor barrier to entry, but it does seem like rule 506 would allow for investment from anyone.
Really? Sorry, not trying to be dense here, but from what I see in 506.b.2.ii:
Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.
Sounds like to me that they just require you or your representative to "know what you're doing" if you're not an accredited investor.
But isn't a general solicitation on a public site considered to be a public offering? My understanding of what a "public offering" is, is that any general solicitation to the public, without qualification, for investment in a security in a company, where a security is any investment without a guaranteed return (as opposed to debt).
I understand that JOBS act allows to solicit up to $1M from unqualified investors, but does it allow public offerings of up to $1M without registration?
As I understand it (ie: barely), the problem here isn't that the SEC is going to send agents in black suits and sunglasses to arrest your parents; rather, the problem is that when a real VC's counsel reviews your company's paperwork, they'll throw a fit if there are nonaccredited investors in the company. As I understand it (less than barely), the biggest real-world issue is that nonaccredited investors can cause extremely expensive legal headaches down the road for a company if those investors decide they've been wronged by the company.
