Much has been written about the potential of new, equity crowdfunding in the United States to double the impressive amounts already raised by businesses this year using existing platforms for donation or reward-based crowdfunding. Strictures in U.S. federal laws, until now, prevented American small businesses from selling ownership or “equity” in their enterprises to unaccredited investors without first complying with expensive requirements for an initial public offering (“IPO”) or finding an existing “safe-harbor” exempting their deal from such regulatory scrutiny.
Federal law was amended in early 2012, however, with passage of the “Jumpstart Our Business Startups” or “JOBS” Act, to permit a limited class of equity sales through “crowdfunding portals.” Full enactment of the JOBS Act (and availability of its provisions to businesses and investors) depends, however, on promulgation of regulations by the U.S. Securities and Exchange Commission (SEC). These regulations are currently six months past due and unlikely to be in place before the end of 2013.
One state already allowing small businesses to sell equity in their enterprise to unrelated, unaccredited investors is Georgia. Georgia has taken the lead in equity crowdfunding by fully enacting its “Invest Georgia Exemption” in late 2012, which excepts equity crowdfunding activities from its ordinary equity investment and solicitation regulatory regime.
The Invest Georgia Exemption and the JOBS Act contain similar provisions, but the Invest Georgia Exemption is far less protective of unaccredited investors, allowing the investor and not a third-party crowdfunding portal to determine how many equity crowdfunding deals he is permitted to fund and further allowing the investor to maintain full privacy of his net worth or income. The Invest Georgia Exemption also allows businesses to promote their deal more freely than does the JOBS Act. Indeed, critics of the federal law point out several aspects of the JOBS Act that may severely blunt its eventual impact on small businesses’ ability to leverage equity crowdfunding as a way of raising capital.
So it remains to be seen whether the JOBS Act will truly revolutionize small business finance, giving unaccredited investors, for the first time, the opportunity to participate in the non-IPO, publicly-solicited equity fundraises currently reserved to high-net worth and high income individuals. In the interim, the Invest Georgia Exemption is a business- and investor-friendly alternative—so long as the deal remains within the State of Georgia.
This is the first in a three-part reprint of an article originally published in June 2013.