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Austin TX Business Law Blog

Friday, July 10, 2015

New Provision Added to 2012 JOBS Act Designed to Make Crowdfunding Easier

What are the limitations on private equity funding, and how does this impact start-ups in need of capital? 

Start-ups are the cornerstone of American industry, particularly within the booming technology sector. As a business just starting out, one of the most difficult aspects of growth and development is finding the necessary capital and liquidity to get off the ground – which in turn requires sizable investments from willing venture capitalists. Over the past several years, several private equity companies have endorsed the concept of “crowdfunding,” which allows for contributions by several smaller investors as opposed to one or two large donors. Problem is, federal and state corporate laws have made crowdfunding an administrative nightmare, and start-ups are facing increasingly burdensome paperwork and reporting requirements that are often required within all 50 states as well as by the federal government. 

To alleviate the burden a little, in June, 2015, the federal government lightened this bureaucratic load by amending the 2012 JOBS Act to increase the amount of capital a business can raise from private individuals to $50 million under what is often called a Regulation A filing – which is a major jump from the former $5 million cap. Under the former rules, publicly-traded companies could not accept more than $5 million from individual corporate investors, which significantly dampened the available crowdfunding sources obtainable by blossoming start-ups. Now, this amount has been greatly expanded to allow companies the opportunity to accept offerings from anyone willing to pitch in. 

Also under the new rules, exhaustive paperwork requirements have been somewhat lessened, thereby allowing start-ups the opportunity to focus on business growth and expansion instead of concentrating on dozens of filings (and the associated fees). Previously, once a business hit $20 million in capital investments, it was required to adhere to the recording, filing, paperwork, and fee schedules of any state wherein an investor was located – along with the Securities and Exchange Commission. Now, most companies can file a single report and audit with only the SEC, however additional oversight might be required in certain situations.

Despite these steps in the right direction to enable crowdfunding easier, the new amendments have specific requirements in the area of eligibility, disclosure, caps on amount as well as percentage of shares being offered to individual investors, etc. especially for offerings in excess of $20 million - being referred to by the new moniker of Tier 2 Regulation A filing.

If you have questions about starting a new business or would like to speak to a reputable business attorney, please do not hesitate to contact the Kumar Law Firm based in Austin, Texas today: (512)960-3808. 


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