ONLINE
LAW
Fundraising on the Internet
Crowdfunding, Kickstarter and the JOBS Act
BY NICKOLAS C. JENSEN
On April 5, 2012, President
Obama signed into law the Jumpstart Our
Business Startups Act of 2012 (the “JOBS
Act”), whose stated purpose is to “increase
American job creation and economic
growth by improving access to the public
capital markets for emerging growth companies.” 1 The act sailed through Congress,
enjoying overwhelming bipartisan support
in an election year in which the economy
and job creation played a central role.
Although much of the JOBS Act
focuses on relaxing compliance
requirements for emerging issuers,
Title III of the act also attempts to
achieve the stated purpose by embracing an innovative and increasingly
popular method for raising capital
online known as “crowdfunding.”
This article offers Arizona attorneys a
basic Q&A primer on the new crowdfunding exemption created by Title
III of the JOBS Act, and its relationship to federal and state securities
laws.
number of musicians, artists, filmmakers,
designers and entrepreneurs have employed
this fundraising technique, often with great
success. The rise of online crowdfunding platforms such as Kickstarter and
IndieGoGo have further propelled this
growth. To date, more than 30,000 projects have been funded successfully (for a
combined amount of more than $350 million) on Kickstarter alone. 4
Crowdfunding is the
act of raising capital by
soliciting typically small
Act of 1933 (the “Securities Act”) prohibits sales and offers to sell securities in
interstate commerce unless the securities
are registered with the Securities and
Exchange Commission (SEC) or an
exemption is otherwise met. 5 Similarly,
Arizona law provides that selling or offering to sell unregistered securities is a Class
4 felony. 6
Title III of the JOBS Act creates a new
exemption from the registration requirements imposed by the Securities Act
and state blue-sky laws for crowdfunding offerings. The exemption provides an
alternative model to current crowdfunding models, which are based on a combination of pre-orders and reward schemes.
amounts of money
How does the crowdfunding
exemption work?
from a large number of
contributors, generally
over the Internet.
What is “crowdfunding”?
Crowdfunding is the act of raising
capital by soliciting typically small
amounts of money from a large number of
contributors, generally over the Internet.
The concept began with independent
artists and musicians for whom traditional
studio deals were either unavailable or
undesirable, and it has grown into a multimillion dollar phenomenon used by artists,
musicians, developers, writers, filmmakers
and charitable organizations.
Many commentators cite the British
progressive-rock band Marillion as an early
adopter of crowdfunding. In 2001, the
band raised more than $100,000 by emailing its 30,000 fans and asking them to pre-order the band’s new album, before it had
even been recorded. 2 By receiving funds
directly from fans, Marillion bypassed the
traditional record company deal and
retained complete control over its music. 3
Since Marillion’s success, an increasing
Local examples of crowdfunding success
abound. In August 2012, local Phoenix
startup incubator Seed Spot raised more
than $25,000 in a Kickstarter campaign
to fund a documentary about its opening
and operations. Similarly, local producer
Nicholas Holthaus raised more than
$15,000 in February 2012 to fund a movie
about the 1990s music scene in Tempe,
Arizona.
The crowdfunding exemption
(added as Section 4( 6) of the Securities
Act) allows issuers to raise up to $1 million in a 12-month period through
crowdfunding offerings, as long as ( 1)
the issuer meets certain requirements, ( 2)
the offering is conducted through a registered broker or “funding portal” that complies with certain requirements, and ( 3) the
amount raised from any one investor does
not exceed certain limits. 7
What are the individual limits for
investors?
How does the JOBS Act affect
crowdfunding?
Title III of the JOBS Act creates the
opportunity for contributors to participate
in the potential profits of the crowdfunded
project by issuing stock or limited partnership interests in the project, or by loaning
money to the project at interest—practices
currently prohibited by existing federal and
state securities laws.
Specifically, Section 5 of the Securities
The aggregate amount of securities
sold by an issuer to any one investor during
a 12-month period may not exceed:
• For investors whose annual income and
net worth do not exceed $100,000,
the greater of ( 1) $2,000 or ( 2) 5 per-
cent of the investor’s annual income or
net worth; and
• For investors whose annual income or
net worth exceeds $100,000, the lesser
of ( 1) $100,000 or ( 2) 10 percent of
the investor’s annual income or net
worth. 8
