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Banking and Finance

Crowdfunding Under the JOBS Act: The Bottom Line Impact on Private Equity Issuers and Market Intermediaries

by Jonathan B. Wilson and Dianne L. Trenholm


On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the "JOBS Act"), H.R. 3606, into law calling it "a potential game-changer" for startup companies. President Obama signed the JOBS Act just over a week after it was passed by Congress with strong bipartisan support. The stated purpose of the JOBS Act is to "increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies."

The JOBS Act contains several provisions that open new doors for both public and private emerging companies. However, Title III of the Jobs Act, named the "Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012," or the CROWDFUND Act, has by far generated the most discussion and debate in the context of the private equity marketplace. The CROWDFUND Act has been added as new Section 4(6) of the Securities Act of 1933, as amended (the "Securities Act").

The concept of "crowdfunding" - or raising money privately from a large pool of individuals - is not a new one. For example, a charitable organization soliciting donations from the public at large, oftentimes in small dollar increments, falls within the guise of crowdfunding. Additionally, private companies previously have been permitted to engage in crowdfunding activities pursuant to existing exemptions under federal securities laws, e.g., Regulation D promulgated under the Securities Act, as long as all other conditions of such exemptions are met. Title III of the new JOBS Act codifies "crowdfunding" as a separate exemption for private securities offerings and provides parameters for issuers and market intermediaries that obviate the need to comply with other conditions of exemptions such as Regulation D.

In early versions of the legislation (prior to passing Congress), the CROWDFUND Act would have allowed private issuers to engage in crowdfunding solicitation via the Internet to the public directly. This was a ground-breaking proposal. Domain names containing almost every imaginable variation of the term "crowdfunding" were reserved in anticipation of this new marketplace for small, private issuers. Forget Wall Street. Private issuers were expected to cut out the middle man and take over Main Street with crowdfunding offerings offered directly to the public. "Not so fast" said many critics, including the Securities and Exchange Commission (the "Commission"). Significant concerns about the potential for fraud and abuse were raised with Congress. Charles Ponzi, circa 1920, meets the Internet age. Congress heeded the warnings.'

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Jonathan B. Wilson is a partner in the Firm, focusing his practice on technology, corporate finance, M&A and issues of concern for growing public and private companies. With more than 21 years of legal experience, including serving as the general counsel/chief legal officer of two public companies, Mr. Wilson regularly advises emerging growth clients on corporate finance and securities issues.

Dianne L. Trenholm is of counsel to the Firm, focusing her practice on securities matters relevant to public and private issuers, broker-dealers and registered investment advisers. Ms. Trenholm has 15 years of combined experience serving as senior in-house counsel to a national, independent broker-dealer and representing private and public issuers with respect to multi-billion dollar initial public offerings.