JOBS Act – Not Just About Jobs: The Metamorphosis of Crowd Funding for Digital Entrepreneurs

by Latoya Livingston and Maurita Coley on October 22, 2013

JOBS ActIf you’ve got a great business idea but are perplexed about how to get it funded, you should be aware of some recent changes in the Jumpstart Our Business Start-ups Act, commonly called the JOBS Act of 2012, that make it easier for digital entrepreneurs to raise much-needed capital to fund their businesses.

Financial Innovation in the Digital Age

In recent years, crowdfunding has become the go-to method for raising funds for digital and non-digital entrepreneurs alike, with sites such as Kickstarter.com and Indiegogo.com leading the pack of crowdfunding portals that now numbers at around 650.  While most entrepreneurs find modest success in their endeavors, savvy crowdfunders can reap massive rewards for their campaigns, if their approach is optimally structured.

Those well-versed in this relatively new phenomenon are cashing in on books and lectures aimed at teaching those strategies to capital-strapped entrepreneurs.  For example, Kevin M. Lewis, founder of Lewis Education Group and author of the e-book “Crowdfundamentals:  How to Raise $100K in 30 Days through Crowdfunding,” says he plans to take advantage of a recent significant rule change by the Securities and Exchange Commission (SEC) that will revolutionize the way that entrepreneurs raise capital for start up businesses.

“On September 23, 2013, the SEC announced the formal adoption of amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 to implement Section 201(a) of the JOBS Act,” says Lewis. “The amendment to Rule 506 allows an issuer to engage in general solicitation or general advertising in offering and selling securities pursuant to Rule 506, provided that all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors.  This is a huge opportunity for all entrepreneurs, but for minority entrepreneurs in particular.”

Lewis, who specializes in working with small African-American businesses, says he has helped small business clients raise as much as $100,000 in 30 days.  Lewis reports that one client’s Indiegogo campaign generated $65,000 more funds than the entrepreneur requested.

Crowdfunding:  Fundamentally Not Free

According to Lewis, crowdfunding can be a vital tool for digital entrepreneurs if they set a plan and are willing to continuously hone their business and fundraising plan.  However, crowdfunding isn’t free.  Lewis’ group, for example, currently charges a $99 administration fee plus a percentage of the raised funds for his consulting services in a crowdfunding campaign. Whether or not a campaigner uses a consultant such as Lewis, crowdfunding websites or portals also charge fees ranging from four to ten percent, and some portals won’t release the funds unless the campaign hits the preset funding goal. Kickstarter.com, for example, won’t give the crowdfunder the monies that were raised and returns the funds to investors/donors if the goal isn’t met. Indiegogo.com charges an additional fee if the campaigner fails to meet its pre-established goals for the campaign. Crowdfunding websites like Rockthepost.com offer an alternative to traditional crowdfunding by screening entrepreneurs and investors to find the best fit, which may be a better option for  entrepreneurs who want to raise larger sums of money but are not large enough to attract venture capital investment.

JOBS Act Tweaks Open Doors to Small Business Investment

Prior to the passage of the JOBS Act, crowdfunding websites were restricted to offering a product, discount, or enticement in exchange for monetary funding on a reward or donation basis.  Changes to the law mean that the general public can now receive company equity in exchange for funding; however, the law limits investments to five percent for individuals with annual income of less than $100,000 and ten percent for those who make over $100,000.

Although the law took effect in January 2013, it is still subject to further SEC regulation and restrictions.  In fact, on July 10th, the SEC voted four-to-one to finalize rulings around Title II of the JOBS Act, which lifts the longtime ban on public solicitation.  Title II, which went into effect September 23rd, creates a new type of offering called 506(c), which allows companies to freely advertise that they are fundraising to the general public through social networking websites such as Facebook or Twitter, as long as that promotion leads back to a platform that verifies that investors are accredited before granting access to the investment offering.

Although companies have to enter new filings with the SEC prior to doing any solicitation, this announcement is a positive for crowdfunding companies and entrepreneurs alike.  The SEC expects to propose Title III of the Act, which will allow non-accredited investors to participate and invest this Fall.   Insiders believe Title III will likely be voted on and passed by early 2014.

All of these new changes and opportunities for financing endeavors have created an atmosphere that opens new financing doors for entrepreneurs, and especially minority entrepreneurs, on a daily basis. But entrepreneurs are cautioned to invest the time to learn about financing options and secure expert counsel prior to soliciting monies from the public.

  • Latoya LivingstonLatoya Livingston is a Washington-D.C.-based attorney with years of legal experience working in the private and public sector. Currently, Attorney Livingston serves as a Senior Attorney and the Earle K. Moore Fellow at MMTC.
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  • Maurita ColeyMaurita Coley, Vice President and Chief Operating Officer of MMTC, is the former Executive Director of Capital Area Asset Builders and a former Partner at the Davis Wright Tremaine Law and Cole Raywid & Braverman law firms. She earned her law degree from Georgetown Law where she was a recipient of the 2011 Paul R. Dean Award, and she holds a BA in Communications from Michigan State University. Coley served on the BET executive management team in the 1990s.
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