January 2013 Bar Bulletin
 
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January 2013 Bar Bulletin

Empowering the Small(er) Investor and Business

By Gavin Johnson

 

Last April, President Obama signed the JOBS Act into law. The goal behind the JOBS Act was to ease federal regulations to make it easier for smaller companies to obtain funding. Recently, there has been a rising interest in the effect of the JOBS Act, focused mainly on "crowdfunding" - which, at least for purposes of this article, refers to the funding of a company by selling small amounts of equity to many investors through online intermediaries.

Title III of the JOBS Act (the crowdfunding portion) allows for companies to raise funds online from a variety of investors, including non-accredited investors. Industry professionals can't seem to agree on what the effect of crowdfunding is going to be. Some of the potential impacts for both investors and businesses are set forth below.

Non-Accredited Investors

Depending on whom you talk to, you'll hear mixed ideas about the effect of crowdfunding on the investment landscape. One thing is for sure, the barrier to entry for non-accredited investors has been lowered. So one potential impact that crowdfunding will have is an increase in non-accredited investors' access to the investment game.

Non-accredited investors will likely benefit from the experience. Most individuals in the U.S. do not fall under the definition of "accredited investor" and, therefore, have not been able to learn about investing in businesses in the same way accredited investors have. By opening the doors to crowdfunding, the JOBS Act allows many non-accredited investors to learn about investing, including the rights and obligations of a shareholder.

But minimizing barriers to entry is a double-edged sword. On the one hand, reducing the costs associated with investing will no doubt increase investors' ability to invest and companies' access to capital. However, the barriers to entry were created for a reason - to prevent fraud and to protect the investor.

These barriers have been in place for decades, and lifting them may increase the risk of fraud. Hopefully, individuals who have never invested will take the initiative to learn about investing before diving in. Otherwise, it would be like jumping in a pool before learning to swim. The consequences could be ugly.

Title III does place limits on the amount an individual is able to invest using crowdfunding. These limits are put in place to reduce the amount of frivolous, "uneducated" investing that is thought to occur throughout the non-accredited investor community.


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