US JoBS Act Passes:Crowdfunding US Startups Grows Closer to Reality!
On March 8th, the group of US Congress bills, collectively called the JoBS Act (Jumpstart our Business Startups) passed the House of Representatives and now goes to the Senate….and IMHO, that spells trouble for our Canuck startup futures…but let me explain! You already know as a reader, that we’ve been watching closely on HR 2930, the Crowdfunding Bill, but this group encompasses much more opportunity for both startups and investors and here’s a simple one-pager on the Act itself…
Right now, it’s illegal for a US or Canadain startup to solicit investors on platforms like Twitter or Kickstarter. But the US-onlyJOBS Act would change that south of the border only!
For startups raising $1 million or less, anyone can now buy up to $10,000 or 10 percent of the annual income (whichever is less) in equity. One of the principle drivers behind the IPO filings of Facebook and Zynga was the 500-shareholder rule, a vestige of the Securities and Exchange Act of 1934, which said that any company with more than 500 shareholders has to open its financials to the SEC like a public company. But under the JOBS Act, anyone who gives $10,000 or less will not count toward this limit. The act also raises the shareholder limit from 500 to 1,000.
Startups can opt to raise as much as $2 million in this manner; but if they go the crowdfunding route, they will have to provide audited financial statements to their investors. And while raising capital from the crowd is pretty nifty on Kickstarter, it has some drawbacks for startups. Here are some highlights from our FAQ on crowdfunding:
“First, US startups must understand that minority stockholders have certain significant rights under state law, including voting rights, the right to inspect the company’s books and records, the right to bring a derivative claim on behalf of the company, and certain protections against oppression by the controlling stockholders. Indeed, the more stockholders a startup has, the greater the likelihood that a disgruntled stockholder will cause problems, including filing lawsuits.
Second, having hundreds of stockholders is an administrative nightmare and will be time consuming and costly. Presumably, each stockholder will be required to execute a subscription agreement and/or stockholders’ agreement to address key issues such as transfer restrictions, rights of first refusal, and drag-along rights. There will also be administrative issues relating to voting and stock transfer issues.
Third, startups will likely have difficulty raising funds from VCs and other sophisticated investors if they have hundreds of unsophisticated stockholders. Needless to say, few sophisticated investors will want to sit on the board of directors of such a company due to the risks of lawsuits relating to director liability, and I would assume D&O liability insurance rates will skyrocket for these companies…”
As you can see, there are other issues here to think upon…the US JOBS Act also makes it easier for small companies to go public by increasing the offering threshold for companies exemepted from SEC regulation from $5 to $50 million on companies. Additional regulations will be phased in over a five-year period for companies that stay under $1 billion in revenue.
And what is next for the US is that the U.S. Senate, which startups hope will quickly pass the similar bill. The White House supports the House bill, so upon reconciliation, it will be signed into law. Then entrepreneurs will have a new option to consider when raising money for their startup…in the US!!!
And for us Canucks? Well, IMHO, as the US moves to enble such funding….Canuck startups will have a choice…open up a US based startup for that kind of funding via the coming wave of US crowdfunding sites that will rise in response to the new JoBS Act….or stay here in Canada and give up any chance of same. Which would you do…I know what the answer will be for the startups that I work on and I know what counsel I’ll give for same.
Hello….Canada? Are you listening here?