Issuing and Investing in Securities through Crowdfunding: Frequently Asked Questions
DISCLAIMER: The adoption of the JOBS Act has raised many questions and issues related to Crowdfunding; these Frequently Asked Questions (FAQs) are intended to provide clarification. The information below does not take the place of legal advice. To protect against undesired and unintended consequences, one should consult with competent legal advisors.
What is Crowdfunding?
The term Crowdfunding has many different connotations. Crowdfunding includes a wide variety of collective efforts and allows people to raise funds for almost any type of project with donations from others. Crowdfunding also refers to funding a company by selling small amounts of equity to a large number of investors; this more narrow definition is what we are addressing in this FAQ.
What is the JOBS Act?
The Jumpstart Our Business Startups Act (the JOBS Act) was signed into law by President Obama on April 5, 2012.  The JOBS Act makes it easier for private, U.S. companies to raise capital by selling investments in their companies (securities) to investors by reducing regulatory requirements and government oversight. Note: Only private (not publicly traded) U.S. companies may avail themselves of the JOBS Act provisions.
How does the JOBS Act potentially affect Michigan investors?
Title III of the JOBS Act is known as "Crowdfunding", and it will significantly affect investors. New, private U.S. companies may "crowdfund", i.e. offer and sell their securities through the internet to an unlimited number of investors.
From an investor protection perspective, how is crowdfunding different from a traditional investment opportunity?
Traditionally, a broker dealer or investment adviser representative evaluates an investor's risk tolerance, investment objectives, investment goals, income, net worth, etc. before recommending an investment product or plan. Under the JOBS Act, a private U.S. company may offer and sell its securities to any investor through a funding portal, without making a determination as to the suitability of the investment. A funding portal is a website or platform that advertises the company's investment opportunity and assists the investor in making payment to the company.
Does the JOBS Act impose any restrictions/limitations on how much money a private, U.S. company can raise via crowdfunding?
Yes. The aggregate amount a private, U.S. company may sell to all investors during a 12 month period cannot exceed $1 million dollars. The aggregate amount a private, U.S. company may sell to any one investor cannot exceed:
(i) the greater of $2,000 or 5% of the annual income or net worth of the investor, if either is less than $100,000; and
(ii) 10% of the annual income or net worth of the investor, up to a maximum aggregate amount sold of $100,000, if the investor's annual income or net worth is equal to or more than $100,000.
Does the JOBS Act impose any limitations on the number of investors who may purchase securities sold by a private, U.S. company pursuant to the JOBS Act?
Under the JOBS Act, there is no limit on the number of investors that can purchase securities sold by a private, U.S. company pursuant to the JOBS Act.
Investors obtained through crowdfunding are shareholders; however, they are not counted against the shareholder threshold.
How does an investor know if the company that is offering and selling its securities via the internet is legitimate?
Investors should always thoroughly investigate all investment opportunities. Investors should also remember that only private, U.S. companies are allowed to engage in crowdfunding pursuant to the JOBS Act. All companies that offer and sell securities pursuant to the JOBS Act must do so through a broker dealer or a funding portal. As noted above, a funding portal is a website or platform that advertises the company's investment opportunity and assists the investor in making payment to the company. Funding portals and broker dealers must be registered with the Securities and Exchange Commission (SEC) and a self-regulatory organization.
The State of Michigan, Corporations Division provides the ability to conduct a business entity search. This tool allows individuals to search for records of corporations, limited liability companies, and limited partnerships authorized to transact business in the State of Michigan. Please see the click the link to the business entity search page: http://www.dleg.state.mi.us/bcs_corp/sr_corp.asp.
Does the JOBS Act impose any other requirements on the broker dealer or funding portal?
Yes. As noted above, brokers and funding portals must register with the SEC and any applicable self-regulatory organization, such as the Financial Industry Regulatory Authority.
A Funding Portal cannot offer investment advice or make recommendations; solicit purchases, sales, or offers to buy the securities offered or displayed on its website; or compensate employees, agents, or other persons for solicitation of the foregoing; and cannot hold, possess, manage, or otherwise handle investor funds or securities.
A Funding Portal is responsible for providing disclosures and confirming investor qualifications.
A Funding Portal is responsible for taking action to prevent fraud
Does the private, U.S. company that offers and sells securities pursuant to the JOBS Act have to register the securities with the State of Michigan? If they are not registered, does that have any impact on investor protection?
Securities offered and sold pursuant to the JOBS Act are deemed federal covered securities and do not have to be registered with the State of Michigan Securities Section. What this means is that the State of Michigan does not review any materials related to the offer and sale of these securities to determine if the offering is fair, just, equitable and meritorious.
Does the State of Michigan have any enforcement authority with respect to the issuers of crowdfunding securities and/or the funding portals?
Yes. The State maintains the authority to take enforcement action against the issuer, funding portal or any person or entity that is using the crowdfunding exemption.
Additionally, the State retains jurisdiction to investigate and bring enforcement action with respect to fraud or deceit or unlawful conduct by a broker, dealer, funding portal or issuer.
Does the JOBS Act impose any requirements on the private, U.S. company that offers and sells securities?
Yes. Under Section 4A(b) of the Securities Act of 1933 (15 USC 77a et seq.), issuers must file certain information with the SEC including the company's name, address, website, financial statements or tax returns depending on the size of the offering, a description of how the money raised in the offering will be used, and the type of business in which the issuer is engaged. Also, each year issuers must file with the SEC and provide to investors reports of the results of operations and current financial statements or tax returns.
Are not allowed to advertise the terms of the offering; only allowed to provide notices directing the investors to the funding portal or broker dealer through which the offering is being facilitated.
Cannot compensate third party promoters unless such compensation is disclosed to the investors.
Are subject to liability for making untrue statements of material facts or omissions of material facts that would otherwise make the offering misleading.
When securities are purchased pursuant to the crowdfunding provision of the JOBS Act, are they transferable?
Investors cannot transfer securities purchased pursuant to the crowdfunding provision of the JOBS Act for 1 year beginning with the date of purchase. There are exceptions to this 1 year restriction for transfers:
(i) to the issuer,
(ii) in a registered offering;
(iii) to accredited investors;
(iv) certain family members; or
(v) as may be limited by the SEC when it promulgates rules under the JOBS Act.
When does Title III of the JOBS Act take effect?
The JOBS Act directs the SEC to create rules exempting crowdfunding from the securities registration laws. The SEC has proposed rules, but final rules have not been adopted. The proposed rules are available at: http://www.sec.gov/rules/proposed/2012/33-9354.pdf.
COMPANIES CANNOT ENGAGE IN CROWDFUNDING TO ISSUE SECURITIES UNDER TITLE III OF THE JOBS ACT UNTIL THE SEC ADOPTS RULES.
Where can I learn more about the JOBS Act?
The Securities and Exchange Commission has a FAQ available at http://www.sec.gov/spotlight/jobs-act.shtml.
Also, the North American Association of Securities Administrators has an investor alert available at:
Who do I contact if I have questions about crowdfunding?
The Corporations, Securities, and Commercial Licensing Bureau (CSCL) administers the Uniform Securities Act in Michigan
CSCL's contact information is as follows:
 Pub. L. No. 112-106, 126 Stat. 306. The JOBS Act can be viewed in its entirety at: http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.