Coming Soon to a Start-up Near You: Crowdfunded Capital

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When small business clients learn about the barriers to sourcing capital imposed by U.S. securities laws, perhaps the most consistent theme is one of frustration. The prohibition on general solicitation of investors imposed by Rule 506 of the Securities Act of 1933, as amended (the “Securities Act”), means that unless the business has a pre-existing relationship with a potential investor, it can be difficult to make the right connection to bring in critical funding. And while other avenues to capital permit general solicitation in private offerings, they generally come at the price of lengthy, and potentially expensive, merit review by state securities administrators. Soon, this may all change.

Having passed both houses of Congress, the Jumpstart Our Business Startups Act (the “JOBS Act”) is on the cusp of receiving President Obama’s signature. With those few strokes of a pen, U.S. law in this area will dramatically change. Crowdfunding, or the practice of raising capital online from a large number of small investors, will become a practical option for businesses wishing to source capital in the states in the U.S. While there are still a few details to iron out in the form of new rules to be crafted by the Securities and Exchange Commission, the basic framework is clear...

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