On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (commonly referred to as the "JOBS Act"), which was designed to promote job creation by small companies and start-ups through the relaxation of the regulatory burdens of raising capital. The JOBS Act will, inter alia, relax restrictions on private fundraising and expressly allow companies to "crowdfund" up to $1 million in capital over a 12-month period from a large number of small investors online. In this vein, the JOBS Act directs the Securities and Exchange Commission (SEC) to adopt rules within 270 days to implement a new exemption to allow crowdfunding. The SEC has announced that, until the rules are adopted, any offers or sales of securities purporting to rely on the crowdfunding exemption will be unlawful under the federal securities laws.

While the JOBS Act will help smaller companies raise capital, it also opens the door to potential civil actions that may not be covered by the typical private company D&O insurance policy. This alert describes the potential D&O insurance implications of the JOBS Act for companies that choose to participate in crowdfunding.

A New Exemption and a New Cause of Action

Section 302 of the JOBS Act provides a new exemption from registration under the Securities Act of 1933 for private companies using crowdfunding to sell no more than $1 million of securities within any 12-month period, as long as the amount sold to any one investor does not exceed specified per-investor annual income levels and net-worth limitations. Significantly, the JOBS Act also authorizes a purchaser in a crowdfunding offering to bring a civil action against an issuer for rescission or rescissionary damages in the event that there are material misstatements or omissions in connection with the offering.