JOBS to Open Up Equity Crowdfunding, Tread With Caution

By Andrés Uribe, Expedition PR

The Jumpstart Our Business Startups Act, commonly known as the JOBS act, is inherently a great thing for small businesses. Part of this piece of legislation will serve to amend archaic rulings regarding the advertising of equity issuances to the public. This is aimed at allowing ordinary unaccredited investors the opportunity to have startups advertise their equity offerings to them, and it will also serve to make it easier for accredited investors to invest in early stage companies. These rules will eventually change the options available to small companies when they seek crowdfunding dollars.

crowdfundingWhile these initiatives sound true to their name in seeking to help ‘Jumpstart’ startups seeking early stage investors, the legal ramifications of such amendments are tricky to say the least. The laws that the JOBS act is attempting to amend were put in place in the 1930’s to help protect grandma and grandpa, or any unaccredited investors making less than $200,000 annually or who have less than $1 million in assets, from being swindled out of their retirements by a questionable small business seeking investments. It is for this reason that lawmakers are moving with caution as they attempt to fine tune the amendments that the JOBS act is calling for while still protecting all potential investors.

Without reading all of the crowdfunding exemption of the JOBS Act, here are a couple of points you will want to be vigilant of before you decide to invest in an equity-based crowdfunding campaign.

Choose your crowdfunding platform carefully. Before you decide to issue or invest in an equity crowdfunding campaign, be weary of the platform that will be facilitating the transaction. Generally speaking, when you sue a company in the United States and win, but the company doesn’t have the funds to pay you back even after all assets are liquidated, then tough luck, you cannot go after the personal wealth of those leading the company. But in the case that there were funds raised by the company through an equity crowdfunding site that wasn’t playing by the rules, this all changes.

If equity crowdfunding is facilitated by a website that doesn’t comply with applicable securities regulations, then all investors in the company, weather they invested through the unlawful website or by other means, have the right to get their money back. Additionally, according to an AngelList interpretation of the laws, “the directors and officers of the company may also be personally liable in this event.” Meaning that in certain cases investors will be able to go after the personal wealth of those leading the company, should the company assets run dry.

Watch out for lemons! If you have ever been to a used car lot and seen a car that turns heads like a Ferrari but has the price tag of a Civic and is still sitting on the lot, there is probably a reason for this. Possibly there was a small fire in the back seat, or the back axel is slightly bent and will soon need replacing but you don’t have the tools or knowledge to check for this until it’s too late. These problems are similar to the problems that will inevitably plague the equity crowdfunding model; the plight of the lemon business.

There are countless small time accredited investors, angel funds, venture capital and private equity firms out there that have teams of people scouring startup conferences and conventions in search of companies that will net them a return. There is a good chance that these professional investors have already looked at the startup you are considering investing in, thoroughly examined its team, business model, and other relevant business assets, but have considered it a loser. Maybe they made a mistake and missed something in their analysis, this isn’t an impossible scenario. But regardless, the point is, that if you are considering investing in an equity crowdfunding project, you must at least be realistic and assume that the company you are investing has most likely already been analyzed and passed up by other more accredited investors.

Now all this isn’t to say you should avoid equity crowdfunding projects. But rather, proceed with caution, and as with any investment, be sure to do your due diligence before handing over money to anyone. As the saying goes, a fool and his money are soon parted.