Crowdfunding is a means for large groups of people to give small amounts of money for a particular cause. Websites like Kickstarter and IndieGoGo allow people to donate to a cause, business, or project, usually in exchange for gifts, free products, or other fringe benefits. The Federal JOBS Law enacted in March 2012 legalized equity crowdfunding subject to a series of legal requirements and regulations, which are currently being drafted by the Securities Exchange Commission. Before the JOBS Act, receiving securities in exchange for small contributions was illegal or highly impractical.

Crowdfunding creates a new funding structure for issuers seeking up to $ 1 million, and it is anticipated that there will be restrictions on the amounts an investor will be able to invest based on their annual income and net worth. The issuer must submit to the SEC a comprehensive business plan, how the securities are valued and financial statements. The issuer will have annual filing requirements with the SEC.

Crowdfunding is anticipated to be heavily internet based, and using a structure will have a broker or broker funding portal that must be registered with the SEC and FINRA. The portal will not be able to offer investment advice or solicit buyers. The portal must ensure that each investor understands the investment. The portal will be subject to the information requirements of the SEC with respect to each issuer. The portals will be tasked with implementing investor protections as directed by the SEC.

Foreign entities will not be able to use crowdfunding, because it will be available only to entities organized in the United States. Issuers and intermediaries will be subject to disqualification from the use of crowdfunding for previous bad acts.

To strike a balance between allowing issuers to raise small amounts of capital and protecting investors’ rights, an issuer may sell a total amount to any investor over a 12-month period up to:

(i) the greater of $ 2,000 or 5 percent of the annual income or net worth of said investor, as applicable, if the annual income or net worth of the investor is less than $ 100,000; Y

(ii) 10 percent of the annual income or net worth of said investor, as applicable, without exceeding a maximum total amount sold of $ 100,000, if the annual income or net worth of the investor is equal to or greater than $ 100,000. The net worth does not include the residence of the investor.

The issuer will be responsible for any errors, and the law requires the issuer to file information and financial statements with the Securities Exchange Commission and provide investors and the Internet broker or financing portal, and make available to potential investors certain information, including but not limited to:

1) the name, legal status, physical address and website address of the issuer;

2) the names of the directors and officers (and any person occupying a similar status or performing a similar function) and each person who owns more than 20 per cent of the issuer’s shares;

3) a description of the issuer’s business and the issuer’s anticipated business plan;

4) a description of the issuer’s financial condition, including, for offers that, together with all other offers from the issuer within the preceding 12-month period, collectively have target offer amounts of $ 100,000 or less;

In addition, 5) income tax returns filed by the issuer for the most recently completed year (if applicable); and financial statements of the issuer, that if $ 100.00 or less is offered, they will be “certified” by the issuer as true and complete in all material respects, and that if the issuer has offered more than $ 100,000, but not more than $ 500,000, financial statements “audited” by a certified public accountant who is independent of the issuer, using professional standards and if the issuer has offered more than $ 500,000 (or any other amount that the SEC may establish, by rule), audited financial statements;

6) a description of the stated purpose and intended use of the proceeds of the offer requested by the issuer in relation to the amount of the target offer; the target bid quantity,

7) the deadline for reaching the target offer amount and periodic updates on the issuer’s progress in meeting the target offer amount;

8) the public price of the securities or the method of determining the price, provided that, prior to the sale, each investor is provided in writing the final price and all required disclosures, with a reasonable opportunity to rescind the commitment purchase the securities.

The buyer must keep the acquired securities for at least one year after the date of purchase. The JOBS Act required the SEC to promulgate the final rules for crowdfunding before December 31, 2012, but there are strong indications that the SEC will not have such rules in effect by that date. Until the SEC publishes its final rules, stock crowdfunding is illegal.