by Michael G. Homeier, Founding Shareholder, Homeier Law
“Crowdfunding” persists as one of the hottest topics of the business investor financing and securities worlds, since its introduction via the JOBS Act (“Jump-start Our Business Startups”) passed by Congress and signed into law by President Obama in 2012.* Crowdfunding has revolutionized raising investor funding for small- and medium-sized businesses in every industry, from real estate development to manufacturing, agriculture to technology, energy to movies. Its use in EB-5 continues steady growth, offering the chance to expand marketability in a significantly constrained industry while potentially reducing sky-high fees.
What is “crowdfunding”? Simply, raising funding from a crowd. Initially, the idea was to raise small amounts per investor from a large number (a crowd) of investors. In order to reach large numbers of possible investors, the new technology of the internet is used (along with print, radio, and television) to publicly advertise an offered investment to complete strangers located locally, regionally, nationwide, and/or across the globe – and not only investors with whom the issuer or its brokers were already introduced. In addition to strangers, a business can reach out to its existing stable of social media connections, through Facebook, LinkedIn, Yelp, etc. And finally, funding could be accepted not only from accredited (wealthy) investors, but in many cases from less wealthy “unaccredited” or non-accredited investors (the pool or “crowd” of which dwarfs in sheer numbers the comparatively limited crowd of accredited investors).
The JOBS Act is actually a set of six acts, each with its own specifics and implementing regulations recently promulgated by the Securities and Exchange Commission (“SEC”), and all of them intended to make easier the funding of businesses, especially smaller ones. The three JOBS acts most relevant to business crowdfunding (including EB-5) all share the new permission to use broad public advertising (especially the internet) to raise money from investors without full formal registration, an outreach strategy previously denied businesses since the securities laws were first adopted over 80 years ago. Further, two of those three avenues allow pursuit of the huge new class of unaccredited investors that effectively has not previously been allowed to invest.