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President Barack Obama signs the Jumpstart our Business Startups (JOBS) Act. AP Photo / Carolyn Kaster
President Barack Obama signs the Jumpstart our Business Startups (JOBS) Act. AP Photo / Carolyn Kaster

Online funding given welcome jump start in the US

The Life:Since Congress relaxed securities laws this spring to make it easier for entrepreneurs to fund their businesses, new middlemen are trying to position themselves to benefit.

For all the hype around small businesses in the United States raising money by selling equity stakes to individuals online, no one knows what this type of crowdfunding will actually look like. Since Congress relaxed securities laws this spring to make it easier for entrepreneurs to fund their businesses, new middlemen are trying to position themselves to benefit. The law, called the Jumpstart Our Business Startups (Jobs) Act, called for a new way for private companies to raise up to US$1 million (Dh3.67m) online from retail investors. It also eased other regulations for businesses trying to raise capital, including rolling back the ban on publicly seeking investment in private companies.

What will crowdfunding intermediaries look like?

The law provides for entities to connect companies raising money with people who want to invest. These can be existing securities brokers, or they can be what the law calls "funding portals". While many new companies want to play this role, questions about how they can operate remain: how will they vet companies raising money? How will they make sure investors understand the risks? How will they make money? "This is a new animal, the crowdfunding platform," says Sara Hanks, a former Securities Exchange Commission (SEC) lawyer who is now the chief executive of CrowdCheck, which plans to help investors carry out due diligence on crowdfunding opportunities.


How will they keep bad actors out?

The law directs crowdfunding platforms to "reduce the risk of fraud" by doing a background check on entrepreneurs asking for money. It doesn't say what kind of background check is necessary or what kind of past problems should get someone barred. It would seem obvious that someone with a history of securities fraud ought to be kept out. What about other crimes? What about civil lawsuits? The law doesn't say, and regulators have to figure it out.


What role will state regulators play?

Although crowdfunding investments will not be subject to state securities laws, state-level watchdogs still police other offerings not regulated by the SEC. The law change allowing private companies to promote their share sales publicly - at least to wealthy "accredited" investors - makes that job much more complicated. Bill Beatty, the Washington state securities administrator, says advertising unregistered investment opportunities used to be a red flag for a scam. With the advertising ban repealed, he asks: "How are we to detect the legitimate from the illegitimate offerings?"


When will the rules be set?

Congress passed the Jobs Act as the SEC was still busy writing rules for the Dodd-Frank financial reform law. The Jobs Act directed the agency to make rules relating to crowdfunding and several other law changes by the end of the year. Crowdfunding is on ice until the SEC finalises the regulations, even if that takes more time than the law allows for. "We did say at the time that the deadline in the statute would be challenging and it is," says Meredith Cross, the director of the SEC's division of corporation finance.

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