The State Of The JOBS Act Crowdfunding And What Entrepreneurs Need To Know: Business Success Strategies Q&A w/ Sara Hanks


Equity and debt-based crowdfunding in the U.S. is partially up and running. President Obama signed the Jumpstart our Business Startups (JOBS) Act in April 2012, but the Securities and Exchange Commission (SEC) has not fully implemented all of its provisions. While many entrepreneurs and members of the crowdfunding community await final regulations governing Title III of the JOBS Act, which allows non-accredited investors to participate in crowd investing, an increasing number of entrepreneurs and businesses are benefitting from Title II crowdfunding (accredited investors only). Title II crowdfunding is showing great promise.  At the same time, rewards and gift-based crowdfunding continue to mature and grow. 

The JOBS Act also eased the process of going public in an IPO (Title I), which is bearing fruit. According to a NYSE release on July 1, 2014: “More than 85% of all U.S. IPOs this year have leveraged the JOBS Act – with $20.3 billion raised from JOBS Act IPOs so far this year – a reflection of how the capital markets can support emerging growth companies.”

To get more insight into how the crowdfunding market is developing and what entrepreneurs need to know, SBE Council president & CEO Karen Kerrigan turned to Sara Hanks, co-founder and CEO of CrowdCheck. For CrowdCheck’s clients — entrepreneurs, investors, and online platforms — they benefit from the impressive degree of legal and government experience Ms. Hanks brings to the table.  CrowdCheck provides due diligence and disclosure services for online investments.  We are pleased she has joined us for this edition of Business Success Strategies Q&A.

Business Success Strategies Q&A with Sara Hanks:

KERRIGANIt’s been more than two years since the JOBS Act was signed into law by President Obama, and yet key regulations have not been finalized. Still, the equity crowdfunding market is developing (with accredited investors-Title II) while gift and donation-based crowdfunding continue to chug along. What is your take on where the market is right now, and whether the JOBS Act is fulfilling its intended purpose?

Hanks: The JOBS Act was a mixed bag of capital formation provisions. Some of it (for example, Title I, which eases the process of going public in an IPO) is working well. But that’s really a completely different market, for much later-stage companies than Title II accredited crowdfunding. The accredited crowdfunding market is very promising, but it’s very early days yet and only a fraction of the platforms who intend to offer online alternative investments have stood up yet.

KERRIGAN: Should small businesses be concerned that the rules are taking so long with regards to Title III crowdfunding?  And, given the specifics of SEC’s proposed regulations on Title III, do you believe the final rules will be beneficial for small businesses?

Hanks: I wouldn’t be too concerned about the time: it always takes a long time to write rules for major projects. The substance of the rules, however, is another thing entirely.

KERRIGANIf you could wave a magic wand over the proposed SEC rules on Title III, what are the key things you would fix 

Hanks: Let small businesses use a basis of accounting other than GAAP; reduce the ongoing disclosure burden and be more flexible with respect to audit requirements.

KERRIGANIf Title III falls apart or is not practical for many small businesses, what about Title II? Are you bullish on this opportunity and others presented by the JOBS Act?

Hanks: Very bullish. It’s a much larger market and after all accredited investors have more money. It’s starting slowly but it will develop into an extensive opportunity.

KERRIGANIf a small business owner or entrepreneur wants to crowdfund, what are the first things they should consider before they pursue the effort?

Hanks: Make sure you have all your corporate documentation in order. Are all your directors properly appointed and all your previous raises properly documented? Do you have licenses and permits to do what you are doing in the location you are doing it? Have you checked your officers and directors to ensure no-one violates the SEC “Bad Actor” rules? Not having your paperwork in order is fatal when you are raising money from investors over the Internet.

KERRIGANWhat are the most important things that funders are looking for in their potential investments, especially on a crowdfunding platform?

Hanks: It’s early days yet but I’m seeing a lot of success in products or services that investors can intuitively see a need for. When an investor can say “Oh, I see why people want/need that,” those deals seem to close faster. And on the real estate side, people are looking for yield and a property that improves the community.

KERRIGANAs you noted in a recent blog post on, there are different types of crowds on platforms. How does a serious entrepreneur avoid getting stuck with “the mob” or a crowd that may turn their profile page into a “chat room.” Obviously they’re looking for a thoughtful, serious crowd – does platform selection matter?

Hanks: Platform selection will matter a lot. The only way, in my opinion, you get useful crowd input is if you have a moderated Q&A process and require potential investors to comment or post questions in their real name. Some platforms will likely have some process for commenters to rate other commenters, which will be useful.

KERRIGANThe first case of crowdfunding fraud has been brought by the Washington state Attorney General’s office against a company that completed a crowdfunding campaign on Kickstarter but did not fulfill its promise to funders. What does this mean for crowdfunding?

Hanks: It’s a useful heads-up. People need to know that if you take money from people on the basis of promises that you either don’t intend to keep or know you can’t keep, you are going to get into trouble.

KERRIGANHow do you define “fraud” and does it become more problematic in the crowdfunding environment?

Hanks: The definition of fraud varies from state to state and among different types of law. In securities law fraud is, essentially, a knowing or reckless misstatement of a material fact. So if you tell an investor you can deliver product by December and you just got off the phone from your manufacturer who said “I don’t think I can deliver by December but I’ll try my best,” that’s fraud. It’s not being optimistic, it’s fraud. Entrepreneurs need to understand that.

KERRIGANSpeaking of the states, some have passed laws allowing for equity and debt-based crowdfunding within their borders, under their own set of rules. Any thoughts on whether this will develop into something useful for entrepreneurs who happen to reside in those states?

Hanks: It’s limited. You have to bear in mind that these state exemptions exist within the federal intrastate exemption. So before you meet the state requirements you have to meet the federal requirements. And the federal rule that most of the states are relying on requires that a company be incorporated in that state, that 80% of its assets and 80% of its revenues be from that state and that 80% of the proceeds be used in that state. Also, there are restrictions on publicity outside the state (e.g., by using social media). This exemption is great for hyper-local companies like gyms and bakeries, but it won’t work for internet-based enterprises.

KERRIGANOn the platform side of the business, I have spoken to individuals who are looking to launch a funding portal. Given the regulatory and compliance requirements, this won’t be an easy business. What are going to be their toughest obstacles?

Hanks: Knowing what they don’t know. Or assuming that everyone else is complying with the law. There are a lot of platforms out there just copying what they see others doing. Problem is, some of those other platforms are breaking the law or are in a different regulatory position. So know what laws apply to you and know how you are complying with those laws. It takes the SEC and the state authorities a long time to close down a platform, but some of them will go down. Get a general counsel who knows the law, even if you have to pay them in equity.

KERRIGANIs there going to be a liquid market for resales of crowdfunded securities?

Hanks: It’s going to take a long while. There are restrictions on resales of securities both under Title II and Title III for a year under federal law, but even after that you have inconsistent state law regulation about resales, so either the states have to adopt consistent resale provisions for private companies or the Congress has to adopt a law preempting state regulation of such securities. Even if you get past state regulations, most private companies want to have some element of control over trading in their securities. And you need buyers. You have to ask why all the markets for the resale of private securities thus far have had limited success.

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