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crowdfunding

Crowdfunding is a process that uses the Internet and related social media to offer a company's stock to investors.

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This approach represents a dramatic departure from traditional methods of funding business startups (such as having an investment bank offer shares of the company to investors).

In April 2012, Congress passed and President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act. The Act's intent is to make it easier for "emerging growth companies" (EGCs), defined as firms with $1 billion or less in annual revenues, to raise capital via crowdfunding and to facilitate initial public offerings (IPOs).

Recognizing the potential for fraud by unscrupulous "boiler room" operators, the Act limits companies to raising (1) $1 million a year or (2) $2 million if they provide investors with audited financial statements. In addition, no individual purchaser can invest more than $10,000 or, if a lesser amount, 10 percent of their annual income. The bill also requires the company to provide (1) various warnings to investors and (2) a filing about the crowdfunding offer to the Securities and Exchange Commission (SEC).

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Jumpstart Our Business Startups (JOBS) Act, passed in 2012, is intended to facilitate "emerging...