Although the JOBs Act (Jumpstart Our Business) has been approved in the US Senate and signed by president Obama on April of 2012, it wasn’t until October 30 of 2015 that the Securities an Exchange Commission (SEC) approved the ruling that will allow the enactment of its Title III. This rules allows Crowdfunding Platforms to accept investment in equity to fund a startup in that country.

Crowdfunding has been used as a means to finance businesses and projects for over 30 years and in recent years specialized crowdfunding platforms have proliferated to channel contributions from the public into specific projects and production of prototypes and products. But so far, in America at least, it was not possible to give the contributors anything more than gifts or benefits in exchange for their contribution.

Today is possible to give a percentage of equity of the business to the contributor, so now they can be properly called investors.

The regulation issued by the SEC establishes a series of minimum requisites for the investors and for the startups that are looking to capture funds. In the same way the ruling impose some obligations to the crowdfunding platforms.

The users or investors that participate in the platforms are authorized to invest over a 12-month period up to a 10% of their annual income or net worth, if their annual income and net worth are equal to or more than USD $100.000. If is less, they are authorized to invest up to 5%. The ruling also establishes a limitation to the maximum amount to invest for each user/investor. This limit is USD $100.000 over a 12-month period on all the crowdfunding platforms.

This new system will allow any American citizen the chance to invest in a startup through a crowdfunding platform. The situation before October 30^th (2015) was very different, where only Accredited Investors were able to invest in this type of ventures (if you didn’t want to endure a complex and costly process of authorization from the SEC). The Accredited Investors are those who can demonstrate an annual income of USD $200.000 or a net worth of USD $1.000.000.

On the other hand, for the startups the ruling establishes a limitation of the amount that they can ask from investors through crowdfunding over a 12-month period. This limit will be USD $1.000.000. There are also obligations about the information that must be published in order to use this tool. Among other things, the price per share or convertible security, the term of the offer and if the offer expires at the end of the term, the financial condition of the company, a description of the business, information about officers and directors and certain related-party transactions. Also they are obliged to file an annual report over the SEC.

At last, the crowdfunding platforms are obliged to register over the SEC and to comply with a series of obligations as providing the users/investors with educational materials about the investment process, the information that must be asked from the startup and the investment limits, take measures to reduce the risk of fraud, provide communication channels between investors and companies to resolve queries about the investment, notifications with the relevant issues to the investors, etc.

Also establishes some prohibitions for the platforms as sponsor companies that have the potential for fraud, having financial interest I the companies that makes offer through the platform or compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor.

What is the situation in Chile with this kind of investments?

The reality is that in Chile this is a subject that is not specifically regulated. So today there are no limitation for investors that wish to acquire equity in a startup through a crowdfunding platform. From the startup point of view, the shares offerings must comply with the regulations established in the “Ley de Sociedades Anonimas” and “Ley de Mercado de Valores”, as the pertinent ruling of the “Superintendencia de Valores y Seguros”.

Source: SEC.gov

Santiago Henríquez C, Lawyer.

Picture: Alexey Topolyanskiy

Post originally released in spanish in Broota’s Blog, “Crowdfunding y Red Latinoamericana de Emprendimientos”.