A Non-Musical Brief on JOBS

Crowdfunding   is surpassing record label funding in the modern artist’s lexicon and is now used for tours and recordings, album art, and music videos. For independent musicians, a crowdfunding campaign is a career stepping-stone. It helps that entrepreneurship is the rave and is encouraged at all levels of a music business education. In fact, hundreds of creative individuals are electing to make their wildest dreams a reality and are putting a more traditional career path on hold.

2013 has been the strongest year for IPOs in the United States since 2007. The music industry itself has grown in depth with the foray of countless music startups. Companies like Ovelin are facilitating music education while Soundkeep is forwarding the creative commons community. Stagedom and Crowd Album are modernizing live music, and Dubbler and Fliqq are creating a musical space for social interaction. This robust growth is consistent across all industries and could be attributed to many factors including investor confidence and equity market indices, which are considerably higher than in past years.

Musicians are a creative lot. They are predisposed to this new tumultuous, bootstrapped startup ecosystem. They must understand their music, the market, and the tools at their disposal. But the should also get the bigger picture.

Thus, the following brief. It is offered as road map and update to the new Jumpstart Our Business Startups Act, or the JOBS Act for short. This new piece of legislation may well change the fortunes of the business with its equity crowdfunding provisions, some of which were made clear late in October 2013. JOBS is regarded as the most significant piece of financial legislation since the Securities and Exchange Act of 1934. (Editor’s Note: For more on the JOBS Act, please consult, especially, the May 2013 edition of the MBJ)


The JOBS Act is likely the most influential factor in the recent rise in IPOs. It will undoubtedly be a powerful tool for musicians and entrepreneurs alike. The act eases IPOs by dissolving regulatory barriers for emerging growth companies, also known as EGCs, which are companies with total annual gross revenues of less than $1 billion. Since its enactment in April of 2012, EGCs have led the market, representing 82% of successful IPOs. In the first nine months of 2013, ECGs accounted for 84%, representing nearly $35.5 billion in capital. Many of these companies have taken advantage of confidential filings—demonstrating the impact the JOBS act’s regulations are having on new businesses.

JOBS and Crowdfunding

One of the main purposes of the JOBS Act was to enable EGCs to raise their funds and gather investors through equity crowdfunding. By lifting the ban on general solicitation and advertising, it allows companies to advertise for new investors. This awards flexibility to startups vying for initial growth.

Although the Act was signed in April of 2012, the benefits of equity crowdfunding were delayed due to the continued deliberations within the U.S. Securities and Exchange Commission (SEC) regarding Title III of the Act. Despite an estimated 270 day negotiation period, the SEC finally issued their proposed rules for crowdfunding after over 15 months on October 23 of 2013, which “allow non-accredited individuals to participate and invest online into private companies, in small increments.”1

Title III of the JOBS Act established the basis for a legal framework that would allow EGCs to use crowdfunding to fund themselves. These regulatory measures were projected to help small businesses raise their capital while providing substantial protection for their investors. Under this act, individuals are allowed to invest in start-up companies subject to certain boundaries. It also stipulates that the companies are required to disclose certain information about their offers, and limits the amount of money individual companies can raise.

According to the proposed rules, a company is authorized to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.

On the other side of the spectrum, over the course of a 12-month period, individuals would be permitted to invest up to $2,000, or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000. If the investor’s annual income or net worth is equal to or more than $100,000, they are allowed to invest 10 percent of their annual income or net worth, whichever is greater. It should be highlighted that during the 12-month period, these investors are unable to purchase more than $100,000 of securities through crowdfunding. Most importantly, securities purchased in a crowdfunding transaction can’t be resold for a period of one year. Holders of these types of securities would not count toward the threshold that requires a company to register with the SEC in accordance to the Exchange Act.

Certain companies are not eligible to use the crowdfunding exemption under this Act. “Ineligible companies include non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.”2

The companies that are conducting a crowdfunding offering are required to file pertinent information with the SEC, which, in turn, must be given to the investors and the correspondent intermediary to facilitate the crowdfunding offering and make it available to other potential investors.

In the offering documents, the company must disclose the “information about officers and directors as well as owners of 20 percent or more of the company; a description of the company’s business and the use of proceeds from the offering; the price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount; certain related-party transactions; a description of the financial condition of the company and also the financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.”3

Moreover, the companies relying on the crowdfunding exemption to offer and sell securities are required to adjust the offering documents to indicate any relevant changes and provide the pertinent updates on the company’s progress toward reaching the target-offering amount. Finally, they are also required to file an annual report with the SEC and provide it to investors.

A measure implemented by the SEC to protect the investor is the requirement that the crowdfunding transactions must take place through an intermediary registered with the SEC, which can either be a broker-dealer or a funding portal. A funding portal is a new entity created with the purpose of allowing “Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers.”4 As a result, the offerings could be conducted exclusively online within the confines of a safe port.

These regulations would require the intermediaries to “provide investors with educational materials; take measures to reduce the risk of fraud; make available information about the issuer and the offering; provide communication channels to permit discussions about offerings on the platform and facilitate the offer and sale of crowdfunded securities.”5

Also, these rules would prohibit funding portals from “offering investment advice or making recommendations; soliciting purchases, sales or offers to buy securities offered or displayed on its website; imposing certain restrictions on compensating people for solicitations or holding, possessing, or handling investor funds or securities.”6

What follows is a 90-day period where the SEC is going to seek public comment on the proposed rules. They will then do a deep review process on the comments and determine whether to adopt the proposed rules. Following said period, the SEC will probably spend another 30 days to finalize the revised rulings based on the public comments and then schedule a vote on the final rulings several weeks later.

According to this timeline, the final version of the Title III rulings would likely be approved by April or May of 2014, “when the rulings are voted into effect and the first non-accredited crowdfunding can take place.”7

By Eduardo Loret de Mola 


1. http://www.forbes.com/sites/chancebarnett/2013/10/23/sec-jobs-act-title-iii-investment-being-democratized-moving-online/

2. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540017677#.UpbZopgydG5

3. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540017677#.Upa2VJgydG5

4. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540017677#.Upa2VJgydG5

5. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540017677#.Upa2VJgydG5

6. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540017677#.Upa2VJgydG5

7. http://www.forbes.com/sites/chancebarnett/2013/10/23/sec-jobs-act-title-iii-investment-being-democratized-moving-online/



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