At the Venture Association of New Jersey (VANJ) meeting on July 12, 2012, in Whippany, panelists addressed issues surrounding crowdfunding, a major change to capital formation for small tech companies, authorized by the Jumpstart Our Business Startups (JOBS) Act.

The room was filled with some 80 tech and life sciences entrepreneurs, advisers, lawyers, accountants, VCs and angels — professionals who wanted to learn about the new financing method and had many questions.

The panel, assembled by Frank Graziano, managing partner, Monmouth Venture Partners, provided some answers but not all, since the rules governing crowdfunding are still being written.

Panelists included Ryan Feit, CEO and cofounder, SeedInvest (New York); Vince Molinari, CEO and founder, GATE Technologies (New York); Jay Rand, partner, SorinRand (New York); and Stacey Rasgado, VP of corporate development, SecondMarket (New York).

The panel first addressed the origins of crowdfunding, saying that although it is not really a new phenomenon, using it in the way the JOBS Act envisions is new. Crowdfunding began with companies like Kiva on the microfinance side, Feit noted, and evolved into the rewards-based crowd funding that Kickstarter does.

“This prompted people to ask, ‘Why can’t we do the same thing with equity?’ ” Feit said. He added that there are four kinds of crowdfunding: donation, rewards, debt and equity, and each is appropriate for different types of entities.

Then the questions began.

In response to one audience query, the panelists noted major changes that will result from the JOBS Act. Rasgado pointed out the act gives firms more options for raising capital and “allows companies more flexibility in deciding what is right for them.”

One provision affects the “IPO onramp,” rolling back some regulations imposed by the Sarbanes-Oxley Act of 2002 on small businesses. It is hoped that this provision will make it cheaper and easier for small companies in the high-growth, smaller cap world to go public, Rasgado said.

Yet another provision is an increase in the shareholder cap. Instead of having just 500 shareholders before a private company has to comply with all sorts of SEC reporting requirements, it can now have 2,000, and companies don’t have to count as shareholders people in employee compensation plans. This will help firms keep their teams on the same page, she said

A third provision allows companies and investment funds to publicly solicit for the first time. The lifting of the solicitation clause, which prevented the advertising of investments, will be powerful, Feit noted, because you can “invite” others, including those in your social networks, to invest. For example, you are legally allowed to send a message to Facebook or LinkedIn friends, family and colleagues that you are raising capital. That can turn those individuals into investors and take them to a crowdfunding platform.

An exciting aspect of the law is that 98 percent of the country, which was formerly not allowed by law to invest in startups and small businesses because they didn’t meet certain wealth criteria, will be now be able to do so, Feit said. Those individuals will be capped at how much they can invest based on their income and net worth, but still will have the opportunity to invest small amounts.

An audience member asked if everyone participating in crowdfunding needs to go through a crowdfunding portal, and the answer was “yes.” Portals won’t be regulated or need to file as broker-dealers; they will still have to file with the SEC and the Financial Industry Regulatory Authority (FINRA) to get approved, but it will be an easier process, panelists said.

In response to another question, Feit discussed exit strategies. The law doesn’t provide for an exit, he said. Funds raised through crowdfunding are held for at least 12 months. “It is a concern because there needs to be some liquidity for these products,” he added. “It’s very important for people to understand that most startups don’t make it. It is a very speculative investment. Our regulatory friends feel a need to protect the investors.”

Asked by Jay Trien, VANJ president, whether SecondMarket will profit from the law as people try to exit their investments, Rasgado answered, “Because the law is so fuzzy, SecondMarket doesn’t know exactly what it will do. We are anxiously awaiting news of the SEC take on exit strategies not just for crowdfunded shares but [to see] how that relates to VC shares.”

“We can easily imagine a scenario where a company raises initial funding through crowdfunding and then a VC comes in who doesn’t want to deal with all these additional shareholders. So there would be some kind of consolidation,” she said.

“A lot of crowdfunded portals themselves are trying to anticipate what the SEC is going to do and build capacity into their platform,” said Rasgado. “SecondMarket considers our specialty second markets for private company equity, and we are waiting until the regulations are written before we make firm decisions on how we approach this. But the bottom line is we will find solutions to help companies resolve their ownership structure.”

Molinari addressed questions about the timing of the law’s implementation, noting that the SEC has already missed one deadline. Because the rules are so complex and deal with new concepts, they will probably take longer than the 270 days anticipated by the legislature, he said: “My guess is we’ll see this sometime in Q1 or Q2.”

Those trying to write rules around the law are encountering questions concerning investment advice, the panel said. A major problem is portals are not to be seen as endorsing a particular investment. Yet some want the option to review investments before they are on the portal.

A few questions remain: Does the act of choosing one investment over another for a portal constitute giving investment advice? If one company puts an estimated rate of return on the portal and another one puts up a lower number, will one be judged as better or worse than the other? And will that constitute investment advice?

Finding regulatory paths around these issues is going to take some time. “There is lots of sand in the gears at the present time,” Molinari noted.