CROWDFUNDING

Historic Crowdfunding Rules Proposed--Finally

This proposal could open online investment to anyone. Here's what it means for your business.
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It's just another step on a long journey for the crowdfunding provision of the JOBS Act. But a unanimous approval in a vote by the U.S. Securities and Exchange Commission today ushers the proposal into its next phase and includes some important measures that could help the smallest businesses find funding from a broader array of individuals.

The SEC's goal here, commissioners say, is to both ease fundraising for small companies online and protect investors from fraud. Online crowdfunding has drawn scrutiny from the North American Association of Securities Administrators, which recently dubbed the practice a potentially risky one for investors. 

It's taken the Commission longer than expected to hash out the details in Title III of the JOBS Act--remember, that was passed back in 2012--but with the historic lifting of the 80-year-old ban on general solicitation going into effect just last month, this level of scrutiny isn't uncalled for.

The proposal, which is hundreds of pages long, is open for public comment for the next 90 days. After comment, another SEC vote is required for the proposal to go into effect.

Here are the highlights of what it entails: 

  • A company could raise up to $1 million for equity through crowdfunding each year
  • A company raising more than $500,000 must file more detailed information to the SEC
  • A company must provide educational information to investors, ensuring investors know what they are buying and understand their risks
  • Investors with a net annual income of less than $100,000 would be permitted to invest up to only $2,000 or 5 percent of their annual income or net worth every year
  • Investors with net income or annual income of more than $100,000 would be able to invest 10 percent of that every year
  • Securities would need to be purchased through online crowdfunding portals--a new class created by the SEC
  • Securities purchased through portals would have to be held a year before sold

Earlier this month I reported that the little-known provision that's been hailed as ushering in equity-based crowdfunding would limit the ability of entrepreneurs to take investment from non-wealthy individuals. In essence, it could crush very common friends-and-family investments. The SEC's move today seems poised to correct that major flaw.

"Before the new rules, startup companies raised money from unaccredited friends and family quite frequently," says San Francisco-based startup lawyer Andre Gharakhanian, a partner at Silicon Legal Strategy, a legal advisory service. "It's par for the course in an industry where only the most faithful will back a company at its earliest stages."

What's more, the proposed rules seem most applicable to the country's smallest businesses--perhaps a corner grocery or restaurant struggling to get a bank loan--for whom $1 million or less in funding could really move the needle. But this is in no way game-changing for the future Facebooks or Googles of the tech world, says Alex Mittal, the CEO and co-founder of crowdfunding site Funders Club.

"There's no point at which a million dollars would have moved the needle for Facebook or Google," he says. "They're in specific, hyper-growth industries and to keep doing that it requires much more capital."

SEC Commissioner Michael S. Piwowar seems optimistic that the proposal creates an "outside of the box" regulatory framework for crowdfunding, while staying true to the SEC's goal of protecting investors. He cited support from both President Barack Obama in opening up investor status to more people, and referenced the South by Southwest Interactive festival as a place where the crowdfunding discussion gained some clout last year. 

He also attempted a crowdsourcing joke: "I look forward to unleashing the 'wisdom of the crowd' on our crowdfunding rule proposal to tell us what we got right, what we got wrong, and how we can improve it."

IMAGE: Getty
Last updated: Oct 23, 2013

CHRISTINE LAGORIO-CHAFKIN | Staff Writer | Senior Writer

Christine Lagorio-Chafkin is a writer, editor, and reporter whose work has appeared in The New York Times, The Washington Post, The San Francisco Chronicle, The Village Voice, and The Believer, among other publications. She is a senior writer at Inc.




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