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.
Here are the highlights of what it entails:
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."