SEC Crowdfunding Proposal

In September of this year, the SEC voted to overturn the ban on “general solicitation” that made it illegal for companies to publicly advertise that they are raising capital. While the lifting of the ban did open the private market to a broader pool of investors, it left many restrictions on the types of investors that companies could target and regulations on how to raise crowdfunding capital.
On October 23rd, the SEC unanimously voted on a proposal that makes it even easier for small business to raise capital from a wider range of potential investors while providing additional investment opportunities for investors. The new proposal, which is open for public comment for the next 90 days, outlines the rules for equity crowdfunding and the limitations companies face when offering and selling securities through crowdfunding.

Crowdfunding Proposed Rules

The proposed rules allow all individuals – not just accredited investors – to invest in companies via crowdfunding subject to certain thresholds.  The rules also limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the crowdfunding portals or intermediaries that facilitate the transactions.  More specifically, under the proposed rules:

• A company can raise a maximum of $1M through crowdfunding in a 12 month period.
• Investors are permitted to invest up to $2,000 or 5% of their annual income or net worth, whichever is greater, if their annual income and net worth are less than $100,000.
• Investors are permitted to invest up to 10% of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000.

While there are additional rules in the proposal about the types of companies that are eligible to use the crowdfunding exemption, the major rule change under this proposal is the ability for companies to openly solicit and acquire funds from unaccredited investors.

Another major rule change is that companies and crowdfunding portals are not required to verify compliance with these restrictions.  Rather, investors are required to disclose their income or net worth a means of determining compliance.

The proposal appears to offer great promise for providing capital to small business, but it is important for investors – especially the mom and pop investors – to understand the risk associated with these investments.  It is for this reasons that startups were traditionally mandated to raise capital solely from accredited investors who inherently understand this risk.