SEC Releases Proposed Crowdfunding Rules
New rules were approved regulating businesses that fund their ventures online through Crowdfunding. This long-awaited proposal is the last requirement in the Jumpstart Our Business Startups (JOBS) Act, passed in 2012. Overseen by the Securities and Exchange Commission (SEC), the law's aim is to relax federal regulations to increase investing in small businesses.
The purpose of this is to make raising money easier for small businesses by using technology like Crowdfunding. Crowdfunding has shown its value in the investment realm, exemplified by the more than $2 billion contributed to campaigns in 2012 via sites like Indiegogo, Lending Club and Kickstarter.
The 585-page document includes good news and not-so-good news for parties on both sides of the investment fence, but one positive sign for both is that commissioners unanimously passed the proposed rules, which should cut down on further delays. (Download the full proposed rules PDF)
- Unaccredited investors can still fund small businesses, although the amounts they can invest are capped. Those with a net worth of less than $100,000 are limited to $2,000 or 5% of net worth or income, whichever is greater.
- Small businesses can raise up to $1 million a year through crowdfunding. Companies raising more than $500,000 must provide audited financial statements.
- There is still paperwork, even if it is less. One of the rules requires firms offering equity crowdfunding to report financial information to the SEC every year until they get acquired, go public, or go under. For companies issuing small raises, this requirement may make crowdfunding too much of a pain to pursue.
- There are still expenses. Costs to produce the required SEC filings may be prohibitive to a startup. Securities lawyer Brian Korn wrote in a Forbes article: "To produce an offering disclosure document, enlist a funding portal, run background checks and file an annual report with the SEC year after year might well cost [quite a bit]." One solution is to register an offering only at the state level (not federal) in specific states of investors.
The proposed Crowdfunding rules are in a 90-day comment period, comments can be made at the SEC website. Finalization is expected February 2014.
Thinking about starting a crowdfunding campaign? Social Enterprise Associates can help you get your venture "capital-ready" through our tailored consulting services. Check out our Crowdfunding Tip Sheet.
Find Us Online
Native Learning Center Webinar: Strategic Planning for Housing
See our Resources Guide, and visit our Page.
SIGN UP - PAST ISSUES
Using the power of business to solve social
and environmental problems.