SEC Adopts New Equity-based Crowdfunding Rules

Crowdfunding concept written on a blackboard with chalk

Crowdfunding concept written on a blackboard with chalk

The U.S. Securities and Exchange Commission approved new crowdfunding rules last Friday allowing companies to raise money from anyone.

The new rules allow companies to offer up to $1 million a year in securities through online equity-based crowdfunding portals. The difference is up until the change, only so-called accredited investors, high net worth individuals, could invest in the deals. Now anyone can invest once the rules go into effect next year.

The rules also include some provisions to protect investors. Individual investors are limited to investing $2,000 a year, or five percent of the lesser of their annual income or net worth, in online crowdfunding deals if they make less than $100,000 a year. For investors with annual incomes above that amount, they are allowed to invest 10 percent of the lesser of their annual income or net worth but they are limited to investing $100,000 a year.

Under the new rules, company founders have to file a disclosure of the company’s financial condition. Companies offering between $500,000 and $1 million of securities need to provide reviewed rather than audited financial statements.

The rules come three years after President Obama signed the JOBS Act, which permitted equity-based crowdfunding under Title III of that act in the U.S.

Last year, the Texas State Securities Board officially approved equity-based crowdfunding. It joined a handful of states that passed their own laws in advance of the SEC. Already several equity-based crowdfunding portals are operating in Texas.

The SEC passed the new rules to make it easier for smaller companies to raise money and to provide investors with additional protections, according to a news release.

For years, companies have raised money through online crowdfunding sites like Kickstarter and IndieGoGo. But those are perk-based sites that provide backers with rewards for their pledges. The new rules would allow investors to actually buy a piece of the company through the sale of securities to raise funds.

The rules go into effect 180 days after they are published in the Federal Register. Crowdfunding portals can register with the commission effective Jan. 29th 2016.

Comments

  1. John Browning says:

    In today’s world it takes a minimum of $1M to start a business when land acquisition is involved, are there any provisions for a business that needs more than the $1M max per year?

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