By Bob Emerson, Esq. | Small businesses may be able to solicit non-accredited investors over the internet and raise up to a million dollars per year under proposed “equity crowdfunding” rules released by the SEC last week.
Prior to this summer, small companies seeking investors in private offerings were not permitted to offer or sell their securities by means of the internet or other forms of general advertising. In July, however, the SEC adopted a new rule to allow internet advertising for sales to accredited investors – those with substantial assets (>1m) or annual income (>200k). Now, the SEC has taken the next step by proposing to open up the internet process to all investors (regardless of wealth or income).
These SEC initiatives arise from the Jumpstart Our Business Startups (JOBS) Act of 2012. Congress passed the Act in part to relax federal regulations on the sale of securities and promote small business growth. Up until now, it has been quite difficult and expensive for start-ups to satisfy the requirements for selling securities to non-accredited investors. The new idea is to broaden the potential pool of small business investors yet still provide some protections against the risk of scams.
Under the proposed rules, crowdfunding would proceed through a “funding portal” which is a website to connect potential investors with startups in need of funding. The portals must be neutral – they can’t recommend a deal or provide investment advice. The companies must provide information about their business – including management, use of funds and financial statements. And there are limits to how much an investor can commit – e.g. a person with assets or annual income under $100,000 couldn’t invest more than $5,000 per year.
It remains to be seen whether “equity” crowdfunding will become the capital raising technique of choice by small business. But the potential is there. Last summer my daughter raised $5,000 in a few months through a “project” crowdfunding site to fund an arts camp for kids. As a result, 140 youngsters had an opportunity to improve their dance techniques, artistic skills and performing abilities. And that’s what crowdfunding is all about – the ability to connect a potentially great opportunity with almost unlimited funding sources. Stay tuned for more as the regulatory process unfolds.
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