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SEC votes for crowdfunding rules; passes on the baton to public

Earlier today the SEC unanimously voted in favor of the newly proposed rules for the equity crowdfunding industry. Once in effect, it could very well change the way small businesses function in the United States. Once it comes into effect, the new regulation would allow the non-accredited investors to invest in equity crowdfunding. Prior to the JOBS Act, only accredited investors could invest in equity crowdfunding. The readers can access the proposed guidelines here.


The SEC was supposed to frame the rules within 270 days from April 5, 2012, the day when President Barrack Obama signed the JOBS Act. The JOBS Act is intended to promote financial support of small businesses in the US by easing various securities regulations. The importance of the JOBS Act can be understood by the fact that the House Small Business Committee grilled the SEC over the delay in putting forward a regulatory structure for the crowdfunding industry. Below are some of the topics of interest that intrigued the industry, the regulator and the social media–


Limits on Capital raised and investments

  • The rules would allow both accredited and non-accredited business to fund their venture up to $ 1 million through equity crowdfunding
  • Investors, with annual income or net worth less $100,000, cannot exceed an investment amount of $2000 or 5 percent of annual income or net worth – whichever greater
  • Investors, with annual income or net worth equal to or more than $100,000, can invest 10 percent of the annual income or net worth, not exceeding a maximum aggregate amount sold of $100,000


Rescinding the ban on general solicitation

The JOBS Act ended the 80 year old ban on general solicitation, thereby allowing the businesses to publicize private equity offer to raise funds. However, the companies would still need to abide by the new stricter rules.


The Broke Investor and the Fraud Company

It is well known that the companies opting for crowdfunding are risky ventures. Unlike the companies formed under the tutelage of the Venture Capitals, these firms would not have the expertise and the business acumen of the VCs. Hence, the proposal behind investor income verification is to protect investors against the brokers overselling the investors and then charging commissions based on investment amount. Add to that, the fact that these investments also run a huge risk of turning sour if the underlying company is a fraud. Hence, the compliance checks on the individual investors and companies cannot be done away with.


The companies won’t engage in investor verification

The cat is out of the bag that companies will not conduct income verification of the unaccredited investors. It was not a practical idea to let the companies perform investor checks. Keeping in view the risk of fraudulent activities faced by the ordinary investors, the SEC has passed the question on investor’s income verification for public comment.


However, Industry believes that self-disclosure is the best available option as doing income verification would be highly demanding task. On account of fairness, it is also argued that the companies seeking funds through equity crowdfunding should make public their financial statements and annual operating results.


Public Opinion

The ball is in now public’s court. You can give your inputs to the SEC here over next 90 days after which the SEC will meet again for a final vote over the rule book.