Crowdfunding

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Crowdfunding is a requirement in the Jumpstart our Business Startups (JOBS) Act. Equity crowdfunding allows small companies to raise money by pooling together tiny investments from people around the country in exchange for a potential financial return.[1]

Any investor, regardless of income or net worth, will have access to crowdfunding. Under the proposed law, any business using crowdfunding can raise no more than $5,000 a year from someone with a net worth less than $100,000. Investors with a net worth greater than $100,000 are able to contribute as much as 10 percent of their annual income or net worth, up to a maximum of $100,000 in one year.[2]

SEC Rulings

On October 23, 2013, the U.S. Securities and Exchange Commission (SEC) formally proposed rules to authorize companies to widely sell securities through online portals. As of 2013, firms can only offer equity crowdfunding deals to accredited investors.[3]

If the rules are passed, the creation of funding portals, a new financial entity, would allow investors to connect with young companies electronically, via a website. The SEC would need to approve the sites since they are currently banned for the protection of investors. As of 2013, similar websites need to be registered with the SEC as a broker, allowing the SEC to oversee the entity.[4]

The deadline for public comment was February 3, 2014. Comments may be viewed on the SEC web site HERE. Among the comments received were numerous calls for a scaling back of the crowdfunding rules, specifically the requirement that companies seeking to raise more than $500,000 release audited financial information.[5] The concern is that the requirement will deter smaller companies from using crowdfunding to raise capital.

References

  1. U.S. SEC releases long-awaited 'crowdfunding' rule. Reuters.
  2. SEC to Vote on Crowdfunding Plan as White Advances Jobs Act. Bloomberg.
  3. SEC to propose monumental crowdfunding rules on Wednesday. The Washington Post.
  4. SEC moves toward allowing crowdfunding IPOs. USA Today.
  5. SEC Urged to Scale Back 'Crowdfunding' Rules. WSJ.com.