The Securities and Exchange commission voted today to propose to the public a set of rules regulating "equity crowdfunding," which would allow companies to raise money by selling stock over the internet. Rather the traditional route of investment banks and IPOs, business could use Kickstarter-style fundraising to find investors for their business.
With the new rules, the SEC is looking to open the concept of crowdfunding to the public, while still offering investor protection. The new elements of the rules would cap any company's ability to raise money through crowdfunding to $1 million every 12 months. Investors on the other hand would only be permitted to invest the greater of $2,000 or 5% of their annual income or net worth every 12 months, as long as their net income or annual income is less than $100,000. For investors with net income or annual income of $100,000 or more, investors would be able to invest 10% of that amount every twelve month period in crowdfunding opportunities. Securities bought through portals would have to be held a year before sold.
SEC Chair Mary Jo White said the provisions are “intended to help protect those looking to invest,” and that the “proposal we are considering today to implement those revisions would significantly change the federal securities laws and the means available to small businesses to raise capital.” But securities lawyer Brian Korn writes on Forbes.com that the new rules, which come way past the time orginally allotted to the SEC to offer the regulations, could actually make it more difficult for small-time investors to get a piece of the startup pie:
The proposed rules are extremely impractical because of the restrictions and procedural hurdles a crowdfunding issuer, investor and funding portal will have to endure to raise capital. Compared to other forms of crowdfunding and capital raising, equity crowdfunding to the public has the worst “bang for your buck” in all of corporate finance.
Although the proposal is the most significant step yet towards realizing equity fundraising since Title II of the JOBS act took effect last month, it may be a few months yet before startups create Kickstarter pages. The SEC will have to meet again following the 90-day evaluation period to finalize the draft.