New rules went into effect Monday allowing companies to raise up to $1 million a year through equity crowdfunding without having to register with the Securities and Exchange Commission. This ease in restriction is designed to fuel growth for startups and safely expand the investor class for new businesses.
Since the Securities Act of 1933, strong restrictions have been placed on the advertisement and sale of business securities to the public. In 2012, with the meteoric rise of crowdfunding taking place, Title II of the Jumpstart Our Business Startups Act (“JOBS Act”), lifted these traditional restrictions, but only for investors with a minimum net worth of $1 million or an annual income of $200,000 or more ($300,000 if married).
Title III of the JOBS Act, approved last October, eased these restrictions even further, allowing anyone to formally invest in small business, or even real estate ventures, though there are still limitations based upon the investor’s income.
The hope with these new rules is to allow new and smaller investors access to certain markets without income or net worth being a pre-qualifier.
Under the new rules, if the individual investor has a combined net worth and annual income of less than $100,000, their annual investment through a crowdfunding venture is limited to $2,000 or 5 percent of that amount – whichever is greater.
If both their cumulative annual income and net worth are equal to or more than $100,000, 10 percent can be invested. Across all crowdfunding investments, securities sold to an investor may not exceed $100,000.
SEC Chair Mary Jo White believes these changes to the JOBS Act are a win-win for both business and investors.
“There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need,” White said.”
Funding platforms, such as Kickstarter or GoFundMe, are required to become members of the Financial Industry Regulatory Authority (FINRA). Businesses selling their securities can only sell through one intermediary platform at a time.
Despite protections written into the JOBS Act, there is still considerable, if not greater risk of crowdfunding investors being lured by flashy marketing into “bad” investments. Without protection of seasoned brokers to guide them, new investors are encouraged to do extra research and not be swayed by a promising pitch, or a flashy YouTube video.
Gerri Walsh, senior VP of Investor Education at FINRA, believes it is more important than ever for investors to be educated.
“Crowdfunding generates a lot of buzz, and the possibility of getting in on the ground floor of the next great startup can be very tempting,” Walsh said “But, investing in unregistered, emerging securities carries significant risk, and investors have to beware the attraction of the shiny, new object and make an informed, rational investment decision.”
Story compiled with information from the Securities and Exchange Commission, Forbes, and Crowd Fund Insider.
Jason Best discusses the SEC crowdfunding regulation
For more on the SEC new regulations on crowdfunding, CCTV America’s Michelle Makori spoke with Jason Best, Co-Father of Crowdfund Investing on the Promise of Title III.