SEC Opens Up Equity Crowdfunding To The Crowd
On Friday, Oct. 30 the Securities and Exchange Commission voted 3-1 to adopt the next generation of rules for entrepreneurs and small businesses to raise capital from the “crowd”. With the new rules passing, which form part of Title III of the JOBS Act, it is now possible for every day American citizens to invest in unlisted companies in the US – not simply the rich.
Equity crowdfunding has emerged as a credible alternative method for business to raise capital from individual investors via the Internet. However, prior to these new rulings, entrepreneurs could only sell shares of their company to “accredited investors”. Only those whose net worth exceeds $1M, excluding their primary residence, or who earn more than $200, 000 a year were allowed to participate in crowdfunding.
The New Regulation Democratises Equity Crowdfunding
The SEC’s announcement opens ways for a much wider pool of investors to share in the success of private companies. These new rulings are giving the control back to small business owners and individual investors. Ron Miller, the CEO of US-based StartEngine Crowdfunding says, “This vote by the SEC to approve the final rules for Title III crowdfunding will prove to be the greatest advancement for entrepreneurship in a generation.”
“Access to capital is the greatest inhibitor to entrepreneurs in bringing innovative products and services to the market. Title III is the game changer which dramatically reduces this hurdle for companies that can prove themselves to the market.”
Protect Investors And Help Business Raise Money
With Title III, The SEC wants to develop a regulatory framework to protect small investors. The new rules allow anyone to invest as much as $2,000 or 5% of their annual income or net worth. Investors whose income is more than $100,000 can invest as much as 10% of the lesser of their income or net worth.
Meanwhile, the crowdfunding platform will need to apply to the SEC for accreditation, and they will be held to SEC-mandated rules, including providing investors with “educational materials that explain, among other things, the process for investing on the platform” and taking “certain measures to reduce the risk of fraud.”
SEC Chairman, Mary Jo White, says in her opening statements on Friday, “This rulemaking has generated tremendous interest from potential issuers, investors, and intermediaries. The more than 480 comment letters we received raised a number of important issues, focused on the best ways to protect investors while ensuring that securities-based crowdfunding is a workable path for raising capital by smaller companies.”
ShareIn Ahead Of The Game
For over 3 years the UK has been at the forefront of equity crowdfunding, inviting individuals to diversify their portfolio and helping businesses grow. As one of the leading experts in the UK we have a stake in the new regulation passed in the US and see this as a great opportunity.
With the use of our Microsite technology, we have successfully run a US-UK equity crowdfunding campaign for a UK-based company. This was the first time a company has run an equity crowdfunding campaign to raise funds directly from their own website in the UK and US simultaneously. We worked with a US Broker Dealer to facilitate that and worked only with accredited investors. The new regulation is a great opportunity for ShareIn to expand our reach in the US and allow the crowd into crowdfunding.
Summary of Title III Crowdfunding Rules
Aside for the rules regarding who can invest the new rules also include the following:
- Funding portals may subjectively determine whether and under what terms to allow an issuer to offer and sell securities
- No ongoing audit or review of financial statements to be included in the annual report
- No upfront audited financial statements for first-time issuers raising $500,000 – $1M
- Platforms permitted to take equity stakes
- Platform liability concerns not addressed
The full report can be downloaded here:
Photo credit: ag1st via Pixaby