Last spring, three years after the Jumpstart Our Business Startups or JOBS Act was signed into law, the Securities and Exchange Commission at long last adopted final rules allowing smaller firms greater access to capital. Now, the SEC has gone even farther, approving rules that allow ordinary investors to participate in equity crowdfunding.
Crowdfunding has been a closed game. Only “accredited investors”—whom the SEC defines as those whose net worth exceeds $1 million, not counting their primary residence, or whose income is more than $200,000 a year—could take part.
But Regulation Crowdfunding under Title III of the JOBS Act does away with that limitation. Anyone with income of less than $100,000 will be able to invest the greater of $2,000 or 5 percent of their annual income or net worth in crowdfunding efforts annually. Investors whose income or net worth is $100,000 or more can invest as much as 10 percent of either.
The final rules allow a company to raise up to an aggregate amount of $1 million through crowdfunding offerings in a 12-month period. All transactions covered by the rules would need to be conducted through an SEC-registered intermediary—either a broker-dealer or a funding portal.
As with the Regulation A+ rules adopted in the spring, some say Title III provisions don’t do enough to protect equity crowdfunding investors. But even a cursory examination of the 686-page final rule shows much effort to build in safeguards. Among them are requirements for disclosure of the issuer’s business plan, a description of the firm’s ownership and capital structure, names of officers and directors, financial statements and more.
There are risks for investors, of course. Many small firms—especially fledgling ventures—ultimately fail. And the chance of fraud cannot be removed entirely.
Overall, though, the final Regulation Crowdfunding rules—which should become effective in the second quarter of 2016—seem to achieve the right balance. The result will be a boon to both investors and small, growing companies.
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