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sec kickstarted crowdfunding for startups

How The S.E.C Kickstarted Crowdfunding For Start-Ups

The U.S. Securities & Exchange Commission published rules allowing small investors to acquire shares in privately held companies through crowdfunding campaigns. In other words, startups have been given the green light to raise investor funds through crowdfunding. The rules, years in the making, are ground-breaking and stand to have an enormous positive impact on small companies.

The new rules are part of the Jump-Start Our Business StartUps Act (“JOBS Act”). Prior to today’s rules, only accredited investors—those with an annual income exceeding $200,000 or a net worth of at least $1 million—have been permitted to invest in most of the deals advertised on crowdfunding sites.

With the rule change, startups can now offer unaccredited investors shares in their company through crowdfunding contributions. Before the rule change, startups could only offer goods like t-shirts in exchange for contributions. The new rules permit startups to raise up to $1 million in a 12-month period through crowdfunding.  Generally, companies will need to provide potential investors with financial statements. Some first-time issuers seeking to raise less than $500,000 will be able to avoid the expense of providing audited financials.

Startups will be allowed to offer those with an annual income or net worth of less than $100,000 up to $2,000 in a 12-month period, or 5 percent of the lesser of their income or net worth, whichever is greater. Those with an income and net worth of more than $100,000 will be permitted to invest up to 10 percent of the lesser of their annual income or net worth.

Note, some state securities laws may need to be modified to catch-up to the rules announced today. That could create a regulation gap for some startups to address.

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