SEC Crowdfunding Rules Go into Effect Today
The Securities and Exchange Commission’s new crowdfunding rules are now effective, allowing eligible companies to use crowdfunding to offer and sell securities to the investing public.
Crowdfunding is an evolving method of raising capital that has been used to raise funds through the internet for a variety of projects. Title III of the JOBS Act created a federal exemption under the securities laws so that this type of funding method can be used to offer and sell securities.
According to the SEC, investors can only participate in a crowdfunding offering through an online platform, such as a website or a mobile app, of a broker-dealer or a funding portal. Companies may not offer crowdfunding investments directly to investors.
The broker-dealer or funding portal—a crowdfunding intermediary—must be registered with the SEC and be a member of the Financial Industry Regulatory Authority.
The new rules permit a company to raise a maximum aggregate amount of $1 million, either in debt or equity, through crowdfunding offerings in a 12-month period.
“As the market for securities-based crowdfunding begins to develop this year, we will no doubt receive important input from investors and companies about how the requirements could be improved,” said SEC chair Mary Jo White, at an International Organization of Securities Commissions panel last week. “We look forward to that input and continuing to work to give small businesses access to the capital they need in high-quality markets that have the confidence of investors.”
Investors are now permitted to invest a limited amount of their income or net worth into crowdfunding offerings.
Individual investors with annual income or net worth of less than $100,000 can invest the greater of $2,000 or 5 percent of their annual income or net worth.
Individual investors with an annual income and net worth equal to or greater than $100,000, can invest the lessor of 10 percent of their annual income or net worth.
During the 12-month period, the total amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.
