Crowdfunding for Everyone

On October 30, 2015, the SEC adopted changes to crowdfunding rules.  Thanks to the new rules, small companies looking to raise money will now be able to seek investments from small, non-accredited investors. Who are those “small, non-accredited investors”? They just happen to include the majority of American households.

Crowdfunding and the JOBS Act

Crowdfunding is an evolving method of raising capital that has recently been increasingly used to raise funds through the Internet to fund startups or specific projects. In April 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) became law. The JOBS Act is intended to encourage the funding of US small businesses by easing various securities regulations, and has had the effect of allowing the SEC to pursue crowdfunding rules that would expand access to investing in new ventures to the general public. Title III of the JOBS Act (the “crowdfunding section”) created a federal exemption under the securities laws so that crowdfunding can be used to offer and sell securities. In this vein, the “crowdfunding” section of the Act aims to make venture investing opportunities available to just about anyone.

Though the JOBS Act has been law since 2012, the SEC just adopted the final rules to permit companies to offer and sell securities through crowdfunding on October 30, 2015. And the rule is still not in effect; it is scheduled to take effect 180 days after it has been entered into the Federal Register, which will likely occur at the culmination of a 90-day review period.

Rules Aim to Include “Non-Accredited” InvestorsCrowdfunding - shutterstock_188940020

Prior to the SEC’s new rules, complex and complicated underwriting was required for equity investing, and an investor had to be “accredited,” meaning that an investor had to meet the requirements for an “accredited investor” as set forth under Rule 501 of the SEC’s Regulation D. Generally, accredited investors include high net-worth individuals, banks, and other large corporations. Those “accredited investors” had access to complex and higher-risk investments such as venture capital, hedge funds, and angel investments, while “non-accredited” investors did not. Now, “non-accredited investors” (individuals who have a net worth of less than $1 million (including spouse) and who earned less than $200,000 annually ($300,000 with spouse) in the last two years) also have access to risky investments.

As equity crowdfunding with non-accredited investors under Title III takes effect, increased crowdfunding of startups by everyday citizens is expected to occur. This should result in a remarkable amount of capital available to companies in their early stages.

Be Aware of the Limitations

There are important limitations to note. Startups and small businesses can raise up to $1,000,000 a year through this process, but are prohibited from raising more. Investors making less than $100,000 per year can invest the greater of $2,000 or 5% of their annual income. Investors who make more than $100,000 per year can invest up to 10% of their annual income. However, to keep companies transparent, significant disclosures are required, which should help non-accredited investors in making their investment choices a little less risky.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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