Crowdfunding is becoming a major form of fundraising for businesses of all shapes and sizes. It has made crowdfunding platforms part of the national conversation, but in the United States it is only generally used for rewards-based fundraising. People get to purchase something and this helps a business raise funds. It is equity fundraising that is of concern to the SEC and right now there are specific requirements that must be met in order for this to happen.
Although rule changes have been proposed, at this moment because regulations make a private placement virtually impossible and there are regulations that prohibit advertising for a securities fundraiser. There are also limits on the number of shareholders that a business may have according to the SEC.
Why Haven’t the Rules Changed As of Yet?
The SEC has actually proposed that some of these outdated rules change, especially for small businesses that are looking to raise some small amounts of capital. The framework for the SEC’s rule changes was introduced in October 2013 in response to a Congressional mandate. A public comment period on the following framework expired in February 2014.
The changes that the SEC proposes to the current rules structure so that equity crowdfunding can be achieved are:
1. Businesses may not raise more than $1 million in any 12 consecutive month period in relation to equity fundraising.
2. An individual who invests into such an equity campaign are limited to either $2,000 in total or 5% of their total net worth or annual income.
3. If a backer’s annual income or net worth is less than $100k, there will be a 10% limit on investments, or $10k.
4. All transactions must be conducted through a funding portal, which may include crowdfunding platforms or current registered brokers.
Although this may still seem a bit limited to some backers, it is still an improvement over what current rules allow. Every journey must begin with the first few steps and these proposed SEC rule changes are the first steps toward easier equity fundraising.
Just Because Rules Change Doesn’t Mean Regulations Don’t Exist
If the proposed rule changes are adopted, it won’t change the regulations that businesses must follow in order to utilize these funds. If a small business wishes to raise equity capital, it would be required to disclose through offering documents certain information just as they are required to do so now, such as:
1. Information about officers, directors, and any owners that have a minimum 20% stake in the business.
2. A description of the business itself and how the funds from the crowdfunding campaign will be used.
3. The target offering amount and the price to the public.
4. A complete description of the financial position of the company.
The reason why these rules need to be in place is so that backers can be protected from predatory practices of businesses. They create a form of accountability to the backer so that the business can’t just take their money and waste it. It reduces the chances for fraud and prevents further solicitations for sales.
The SEC rules are expected to change soon. If you’re looking to raise some funds through equity for your business, then equity crowdfunding could be the way to go.
The crowdfunding discussion starts at 15 minutes into the video.
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