New Crowdfunding Rules Would Allow Non-Rich People to Invest in Startups

Yesterday, the Securities and Exchange Commission (SEC) announced a new proposal to regulate the internet’s favorite way to support unusual projects: crowdfunding.

The proposal, which was written in response to the 2012 JOBS Act, seeks to expand financial opportunity for small businesses and startups that wish to obtain investors in less traditional ways. It faces a ninety day period of public judgment, but if successful, it will allow small businesses to raise a maximum of one million dollars per year by tapping backers who are considered unaccredited.

Why is this significant? Current standards only allow startups to obtain financial backing from accredited investors. For individuals, that means people who have at least one million dollars in net worth, excluding the value of their homes, or who make at least $200,000 a year. Regulations such as these are meant to protect those who may not know better from fraud, but it makes the pool for potential funding very small and makes it harder for regular Janes to directly invest in a firm.

Even as of last month, this limitation somewhat stifled a new law that sought to open up crowdfunding further by allowing small companies to publicly seek investment.

Should the SEC proposal become realized, a larger range of people will be able to contribute to projects that might otherwise struggle in a more conventional financial backdrop. Softened restrictions for crowdfunding will allow people whose net worth and annual income is less than $100,000 to invest $2000 or 5 percent of their annual income, whichever is greater. The numbers and percentages are higher for those with a higher net worth and annual income.

Aside from opening up investment to the a wider segment of the public, the proposal seeks to manage fraud by insisting that companies divulge a certain amount of information to those interested in investing. Among the pieces of information to be shared are a description of the company and its plans to utilize its funds, a description of the company’s financial status, and details on the securities on offer.

To be clear, however, these regulations won’t affect the crowdfunding platform you are likely most familiar with: Kickstarter.

When asked about the SEC proposal, a representative from Kickstarter declined to comment and iterated their stance that they do not and will not allow equity crowdfunding on the site. The only way the proposal might affect the platform, he hypothesized, is if it breeds awareness of crowd-funding as an alternative model to traditional investing.

@heyiamlex