Crowdfunding Rules Approved by SEC – The Early Skinny

By: Marianne Hudson, ACA Executive Director

Two years after proposing rules for equity crowdfunding, the Securities and Exchange Commission approved rules for entrepreneurs to raise up to $1 million per year from all investors.  The new U.S. crowdfunding market will officially start in late April or early May of 2016.  The SEC also proposed new rules to modernize crowdfunding within states for public comment during its October 30 meeting. 

Here’s the early “skinny” on the approved rules, noting that they are 686 pages (not a typo):

  • Companies can raise a maximum of $1 million through crowdfunding platforms in a 12-month period.

  • Investors can be accredited or unaccredited, with limits on how much they can invest.  Those with an annual income or net worth of less than $100,000 can invest a total of the greater of $2,000 or five percent of the lesser of their annual income or net worth.  Those equal to or above $100,000 can invest 10 percent of the lesser of their annual income or net worth – up to a maximum of $100,000 per year.

  • The actual launch time for unaccredited equity crowdfunding is Spring, 2016.  All rules and related forms will be effective 180 days after they are published in the Federal Register, so crowdfunding could start in late April or early May.

  • Companies raising money through crowdfunding have many filing and disclosure requirements.  Perhaps the most notable are financial statements.  Those raising $500,000 or more for the first time via the new crowdfunding rules must submit reviewed financials from an independent public accountant.  This is actually a change from the rules proposed two years ago in which more expensive audited statements would have been required.  More details on the other disclosure requirements are in the SEC's release and fact sheets.

  • Under this rule, all crowdfunding must be done through broker-dealers or funding portals registered with the SEC, which must also be a member of a national securities association, such as FINRA.  The SEC will start taking registration applications from the platforms on January 29, 2016.

  • Mentioned less in media coverage, companies will need to raise money exclusively on one platform at a time and these intermediary platforms will also need to disclose information about the companies a minimum of 21 days before any securities are sold.  Some of these disclosure requirements mean that some things about the company are public forever:  price and target size of the raise, financial condition, use of proceeds, and more. There are other details as well.

In addition to the approved crowdfunding rules, the SEC also proposed two new related rule amendments for public comment.  Both relate to “modernizing” crowdfunding done within a particular state, noting that more than half of American states have equity crowdfunding programs for businesses and investors located within their borders.  One would allow companies to publicize their fundraising on their websites or social media, although require all investors to be from their states.  Another would increase the amount businesses could raise within their states from $1 million to $5 million.

What does all of this mean for both crowdfunding and angel investing?  Time will tell.  Media coverage focused on different impacts, such as the New York Times, Wall Street Journal, and Xconomy.  We do know that some online platforms that currently serve accredited investors only plan to establish services for unaccredited investors as well.  And there will be important questions to work out, such as how or if some companies might simultaneously raise money from an angel group via Reg 506 and through crowdfunding.  Stay tuned for more analysis from ACA and members involved in both types of rules, such as SeedInvest.