A look at the SEC's crowdfunding rules for start-up businesses

Posted by The Eureeca Team on Oct 24, 2013 6:44:00 AM

We at Eureeca are very pleased that the Securities and Exchange Commission (SEC) have finally published the new rules for “real crowdfunding” aka Title III of the JOBS Act. We want also to give kudos to those in America that have tirelessly been pushing for this. It is a tribute to the hard work and persistence of the crowdinvesting and equity crowdfunding industry in the US that the SEC voted unanimously on this.

Whilst this has been beset with delays due to various, oft discussed reasons, now we as an industry have a clear lodestar to navigate by.

The rules are long, almost 600 pages and will take time to digest and go through.

So, what are the basic crowdinvesting rules?

  1. A company can raise a maximum of $1 million per year
  2. For the purpose of investor protection, the maximum investment by individual should be either $2,000 or 5% (whichever greater) of annual income under $100k, or 10% annual income above $100k
  3. All crowdfunding must be through registered portals, which are restricted in activity
  4. Companies must disclose to the SEC all funding documents, plus financial disclosure scaled to size at least 21 days prior to going live on any equity crowdfunding platform
  5. A company must not advertise any details the fund raise. You can advertise to direct investors and redirect them to the crowdinvesting portal for more information
  6. Upon a successful fund raise, the company must file annual reports with the SEC

What do the new crowdfunding rules mean for small time investors and companies?

On first glance though it appears that the SEC, in their need to get something out of the door and meet the pressures that almost a year of delays have brought, have not properly considered the effect some of the restrictions which have apparently been put in place for investor protection.

We feel it is very unlikely that main street businesses are going to be able to afford adhering to the rules on annual filing and scaled financial disclosure (up to audited for $500k+ raises). This is fine for the large scale $20 million business, but the real transformative game changing power of equity crowdfunding is to provide the smaller guy with access to capital. The business valued at lower than $1 million looking to raise maybe $100-200k to expand and grow will get their funds from localised people that believe in their products or services. This is where capital needs so desperately to be deployed. The investors have that capital. The industry knows this channel can be unlocked, but will investors necessarily find the right places to invest in?

There is one thing we can be sure of – the market dynamics of American entrepreneurs will ensure that there will be a surge in various support tools being provided by third party ancillary companies to help guide entrepreneurs through the rules laid down yesterday.

In fairness to the SEC, it appears that they adhered to the parameters that have been set down by congress when passing the JOBS Act, and the SEC’s hands have been tied by following these. With any luck these rules may mean that, politically and strategically, the SEC feel that crowdinvesting is a viable and necessary tool for raising business capital and that the current rules for SMEs are too burdensome.  Over time, they may encourage congress to relax some of the provisions of the JOBS Act.

Our conclusion is therefore, this is a good first step. But we hope that over the course of the next 90 days, we see the self-regulatory power of crowdinvesting come together via a transparent, community driven network, and we hope that the SEC will find the confidence to ease these rules in short course.