SEC proposes rules for 'crowdfunding'

Regulatory authorities outline rules for startup companies that want to raise money on the Internet

The Securities and Exchange Commission is considering new legislation that would allow new companies to use crowdfunding to seek investors.
Jonathan Ernst/Reuters

Startup companies would be able to seek investors over the Internet under rules put forth Wednesday by federal regulators.

So-called "crowdfunding" has been popular for years for financing independent films and art projects, but this year Congress said startups could use it for raising capital once regulations are in place to protect potential investors.

The Securities and Exchange Commission on Wednesday took a step toward implementing the law by proposing how much people can invest and how much companies must divulge, voting 5-0 to send the proposal out for public comment. The public will have 90 days to respond to the proposal, and final rules could be approved next year.

The "crowdfunding" proposal, if adopted by the SEC, would let small businesses raise up to $1 million a year by tapping unaccredited investors.

Private companies are allowed to solicit only accredited investors -- those with a net worth of at least $1 million, excluding the value of their homes, or annual income of more than $200,000.

Under the proposal, people with annual income and net worth of less than $100,000 could invest a maximum of 5 percent of their yearly income. Those with higher incomes could invest up to 10 percent. Companies also would be required to provide information to prospective investors about their business plan and financial condition, as well as a list of their officers, directors and those who own at least 20 percent of the company.

"There is a great deal of excitement in the marketplace" over crowdfunding, SEC Chairman Mary Jo White said before the vote. "We want this market to thrive in a safe manner for investors."

A boon to the economy

Crowdfunding is hardly new. Sites like Kickstarter and Indiegogo have helped fund projects for years through donations raised online. Through those sites and others, supporters can help start a project, be it a business, a charity or the arts. In return, supporters can receive a gift, such as a t-shirt or a song named after them. Others simply feel satisfied knowing that they helped a good cause.

Or some get to join Spike Lee courtside at a New York Knicks basketball game. That's how Lee rewarded donors who gave the maximum of $10,000 to his latest film project, which he funded through a Kickstarter campaign in July that raised $1.4 million.

And soon, businesses will be able to offer investors a piece of their company. The 2012 law known as the JOBS Act allows small companies to sell stock over the Internet. They could raise a maximum of $1 million a year from individual investors without registering with the SEC. The SEC was given some discretion to request company information and limits on investment -- it's something they did with Wednesday's proposed rule.

The goal of the law is to help startups raise money quickly when they cannot attract attention from venture capitalists or traditional investors. At the same time, the law eases the SEC's regulatory reach by giving the startups an exemption from filing rules. The rationale was that new businesses in a hurry to raise money would be hampered by having to submit paperwork. That's a change for Congress, which only two years earlier gave the SEC regulatory powers in response to the 2008 crisis.

Supporters say investment crowdfunding could be a boon to the economy. More businesses create more jobs, and that boosts economic growth. Many of the companies that would benefit are in overlooked areas of the country such as the Midwest or Southeast, according to Robert Hoskins, who does public relations and marketing for crowdfunding ventures.

"It's going to save America's butt," he said.

But investor advocates and other critics worry that this new arena of investing could be a breeding ground for fraud.

SEC Commissioner Luis Aguilar said unscrupulous operators could use investment crowdfunding to prey on "vulnerable segments of society." The system could enable "affinity fraud," he said, with promoters appealing to members of ethnic or religious groups.

Al Jazeera and wire services

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