SEC’s key highlights of the proposed regulations

1. Entrepreneurs could raise $1 million per year. In any 12-month period, a company would be allowed to raise no more than $1 million in aggregate from all crowdfunding portals.

2. The amount individuals could invest would be capped depending on their net worth. In any 12-month period, an individual could invest $2,000 or 5 percent of his or her annual income or net worth, whichever is greater, if both annual income and net worth are less than $100,000. Meanwhile, for those investors whose annual income or net worth are more than $100,000, an individual could opt to invest as much as 10 percent of their annual income or net worth, whichever is greater. Investors could buy no more than $100,000 worth of securities in companies through crowdfunding in any 12-month period.

3. Equity in a company must be held for one year. If an investor purchases securities in a company via crowdfunding, he or she would not be permitted to sell that equity for one year.

4. Transactions must be supervised by an SEC-registered intermediary. Crowdfunding online would be required to be processed by a registered broker-dealer or funding portal that has to be registered by the SEC. To be registered as such an intermediary, broker-dealers or portals would be required to provide potential investors education materials, make efforts to reduce the risks of fraud and refrain from making any sort of investment advice or recommendations, among other rules.

Eakin says that having compliance regulations for intermediaries is a positive and “will help lay the foundation for a healthy market.”

5. Not all companies would be eligible to crowdfund. Under the rules proposed by the SEC, only U.S.-based companies would be able to crowdfund online. Also, companies without a specific business plan would be ineligible, as would companies that are essentially investment companies and any company that fails to submit required financial documentation.

6. Financial disclosure requirements. Companies that participate in online equity crowdfunding would need to disclose who are their primary officers and directors and anyone who owns more than 20 percent of the company. Entrepreneurs seeking funding through equity crowdfunding also must disclose how they would use the money they raise, a description of the financial health of the company and depending on how much equity is sold in a 12-month period, a copy of the company’s tax returns.

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