Chief Executive Officer at BankRoll Ventures
The SEC has released rules for Title III of the JOBS Act giving us guidance as to how equity crowdfunding will be legalized. Nearly 3 years and 7 months after the game-changing law was signed by the President, the use of equity crowdfunding will be available to startups and small companies in 180 days. And yes, the SEC did make the law workable for most startups and small businesses, despite critics believing it could not be done.
With equity crowdfunding, a company can raise up to $1,000,000 online on new equity crowdfunding portals from anyone in the general public. If a company wants to raise more, there is always equity crowdfunding’s sister, a Regulation A+ Mini-IPO to consider.
Under the final rules just passed, members of the “crowd” are limited in what they can invest, as part of the SEC’s attempts to protect investors. The law limits investors to (a) the greater of $2,000 or 5 percent of the lesser of their annual income or net worth, if either the annual income or the net worth of the investor is less than $100,000 and (b) 10 percent of the lesser of their annual income or net worth, if both the annual income and net worth of the investor is equal to or more than $100,000. In both cases, Investors may not invest more than an aggregate amount of $100,000 in one year
The most important development from the new SEC rules is that the proposed requirement of a full financial audit has been dropped by the SEC for companies using the equity crowdfunding law for the first time. Requiring a startup to spend tens of thousands of dollars on an audit was absurd, and made the law unworkable. The SEC removed that requirement, so now a company using the law for the first time only must have reviewed financials to raise more than $100,000, and even lesser financial disclosures when raising less than $100,000.
Before companies get too excited about the prospect of going online and finding crowd investors, you must keep in mind that equity crowdfunding involves the sale of securities, and not just pre-selling a cool new device like on Indiegogo. Federal and state laws govern the sale of securities, and if a company does something wrong, the business and its officers and directors can be sued, and in some cases, could face criminal penalties. Having experienced counsel assist with equity crowdfunding is a necessity.
Some will clearly disagree (I can’t help it is I have always been a glass-half-full type of guy), but I believe there is a workable model with these equity crowdfunding rules and that startups will be able to use this law to raise capital. Those of us who do this for a living will work within the laws and rules to find ways to help companies raise funds online in a way they never could before. This is truly the democratization of the investment process.