SEC to Issue Crowdfunding Proposal Easing Investor Verification

sec

By Dave Michaels, Small businesses raising money by selling shares over the Internet wouldn’t have to verify that their backers comply with individual investment limits under a U.S. regulatory proposal set for a vote as soon as  next week. The plan, targeted for an Oct. 23 vote by the Securities and Exchange Commission, would allow such companies to use so-called equity crowdfunding without having to check that a person’s investment is a greater share of their income or net worth than allowed by law, according to two people with direct knowledge of the matter who asked not to be named because the proposal hasn’t been made public.

The crowdfunding rule, authorized as part of the 2012 Jumpstart Our Business Startups Act, is intended to benefit small businesses and startups too small to attract funding from banks or venture capitalists. It may also boost business for Internet funding portals such as Kickstarter Inc., IndieGoGo Inc., and CircleUp Network Inc. that are used by startups to raise money.

“Some of the verification requirements would effectively negate what Congress had in mind,” Harvey L. Pitt, a former SEC chairman and now chief executive officer of Kalorama Partners LLC, said in an interview. “It has to be done in a way that lets people raise money.”

Crowdfunding was a popular provision in the JOBS Act, with advocates saying it would unlock capital for small businesses and entrepreneurs. In implementing the law, the SEC has been trying to balance the need to protect ordinary investors from potential fraud with Congress’s goal of reducing regulations for small businesses.

Broker Commissions

The SEC should require income verification to help guard against instances of brokers, who earn commissions based on the size of an investment, overselling to retail investors, said Lynn Turner, a former SEC chief accountant. Compliance checks are especially important in crowdfunding because the companies using it are unproven and risky, Turner said.

“What we are talking about are companies that in all likelihood are not going to be winners, and they are being invested in by people who clearly don’t have the expertise and financial smarts of venture capitalists,” Turner said in a phone interview. “So you put those together and you are creating a real opportunity for scams and fraud and significant losses.”

Verification Impractical

The SEC’s proposal, overdue by nine months, will become the second regulatory item from the JOBS Act advanced under Chairman Mary Jo White. Although the law imposes limits on investors based on the person’s income or net worth, the people said the SEC’s proposal won’t require companies or brokers to verify compliance with the limit, something Internet funders have argued is impractical.

Under the law, businesses using crowdfunding could raise no more than $5,000 a year from someone whose net worth is less than $100,000. Investors with a net worth greater than $100,000 could contribute as much as 10 percent of their annual income or net worth, up to a maximum of $100,000 in one year.

 

A person investing in a project through a crowdfunding portal will have to disclose their income or net worth, said Sherwood Neiss, principal at consultant Crowdfund Capital Advisors. The systems will block an investment that exceeds the income and wealth thresholds, he said.

“It is virtually impossible to do income verification for an individual, and that is why we have to rely on self-disclosure,” Neiss said in a phone interview. “The SEC gets it, they understand we are moving to this collaborative culture where we use technology to enable capital formation. And now we are going to use technology to keep people within the bumpers we have out there.”

Pebble Smartwatch

Crowdfunding platforms raised $2.7 billion in 2012 and funded more than 1 million projects, according to research firm Massolution. Crowdfunding has financed technology projects such as the Pebble smartwatch, which raised more than $10 million on Kickstarter to develop a watch that works with an iPhone or Android-powered device.

 

Equity crowdfunding, which is practiced legally in the U.K. and Australia, accounts for less than 5 percent of the market, according to Ethan Mollick, a professor of management at the University of Pennsylvania’s Wharton School of Business. Less than 1 percent of the money pledged through Kickstarter has gone to projects that may be fraudulent, according to Mollick, whose research has focused on the practice.

http://www.businessweek.com/news/2013-10-17/sec-to-release-crowdfunding-rule-easing-investor-verification

 

HEADLINE NEWS

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news [...]

TechCrunchHow hate speech crowdfunding outfit Hatreon crept back online ...TechCrunchIf you want to make a living creating white supremacist content, you're probably not going to do it via sites like Kickstarter and Patreon, which prohibit hate speech. Fortunately there's Ha [...]

Coindesk (press release) (blog)Crowdfunding Giant Indiegogo Opens to ICOs - CoinDeskCoindesk (press release) (blog)The startup revealed today that, through an existing partnership with MicroVentures, it will begin offering services to projects seek to use the blockchain funding model. [...]

TechCrunchFormer Gawker employees are crowdfunding an effort to buy Gawker.comTechCrunchWhile Univision acquired most of Gawker Media's sites last year (and renamed them as the Gizmodo Media Group), the deal didn't include Gawker itself. In fact, BuzzFeed reported last month [...]

Ypsi crowdfunding statistics reveal startling disparityConcentrateWe all hear the words "Kickstarter," "Patronicity," and "GoFundMe" on an almost daily basis, but how much good do those campaigns actually do? Here in Ypsilanti, quite a lot – although more [...]

ForbesCrowdfunding Do's And Dont's From iFundWomen's Karen CahnForbesDuring our conversation, she was transparent in sharing that her first software company, VProud, failed because she “did everything backwards” and spent too much time trying to perfect the product. “Pe [...]

Business InsiderSeedrs CEO hails 'standout year' as total investment on crowdfunding platform passes £300 millionBusiness InsiderSeedrs said crowdfunding investors reaped "strong returns" but didn't specify the amount. The crowdfunding platform, one of the two [...]

Crowdfunding For French CastlesNPRYou too can own a French chateau, in part, anyway. Romain Delaume, CEO of Dartagnans, tells NPR's Scott Simon about a crowdfunding effort underway to preserve La Mothe-Chandeniers. SCOTT SIMON, HOST: What if I told you that for about $60, you cou [...]

Want to Hold Your Own ICO? Indiegogo Can Help You With ThatFortuneCrowdfunding sites like Kickstarter (kickstarter, +0.00%) and Indiegogo raised start-up cash for a generation of online entrepreneurs, but one increasingly visible method of internet-sourced financing seemed to have sli [...]

Financial TimesCrowdfunding a mission to save capitalism from itselfFinancial TimesJeff Lynn is on a mission to save capitalism from itself at a time when millions feel locked out, and unable to foresee themselves better off than their parents. His answer: to democratise capital. That [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |