On October 30, 2015, the Securities and Exchange Commission (“SEC”) adopted final crowdfunding rules to implement Title III of the bipartisan Jumpstart Our Business Startups Act (“JOBS Act”). An alternative to traditional financing, “crowdfunding” involves soliciting small monetary contributions from a large number of people, typically through the internet.
Previously, crowdfunding platforms violated the Securities Act when they sold unregistered securities across state lines to unaccredited investors. As a result, most crowdfunding opportunities were restricted to accredited investors with a net worth in excess of $1,000,000.00 or an annual income of more than $200,000.00. If a startup wanted to sell securities to unaccredited investors, it needed to go through the costly and paperwork intensive process of registering a securities offering with the SEC.
The SEC’s new rules loosen (but do not eliminate) restrictions on crowdfunding. Investors with an income of less than $100,000.00 may invest up to 5 percent of their net worth or annual income or $2,000.00, whichever is greater. Investors with an income of more than $100,000.00 may invest up to 10 percent of their net worth or annual income provided that amount does not exceed $100,000.00.
The new rules also require that crowdfunding go through broker-dealers and funding portals which must be registered with the SEC and are subject to audit. Registered portals must offer educational materials to investors, disclose information about the specific securities offered, facilitate open communication about crowdfunded securities, take measures to prevent fraud, and disclose any compensation that the portals receive.
The full text of the crowdfunding regulation is available here.
