Big lift for small biz: SEC sets down rules for crowdfunding
I have many concerns about the final version of the crowdfunding exemption (Title III of the JOBS Act), which is very different from our original idea. The maximum allowable investments (generally 5 percent of net worth or annual income) are much higher than our original proposed cap of $100, and without income or net worth verification, investors stand to lose more than they can afford. Because of the large potential risk to investors, Congress felt compelled to impose onerous requirements on companies raising money under the crowdfunding exemption. For example, reviewed or audited financials are required for companies raising more than $100,000 and companies are prohibited from directly communicating with potential investors other than to tell them to look at the website of a crowdfunding intermediary. We believe this defeats an important purpose of investment crowdfunding the opportunity for company principals to communicate directly with potential investors. In fact, since submitting our petition, we have focused on a much better way to do investment crowdfunding. We now use a little known tool that has existed for decades called Direct Public Offerings (DPOs) that works under existing law. Yes, existing law! While DPOs also allow public offerings of securities to all, whether wealthy or not, they must be filed with the states and are screened by state level securities regulators who have a great deal of experience at spotting fraud and overly risky propositions.
“Today’s ruling has the ablity to democratize access to startup capital,” Scott Gerber, founder of the Young Entrepreneur Council, told the Daily News The rules will now be put out for public comment and could be finalized by next year. The SEC set out a template on Wednesday for how borrowing on crowdfunding portals would work. Among the rules: the amount raised by a company must not exceed $1 million in a 12-month period. If a potential investor’s annual net income or net worth is less than $100,000, their investment in a 12-month period is limited to $2,000 or 5% of their income or net worth, whichever is greater. If their income or net worth is more than $100,000, the limit is 10%.