After a lengthy holdup in Congress, it's official: Nation-wide policies allowing any interested person to invest in a business through equity crowdfunding will go into effect this summer.
On March 25, the U.S. Securities and Exchange Commission announced its final set of new rules that will make it easier for smaller companies to access investor capital through crowdfunding, and provide investors with more investment choices. These rules, known as "Regulation A+," update and expand the existing Regulation A, and are mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act passed in 2012.
According to the SEC fact sheet, nonaccredited investors — meaning anyone with cash to spare — will be allowed to annually invest up to 10 percent of their income or net worth, depending on which amount is greater. Prior to this, only accredited investors (or nonaccredited investors in a state with its own equity crowdfunding provisions) were allowed to invest in startups through equity crowdfunding. [Equity Crowdfunding: 3 Facts Entrepreneurs Should Know]
Alex Feldman, CEO and founder of crowdfunding review site CrowdsUnite, said that this new rule will allow a much greater percentage of private startups to receive investment money. Angel investors and venture capitalists invest in companies to make money, he said, and since many small businesses don't have the types of exit opportunities these investors look for, they're often passed over for funding opportunities.
"With the new rules, [more] businesses will be able to receive equity funding," Feldman told Business News Daily. "I believe that investments in ... a business like a local diner, for example, will be driven by the community and customers who want to keep the business running and believe in it beyond the financial incentive. This will be a huge shift in the traditional funding paradigm that will change how small businesses raise money."
Additionally, eligible U.S. and Canada-based companies will be able to offer and sell up to $20 million (Tier 1) or $50 million (Tier 2) of equity in a single year, up from a previous limit of $5 million. Any company seeking equity funding will also be allowed to publicly market their offerings via their websites, social media, etc.
Both tiers must follow a set of basic disclosure rules, but Tier 2 companies are no longer required to register their offerings in each state where they sell securities. However, unlike Tier 1, the Tier 2 companies will be held to additional requirements, including audited financial statements and regular reports to investors.
"These new rules provide an effective, workable path to raising capital that also provides strong investor protections," SEC Chair Mary Jo White said in a statement accompanying the fact sheet. "It is important for the commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies."
For startups and small businesses that plan to take advantage of Regulation A+, Alex Castelli, a partner with CohnReznick LLP, advised crowdfunders to consider how they will manage their investor groups.
"Be prepared to have a large number of small-dollar investors ... [and] act like a public company," Castelli said. "This means being transparent. Hire experienced professionals to help guide you and make sure you stay in compliance with the rules and regulations."
Feldman noted that any nonaccredited investors who are interested in backing your business should be well-educated about equity crowdfunding.
"Investing in private companies is extremely risky, and is not liquid investment," Feldman said. "The business doesn't want to have hundreds or thousands of shareholders who are not happy and want to take their money out."
The provisions of Title IV will go into effect 60 days after publication in the Federal Register. For more information on the JOBS Act and its regulations, visit sec.gov. If you are unsure of how any of these rules will affect your fundraising plans or if you have questions about them, please consult a legal professional.