More than a year ago, the Securities and Exchange Commission came out with a bold new plan to regulate crowdfunding in America.
The SEC basically promised we would have the final rules for well-regulated crowdfunding under the JOBS Act by October 2015, but no one expected them to actually deliver on this promise. So, when the final rules for the new regulations were actually set out on time, it surprised many experts and showed that regulators saw tremendous potential in this new form of venture funding.
Here’s what you need to know about the official rules of crowdfunding in America.
What is Crowdfunding?
If you’ve ever heard of Kickstarter or a project that was massively successful on it, you already understand how crowdfunding works. Millions of people with credit cards and access to the internet come together to pledge small amounts of cash to projects that they support.
What you’ll notice about this model, besides that it is extremely successful, is that the people who pledge money do so for little to nothing in return. They could be donating as little as $10 just because they believe in the idea or they could put up much more in exchange for a special gift from the creators.
But getting gifts from creators is not nearly as valuable as getting to share in their success story. It makes sense that a financially savvy person would want to become more intimately involved in “the next big thing.”
That’s where equity crowdfunding comes in. It’s the same principle of raising small amounts from many people, but the creator in this case is an entrepreneur and the return is an equity stake in the business.
If this sounds like a good idea, that’s because, for many, it is. Crowdcube, a equity crowdfunding website based in the UK, has been helping small entrepreneurs get the funds they need for years now. Seed Equity Ventures is an American firm that does something similar, but it operates under the SEC’s strict Regulation D 506(c) rules for general solicitations.
It is important to understand that the regulators need to closely examine this model, since there are a number of ways it could be vulnerable to abuse. But the SEC seems to have addressed almost all the concerns anyone could have had.
Here is an overview of all the rules they’ve set out that go live in May 2016:
- A startup cannot raise more than $5 million within a 12-month period (revised up from $1 million).
- People who want to fund businesses on these platforms must prove their income in a given year.
- Companies need to make full disclosures about their businesses before seeking funds on crowdsourcing platforms.
- Platform operators have to do their due diligence before they let a business raise money.
There is, of course, more to the rules than what’s been mentioned here but this brief overview shows us that the SEC is serious about getting crowdfunding startups into the spotlight.