Crowdfunding is a part of the ‘Jumpstart Our Business Startups (JOBS) Act’ – a 2012 law that aims to help the economy by financing startups and small biz, hard hit by recession and lack of finance. Last week the SEC released the ground rules for crowd funded investments. Here are the 5 most relevant questions to get you up to speed on the regulation.
What are these new Crowdfunding rules? I thought that US Congress already passed that last year.
Yes, the crowdfunding plan was a part of the ‘Jumpstart Our Business Startups (JOBS) Act’ – a law enacted in 2012 with wide support from democrats and republicans that eases certain federal regulations on crowd investing – to help spur small business growth. The Securities and Exchange Commission (SEC) has last week published the rules (a year late) that will enable accredited investors to fund startups through small investments over the internet.
What’s next for the legislation?
The rules now enter a period of public comment. The public has 90 days to comment on the proposed rules. Industry experts say that it could be at least another six months before the agency issues final rules.
Who can invest?
“Accredited” investors are individuals with a net worth of $1-million, excluding the value of their homes, or an individual with annual income of more than $200,000. These investors will have to use an approved crowdfunding “portal”, that would be required to provide adequate training and educational support to investors regarding risk, under the law.
What are some of the benefits of the laws?
Under the law, small companies can raise small amounts of money, up to $1 million a year from public investors without being publicly traded. This can significantly help businesses take off the ground and offer small time investors a chance to be a part of successful startups.
What do the critics say?
Experts are calling for proper rules to protect investors while also ensuring that these are not cost prohibitive for the startups itself.
Barbara Roper, director of investor protection at the Consumer Federation of America, said the new rules on investment does not adequately protect investors. “The crux of investor protections in crowdfunding is you limit the amount of money any investor can lose,” she said. “There’s no real effort to ensure that intermediaries verify the income, the net worth, or the compliance with aggregate investment limits.”
On the flip side, there have been industry calls to remove the requirement that mandates companies seeking more than $500,000 to release audited financial statements, arguing that it could prove restrictive to startups.
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Read more about our previous coverage on equity crowdfunding here.