New Crowd-Funding Rules Could Affect You

If you're in need of capital, the SEC is set to make it easier for mom-and-pop investors to buy a stake in new and growing companies.
September 25, 2012

The U.S. Securities and Exchange Commission recently proposed a set of rules that would somewhat relax the bans on companies advertising for investors as part of the mandated rules for crowd-funding.

The agency has until Dec. 31 to come up with rules for small-time investors, the target of the crowd-funding concept. 

Until now, crowd-funding in this country has been mainly limited to small businesses that raise capital through small contributions from investors who, in return, get items from the businesses ranging from coffee mugs and t-shirts to mentions in books.

The Jumpstart Our Business Startups Act (JOBS Act) signed in to law by President Obama last spring mandated an easing of the rules governing how businesses seek funding to try to spur business growth and job creation. 

The SEC has been charged with developing those rules. Let's take a look at what's been done so far.

The Proposed Changes 

The SEC has proposed allowing companies to solicit and advertise their securities for sale to accredited investors.

The agency currently requires companies that want to sell securities to register their offerings through the SEC or use a registration exemption, which prohibits them from advertising the securities.

Part of the JOBS Act mandated the SEC remove the ban on advertising to accredited investors. The act also required businesses to make reasonable attempts to ensure investors who buy the securities were accredited. The SEC is taking comments on the proposed rules through the end of the month.

What Are Accredited Investors

Under federal law, an accredited investor is anyone with a net worth, or a joint net worth with spouse, of more than $1 million or has income of more than $200,000 in each of the previous two years. 

An investor is also considered an accredited investor if a joint income with a spouse is more than $300,000 in the previous two years and there is a reasonable expectation to earn the same income in the current year.

How Does It Impact You?

As a small-business owner, you're going to need to take "reasonable" steps to ensure your investors are accredited. 

In its proposal, the SEC said the verification process is to safeguard investors who saw the advertisement for the investment, but don't have the means to be an accredited investor and could be financially hurt if the investment fails.

Before letting the investor buy your company's stock, you'll have to make sure the buyer is accredited by taking a look at:

  • The nature of the buyer and the type of accredited investor he or she is claiming to be
  • The amount and kind of information you have about the buyer 
  • How the buyer was solicited to participate in the investment, and the terms of the offering, such as if there is a minimum investment amount

What's Left 

The SEC has until the end of the year to develop rules for the smaller investors. For now, smaller investors are limited to sites like KickStarter.com.

There is a difference between the investment opportunities available on KickStarter and what would be open for investors through crowd-funding under the JOBS Act.

While investors on current crowd-funding sites get almost instant gratification by getting something for their contributions, investments in a company's securities offer the promise of a return on investment, something that may not come to fruition if the business fails.

Linda is an award-winning journalist with more than more than 20 years' experience as a reporter, editor and blogger. Linda blogs via Contently.com.