SEC offers rules for crowdfunding startup finance
By Paul Handley, AFPWASHINGTON--Crowdfunding could become a hot new source of venture capital under new U.S. rules proposed Wednesday to allow companies to make private share placements to micro-investors via the Internet.
October 25, 2013, 12:27 am TWN
The new Securities and Exchange Commission regulations would allow companies to raise up to US$1 million a year via crowdsourcing without registering the securities.
They also would lower the bar for investors taking part in private placements, giving people with less than US$200,000 a year in income the opportunity to get in on the ground floor of new ventures.
Coupled with new guidelines in July that allow companies to openly advertise private placements, including via social media, the SEC's crowdsourcing rules for finance herald a new model for financing small ventures.
Chance Barnett, chief executive of Crowdfunder.com, which hopes to get a piece of the new business, said the rules will bring “an entirely new set of financing” into the market, potentially several times larger than the US$30 billion annually invested by venture capitalists in Silicon Valley.
After holding back on the rules for months, the SEC board in a hearing Wednesday cautiously endorsed the rules, which could come into effect after a 90-day period for public comment.
“We want this market to thrive, in a safe manner for investors,” said SEC Chairwoman Mary Jo White.
Crowdfunding has mostly been used by artists and inventors to finance their work via micro-donations, while they retain full ownership of their work.
Five-year-old Kickstarter has funneled some US$830 million to 50,000 projects from some five million donors on this model.
But other companies like Crowdfunder have sought to use the model for venture capital-like funding from thousands of small investors — though up until now “small” has meant “accredited investors” with incomes above US$200,000, or net worth over US$1 million.
The new rules would exempt companies raising no more than US$1 million a year via crowdfunding from registering the issue with the SEC.
The companies would be required to make disclosures about the owners, executives, and finances, and they could only place the shares through traditional broker-dealers or “crowdfunding platforms,” a new form of SEC-registered funding portal that would be banned from giving investors advice or promoting specific offerings.