By Sarah N. Lynch
WASHINGTON Oct 23 Entrepreneurs and start-up
companies looking for investors will be able to solicit over the
Internet from the general public under a new proposal issued by
U.S. regulators on Wednesday.
The "crowdfunding" proposal, if adopted by the Securities
and Exchange Commission, would be a major shift in how small
U.S. companies can raise money in the private securities market.
Private companies are currently allowed to solicit only
accredited investors - those with a net worth of at least $1
million, excluding the value of their homes, or annual income of
more than $200,000.
The crowdfunding rule would let small businesses raise up to
$1 million a year by tapping unaccredited investors.
It remains to be seen if the plan goes far enough in
limiting regulatory costs so that small businesses find
The measure would still impose a number of disclosure rules
and other requirements on small companies and crowdfunding
Rory Eakin, the chief operating officer and founder of
CircleUp, a brokerage that offers crowdfunding opportunities to
high-net-worth "accredited" investors, said he was initially
optimistic about the proposal until he read the fine print.
"It's hard to imagine attractive companies will take
advantage of these proposed rules," he said, citing a raft of
concerns including a requirement for companies to file financial
statements every year.
SEC commissioners said on Wednesday they hope the plan
strikes the right balance between facilitating crowdfunding and
protecting investors from possible fraud.
The public will have 90 days to respond to the proposal,
which is hundreds of pages long.
"I believe our proposal is generally careful not to add
additional, unnecessary frictions into this marketplace," SEC
Republican Commissioner Daniel Gallagher said. "That said, the
proof is always in the pudding."
Alon Hillel-Tuch, a co-founder and chief financial officer
at RocketHub, a crowdfunding platform that is considering
registering with the SEC, said that overall he was optimistic
about the SEC's plan.
At the same time, he is concerned about aspects of the
proposal, such as a requirement that a company raising more than
$500,000 provide an audited financial statement.
Some small companies have no historical financials, making
it hard to figure out how they would be audited under U.S.
accounting standards, Hillel-Tuch said.
The SEC's crowdfunding plan is a requirement in the
Jumpstart Our Business Startups (JOBS) Act, a 2012 law enacted
with wide bipartisan support that relaxes federal regulations to
help spur small business growth.
The rule was supposed to be completed 270 days after the law
was enacted, but it has been delayed at the SEC by leadership
changes, a heavy workload and the difficulties in crafting a
workable crowdfunding proposal.
As part of an investor protection measure in the JOBS Act,
companies using crowdfunding will still be required to raise the
money through regulated broker-dealers, such as CircleUp, or
through crowdfunding portals, a new regulatory category at the
The crowdfunding portals will most likely be self-policed by
Wall Street's industry-funded watchdog, the Financial Industry
Regulatory Authority, which unveiled its own parallel set of
proposed rules on Wednesday.
How many entities might register as crowdfunding portals or
brokers is not known. In an early, tentative estimate, the SEC
said anywhere from 50 to 100 brokers and portals could initially
seek to enter the space after the rule is adopted.
Under the SEC's proposal, crowdfunding portals would be
required to provide investors with educational materials and
take certain steps to reduce the risk of fraud.
Companies using crowdfunding would also have to make some
disclosures about their businesses, such as information about
officers and directors, how proceeds from the offering will be
used, and financial statements.
In addition, the proposal limits how much money an
unaccredited investor can contribute each year, based on certain
The proposal says that investors with a net worth and income
of less than $100,000 can contribute only $2,000 or 5 percent of
their net worth or income, whichever is greater.
Those with a net worth or income of more than $100,000 can
In an effort to reduce burdens on companies and portals, the
SEC's plan would not explicitly force them to take steps to
verify the income levels and net worth of investors in
At the same time, the SEC plan would require companies using
crowdfunding to release financial statements and other
information that could prove costly.
Mat Dellorso, the founder and chief executive of
WealthForge, a brokerage involved in crowdfunding, said he saw
the SEC's plan as being "middle of the road" with very few
surprises, and that he was happy to see the agency making
"Experienced entrepreneurs will have no problem navigating
the crowdfunding rules, nor will the intermediaries," he said.
"It is the first-time entrepreneurs that will need help."