SEC floats proposed crowdfunding rules
Last Updated: 16:44 October 24, 2013
Anyone would be allowed to invest in startup companies without having to register with the Securities and Exchange Commission first, under the proposed rules released Wednesday, Oct. 23. The federal regulatory agency plans to hold a 90-day public comment period before considering approval of the proposed rules.
The Boulder Valley has been at the forefront of the crowdfunding scene, hosting industry conferences on the topic in the last year. Crowdfunding has taken off since Congress passed the Jumpstart Our Business Startups, or JOBS, Act in 2012 to allow it. In general, crowdfunding allows individuals and companies to raise money online.
Three directives stand out in the proposed rules, said Andrew Schwartz, a national expert on crowdfunding, and a professor at the University of Colorado-Boulder's Law School. Schwartz said the proposed rules are "exciting" because they may spur general investment in new companies even more than the newly successful online funding sites such as Kickstarter.com.
Kickstarter promises investors some sort of product or service in a company rather than equity in a company, Schwartz pointed out. With the proposed new rules, investors would have equity in the companies they invest in, he said.
Key points in the new rules, according to Schwartz:
1. The SEC generally wants to protect unaccredited investors - anyone who wants to buy securities in a startup company - through a variety of provisions in the latest rules, Schwartz said, including education provisions.
"The concern is for people who are unaccredited, now that they can make these types of securities investments, are they going to lose their shirts?" Schwartz asked rhetorically.
2. Companies looking to raise money would be required to sell securities to unaccredited investors through online "funding portals," which don't exist, yet, Schwartz said. Companies currently can offer securities to "accredited investors" who are individuals with annual income exceeding $200,000 or more, or net worth of $1 million or more under existing SEC rules.
3. There's a "safe harbor provision" in the proposed rules, Schwartz said. What that means is that companies selling securities may be able to make mistakes without penalties in the future. Current SEC rules are very strict about penalties for companies that sell securities.
But the proposed rules do not seem very easy for potential investors to navigate, said Dave Milliken, founder of Boulder company Vim Funding Inc. doing business as Grofolio. Grofolio created a crowdfunding software platform that targets "accredited investors," Milliken said.
"(The SEC) still is not interested in making this easy and incredibly viable," Milliken said about the proposed rules.
The proposed rules will help educate potential investors as to how fundraising will be done, however, said Jonathan Beninson, a founder of First Funder Inc., a Boulder crowdfunding company.
"I applaud them for having (released proposed rules) about equity crowdfunding," Beninson said. "This will provide transparency beyond what the traditional accredited investor would receive at first blush."
The latest proposed rules are the third phase of regulatory changes spelled out by the JOBS Act. SEC officials previously changed some reporting requirements for startup companies that raise capital. Last month, the SEC lifted a ban on what is known as general solicitation. Lifting the ban allowed entrepreneurs to start advertising securities offerings.
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