Here are the SEC's new crowdfunding rules

Rules take onus off of companies to verify, but force them to submit annual statements to the SEC

As we reported last week that they would, the Securities and Exchange Commission has voted to propose new rules for Title III of the JOBS Act, those that have to do with crowdfunding provisions.

This provision will essentially allow small businesses and startups to raise money from an unlimited amount of non-accredited investors. If, and when, this provision does take effect, it will be a major change from the previous limit of 35.

But, of course, it is not so easy as to allow companies to just take money from anyone. There are a set of rules and regulations put forth by the SEC about who, and how, crowdfunding can take place.

Here are the new rules:

The SEC is proposing to make it so that a company would be limited in how much money they could raise this way. Right now the cap would be $1 million in a 12 month period.

The rules will also limit how much each individual can invest: an investor will be limited to either $2,000, or 5% of their income or net worth, if they are worth less than $100,000.

For those who make/are worth over that amount, the number then goes up to 10%. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.

As it was previously rumored, the SEC will in fact be taking the onus off of companies that looking to crowdfund to verify each individual investor. There are many reasons for that, of course, chief among them that it would basically be impossible to ask a company to somehow verify each individual person who donates online.

Instead, the SEC is putting it onto the investors themselves to self-verify.

Companies that decide to go the crowdfunding route will also be required to disclose certain information to the SEC, including who their officers and directors are, and anyone who owns 20% or more of the company, and a description of the financial condition of the company.

The company also has to give the SEC annual financial statements. For those companies who are looking to raise over $500,000, they would have to provide financial statements that had been audited.

And, finally, the SEC is also proposing to make it a requirement that crowdfunding transactions have to take place through an SEC-registered intermediary, which would either be a broker-dealer or a funding portal.

The intermediary would be required to give investors educational material, help reduce fraud, give the two sides a way to communicate and make sure that information about both the issuer and the offering was available. 

They would not, however, be allowed to give out advice or make recommendations, solicit purchases or compensate employees based on sales.

The reaction

When these new rules were revealed the reaction was less than enthusiastic.

"The proposed rules are extremely impractical because of the restrictions and procedural hurdles a crowdfunding issuer, investor and funding portal will have to endure to raise capital," Brian Korn, a securities lawyer with Pepper Hamilton, wrote.

"Compared to other forms of crowdfunding and capital raising, equity crowdfunding to the public has the worst 'bang for your buck' in all of corporate finance."

The reaction from brokerages was not better.

"It's hard to imagine attractive companies will take advantage of these proposed rules," Rory Eakin, the chief operating officer and founder of CircleUp, told Reuters.

Both had specifically had a problem with the rule that would require the company to file annual statements to the SEC, which would be a costly exercise for those companies. 

"To produce an offering disclosure document, enlist a funding portal, run background checks and file an annual report with the SEC year after year might well cost upwards of $100,000," said Korn.

Anticipating this kind of reaction, the SEC now has 90 days to seeking public comment on the proposed rules before they are officially voted on. So there is still plenty of time to change anything that is particularly aggregious.

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