SEC Definitively Weighs in On Crowdfunding

Three years after the passage of the Jumpstart Our Businesses Startups (JOBS) Act, the Securities and Exchange Commission has released new guidelines for small businesses raising money online. Crowdfunding originally allowed people to fund companies and projects, typically on a website, without the stringent regulations large companies face when trying to acquire financial backing from the public.  Before the JOBS Act came into existence, crowdfunding was operating without much government oversight and protection for people who choose to lend their financial support.

In a move to protect investors from fraud, the SEC is allowing crowdfunded securities to only be sold by established brokerage firms or internet funding portals that are registered with the SEC and licensed by FINRA.  The rules would allow companies to crowdfund up to a million dollars within a 12 month period.  Another safeguard of the new rules allows investors within certain thresholds to participate in crowdfunded investments.  These would include investors with an annual income or net worth less than $100,000 will be allowed to devote a cap of 5% of their annual income, while investors with higher incomes can invest up to 10%. No investor can contribute more than $100,000 in any crowdfunding securities offerings or resell such securities for the period of a year.

Crowdfunding is an example of one of the many new ideas that is driving the “sharing” economy, but without regulation and oversight it can be yet another haven for scammers and fraudsters.  For that reason, I am glad the SEC has gotten behind the new rulemaking to institute protections for investors who may be more apt to invest online through crowdfunding as opposed to other conventional methods.