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After years of delay and political battles, the Security and Exchange Commission has proposed rules to legalize crowdfunding of small businesses. The Jumpstart Our Businesses Act (JOBs) made it possible for the public at large to invest part of their income in tech startups, but required the SEC to approve the rules, subject to heavy limitations on who could invest and how much.
Before last Friday’s vote, crowdfunding platforms like Kickstarter and Indiegogo were heavily restrained. “Those raising the money could only give donors token items in exchange, something like a T-shirt, or a CD, or a thank you in the film credits,” said Thaya Brook Knight of the libertarian-leaning CATO Institute. “They could not sell securities.”
That is, a crowdfunded indie film could offer discounted tickets, but “investors” really weren’t investors. They couldn’t make any money if the movie became the sleeper hit of the summer. Now they can earn money like actual investors, allowing both startups and individuals beyond the elite Silicon Valley circles to participate in the knowledge economy.
3 Key Facts About The New Law
“If you’re a small business owner … it stands to reason once you move past the friends and family stage, if you’re looking to raise money, someone else is going to have to help you do this,” said Mike Ward of industry lobby Technet, “hence the platforms.”
Tech industry experts hope that these new opportunities will help folks who don’t have access to the small circle of Silicon Valley investors.
Here are a few key facts about the new rules:
1) Practically anyone can invest, but there are limits
Traditionally, startup investment was limited to those individuals and institutions with a substantial net worth. This regulation severely limited who could partake in the tech boom.
The new rules allow anyone with a net worth less than $100,000 to invest up to $2,000 (or 5% of their net worth, whichever is greater) over a 12-month period. If an investor has an income and net worth greater than $100,000, they can invest up to 10% of their net worth.
There are restrictions on startups too. During a 12-month period, a startup can only offer a maximum aggregate amount of $1 million in offerings. So any business looking to raise a lot of money will need traditional channels.
2) The law will require strict disclosures
Platforms permitting crowdfunding will have to abide by strict disclosure requirements. According to the SEC, companies will have to disclose their “financial condition,” their goals, leaders, and their fundraising strategy. In other words, they’ll have to disclose a lot of sensitive information.
The platforms themselves will also have to abide by a litany of rules for educating consumers about the process and risks involved in investing.
3) We’ll know the potential limits and rewards next year
The SEC notes that the new rules will be effective January 29, 2016. Technet’s Mike Ward seemed most optimistic about the so-called “rise of the rest”—startup regions outside of Silicon Valley that have difficulty attracting traditional investors.
“Having a more geographically diverse investment community would be good for startup companies,” he said.
However, the CATO institute is cautious that regulations could still be overly cumbersome. “My prediction would be that we’ll see some offerings, that they’ll be companies who are looking for a publicity angle as part of the process, and that these issuers will serve as test cases for whether the process has been made sufficiently user-friendly to be worthwhile,” Knight said.
Either way, the riches of Silicon Valley are will soon be open to the public.
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Lead photo by GotCredit