Crowdfunding For Internet Stock Approved By SEC

Bloomberg reports that startups and other small businesses from Harlem to Hollywood will be free to raise money by selling stock over the Internet under new rules adopted by the U.S. Securities and Exchange Commission.

Equity crowdfunding standards approved by a 3-1 vote Friday lay out how such firms can raise as much as $1 million annually by offering shares to investors online. The funding model is based on platforms such as those developed by Kickstarter PBC and Indiegogo Inc. that allow entrepreneurs, artists and engineers to solicit donations for projects ranging from virtual-reality headsets to music festivals.

“This rulemaking has generated tremendous interest from potential issuers, investors and intermediaries,” SEC Chair Mary Jo White said before commissioners voted on the rules in Washington. The framework “strives to be workable for issuers and delivers a strong set of investor protections,” she said.

A company using equity crowdfunding is limited to raising a maximum of $1 million per year. The firm would have to share financial statements and information from income-tax returns with investors. In a change from a proposal released in October 2013, the SEC won’t require businesses raising more than $500,000 to provide audited financial results. Instead, the company will be able to rely on financial statements that have simply been reviewed by an accountant.

That was an important concession that makes crowdfunding more viable for small companies, said Ryan Feit, chief executive officer of SeedInvest Technology LLC, a crowdfunding portal. The SEC also allowed funding portals to take equity stakes in the companies they advertise, which will lower up-front fees for businesses raising money, he said.

“This will be a very big boon for startups and small businesses,” Feit said. “There is pent-up demand among many Americans to invest small amounts in their favorite startups.”

Crowdfunded shares will be open to any investor regardless of their income or net worth. Those who buy stock will have to hold it for at least one year before trying to sell. Under the rules, crowdfunding must be done online through a broker or funding portal that provides financial information about the companies and discloses how much money it makes for selling the shares.

“These investor protections are not just important to the college student, to the grandmother and to the working mom who jump on the Internet wanting to experiment with crowdfunding,” said Commissioner Kara Stein, a Democrat. “They also protect the small businesses that want a reliable market to raise capital.”

Commissioner Luis Aguilar, a Democrat who supported the rules, said the SEC now needs to examine ways to make it easier to trade crowdfunded shares on a secondary market. Aguilar urged the agency and stock exchanges to advance ideas that would make the shares more liquid.

“The continuing and well-known difficulty of trading small issuer securities is such a problem that requires our immediate attention,” Aguilar said.

People whose income or net worth is less than $100,000 would be limited to investing a maximum of $5,000 annually. Investors with income and net worth of $100,000 or greater could contribute as much as 10 percent of their annual income or net worth, up to a maximum of $100,000 in one year. The restrictions are intended to limit the downside for shareholders who take stakes in riskier companies that provide less information to investors than public companies.

The investment limitations are slightly more strict than what the SEC outlined in its 2013 proposal and drew a stern objection from Republican Commissioner Michael Piwowar.

“Even if you are Warren Buffett or Bill Gates, you are limited to investing no more than $100,000 during any 12-month period,” said Piwowar, who voted against the rule. “While crowdfunding was intended to be a treat for the smallest and least sophisticated companies seeking to raise capital, today’s rules are full of tricks.”

Piwowar also dissented from a proposed rule, passed by a 3-1 vote at the same meeting, that would loosen restrictions on stock offerings sold to residents of a single state. The changes would make it easier for companies to conduct local crowdfunding campaigns that are overseen by state regulators. The proposal will be open to public comment for 60 days.

The plan would allow businesses to raise up to $5 million under the exemption, up from $1 million under current rules. Piwowar said he objected to the $5 million cap, arguing the SEC should have left that up to the states.

“This is the majority of the Commission telling the state legislatures and state securities regulators that they have no confidence in your willingness and ability to protect residents in your own states,” he said.