The SEC has adopted new rules which would permit companies to offer and sell securities through online crowdfunding. Crowdfunding is a method of raising capital by monetary contributions from a large number of people, usually through the Internet. The new rules will allow small businesses and entrepreneurs to more easily raise capital, and will permit average citizens to invest in startups and early stage businesses. Companies are no longer required to offer securities only to accredited investors; now, anyone can participate in an equity offering, subject to certain investment limits. The new rules were enabled by the 2012 JOBS Act, which created an exemption to the existing securities laws to make equity crowdfunding possible. The SEC has been working on crafting new rules since that time. (These new crowdfunding rules should not be confused with, and do not replace, other rules adopted pursuant to the JOBS Act several years ago that expanded the ability of issuers to raise capital using Rule 506 0f Regulation D.)

Under the new rules, a company may raise up to $1 million from unaccredited investors in any 12-month period. An investor with an annual income or net worth of $100,000 or less may invest in any 12-month period up to $2,000, or 5 percent of his net worth, whichever is greater. An investor with an annual income and net worth of $100,000 or greater may invest up to 10 percent of the lesser of her income or net worth. The investment limit for any investor is $100,000 per 12-month period. The rules provide that securities purchased in a crowdfunding transaction generally cannot be resold for one year. Companies offering equity crowdfunding must make certain disclosures in the interest of providing transparency to investors; these disclosures include information about officers and directors and owners of 20 percent or more of the company, the price to the public of the securities being offered and the target offering amount, financial statements, and a description of the financial condition of the company. All transactions utilizing the new rules are required to take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. A funding portal would be required to register with the SEC and become a member of a self-regulatory organization such as FINRA.

The rules have been adopted despite concerns that they could lead to fraudulent activities placing investors at risk.

The new rules will become effective 180 days after they are published in the Federal Register. A link to the SEC’s press release can be found here: http://www.sec.gov/news/pressrelease/2015-249.html.