On Monday, May 16th, 2016, SEC regulations allowing companies to offer and sell securities through crowdfunding came into effect, opening the world of capital formation to newer investors under provisions in the JOBS Act of 2012. These regulations were a long time coming for the SEC, and the results will soon be visible as a new line of private equity fundraising comes into view.
The SEC treaded carefully with the crowdfunding regulations. The agency had been tasked by Congress in the JOBS Act to write regulations within 270 days of the passage of the act in 2012. It finally proposed these regulations in October 23, 2013, and the final rules arrived on October 30, 2015, virtually unchanged. They became effective on May 16th, potentially kickstarting (pun intended) a revolution of sorts in the solicitation of private equity.
Investors with either an annual salary or net worth of less than $100,000 are allowed to invest, in the aggregate across all crowdfunding offerings of all companies, the greater of $2,000 or 5 percent of the lesser of their annual income or net worth in a 12-month period. Investors with both an annual salary and a net worth of $100,000 or more may invest up to 10 percent of the lesser of their annual salary or net worth, but the aggregate amount of all crowdfunded securities by all companies sold to any individual investor may not exceed $100,000. Additionally, the value of a primary residence is not included in net worth, unless the mortgage on the property is underwater, which then counts as a liability.
If these rules on investors seem unduly strict, they are so by design. The SEC is wary of a flood of new, unskilled and unaccredited investors making risky investments in crowdfunding schemes, and has capped investments by these individuals accordingly.
An even higher burden is placed on companies making crowdfund offerings, which must make fairly substantial filings (descriptions of ownership and capital structure, related-party transactions, financial condition, material factors that might make investment risky, etc.) and make their offerings through SEC-registered portals. Under the regulations, companies may raise up to $1 million in a rolling 12-month period through sales of securities through crowdfunding, but it remains to be seen whether companies are willing to jump the rather high regulatory hurdles for a comparatively small pot of capital. A cynic might get the impression that the SEC promulgated these regulations because it had to, but that it set the bar high, potentially increasing the attractiveness of other private equity options (Regulation A+, anyone?).