Thanks to some recent developments at the Securities and Exchange Commission (SEC), entrepreneurs looking to start up their own small businesses by raising funds through crowdfunding are expected to gain an alternative option when it comes to how they raise capital.
In late October, the SEC voted unanimously to develop rules and regulations to allow investors to buy stock in startups and established companies online through popular crowdfunding websites. Some crowdfunding sites include Kickstarter and Indiegogo.
On the surface, these rules could transform how companies raise capital as this would allow them to bypass the traditional costs of taking a company public through an IPO. The process of going public with a company generally involves hiring investment professionals who can be quite expensive.
This vote by the SEC is considered a response to Title III of the JOBS Act, which was passed in 2012. Experts say it demonstrates that Congress is trying to find a loophole to let small businesses get an exemption from the stringent regulations that control the sale of securities. Many members of Congress believe that by using crowdfunding services, small business owners and entrepreneurs can gather capital in order to grow and prosper, particularly by having a larger pool of investors as they would by offering stock options.
The New Funding Portal
These new proposed rules would essentially create a brand new financial entity known as a funding portal. This portal would work as a website designed to electronically connect financially-driven investors with startups and entrepreneurs who need to raise capital. Official approval by the SEC is necessary for this because most of these sites are considered banned.
Crowdfunding has been an increasingly popular form of funding for new businesses over the past few years. Through these new rules, the SEC is attempting to expand crowdfunding to a larger public audience, while keeping investor protection as a priority. The rules would put a cap on a company’s ability to bring in funds via crowdfunding to $1 million per 12-month period. For investors who have an annual net income or worth of under $100,000, they can invest a maximum of 5% of this amount – or up to $2,000 – whichever is greater, per each 12-month period. Investors who have an annual income or net worth over $100,000 are able to invest a maximum of 10% of this amount every 12 months. Any securities purchased through these funding portals would have to be held for one year prior to being sold.
Since the concept of equity crowdfunding is still in the planning phase, there will be a 90-day time period for the SEC to obtain and review comments prior to making final decisions on these proposed rules.
The federal government has been slow to approve and implement rules on the practice of crowdfunding. The main reason for this has been the challenge of striking the right balance between giving entrepreneurs another funding option and protecting them against the numerous Internet scams out there. According to news reports, evidence has shown that many investors have given money to startups, but the small business owners receiving the money have not held up their end of the bargain by actually starting real companies.
Overall, these new regulations proposed by the SEC are intended to drive more entrepreneurs to consider crowdfunding and, at the same time, drive more investors to consider putting their finances behind those in search of capital. Since small businesses drive America’s economy, having more of them in the marketplace can only be beneficial to the country’s future prosperity.
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