At the very end of October, beginning of November 2015, the SEC announced the new rules for Equity Crowdfunding in the United States. Jobs Act Title III had finally passed, and ordinary individuals would be able to invest in equity crowdfunding stocks.
Or would they? As the dust settles, some very clear rules for equity crowdfunding are emerging. First of all, the SEC actually tightened up on the amounts involved in permitting people to invest in equity crowdfunding securities. Some of those numbers are pretty significant. Furthermore, there is still a commenting period before the bill is truly active. This crowdfunding tip takes a look at what investors and companies might expect.
First off, uncredited investors who earn less than $100,000 will be allowed to invest up to $2000 or 10 percent of their income in equity crowdfunding stocks. That seems very sensible – it keeps people from sinking more than they can afford to lose in new companies. Start-up companies are very good for the economy in terms of new jobs and new merchandise, but they are notorious for lack of success. In every sense of the word, investing in these small companies should be considered high-risk investing or even angel investing. That is not to say that it should not happen; it just means that if you are planning to commit your funds in this fashion, you should not put more into such stock than you can afford to lose. Or, in other words, don’t invest your mortgage money.
Second, the SEC is putting a ceiling on the amount that any one investor can put into crowdfunding of any description across the board. That ceiling is $100,000. That means that most of these small companies will have to scramble to find numerous investors. There is also a limit on how much money one company can raise using equity crowdfunding.
Third, the amount that start-ups and small companies can raise in this way is limited to one million per year. After they reach that point, they have to change to a different sort of fund-raising if they wish to sell more stock.
Fourth, Title III stock is not considered to be liquid assets. The Stocks cannot be sold or traded for one year after the initial investment.
Yet, even with all these restrictions, many companies that have dealt with crowdfunding hail the JOBS Title III ruling as a step forward. Among other considerations, it allows companies – and not just crowdfunding companies – to use social media to announce that they are raising funds. This step, alone, is a major change in the way business has been conducted.
Furthermore, this marks the first time in more than eighty years that individuals have been allowed to buy, sell or trade stocks without declaring themselves to be brokers, and paying large fees for the privilege.
One might ask what happens if a company attempts to raise money in this way and their goals are not met. That is a very good question, and the answer is simple. Like funding goals set by Kickstarter, for example, if the goal is not met the company does not receive the funds.
Other safeguards are also in place. Although the SEC decided not to make small start-up companies go through the expensive process of a full audit, they still must meet some fairly stringent standards. An article written for Forbes magazine warns that companies choosing to raise funds in this way will be under close scrutiny. The article recommends that an accountant and a good lawyer should be on the payroll and considered to be part of the crowdfunding expenses to be considered. Such companies will be expected not only to follow the rules set forth by the JOBS Act, they will also be required to follow state and local rulings concerning investing. Some of those rulings, perhaps because the stock market crash of 1920 still looms as an abject lesson to unwary and to unscrupulous investors alike, are very stringent indeed and carry exceptionally stiff penalties – including jail time. It pays, therefore, to be very particular about keeping records. Furthermore, the same article commented that social media would likely be used as part of due diligence and that going over the company and all employees and associates social media with a fine-tooth comb would be prudent.
All of this makes 2015 an exciting year for crowdfunding in general and equity crowdfunding in particular. Should you be interested equity crowdfunding, Best Crowdfunding Websites (powered by SMT Agency) features Microventures, a company that has extensive experience in equity crowdfunding. They offer the tools to help you manage your business situation, whether you are a company or an investor. Their motto is, “We do all the heavy lifting and give you all the data you need to make an informed investment decision.” When it comes to marketing, it just doesn’t get any better than that.