SEC votes to “unleash wisdom of crowds,” approves crowdfunding rule
Commissioners at the Securities and Exchange Commission voted unanimously Wednesday to go forward with a proposal that will let small businesses raise money on the internet from mom-and-pop investors without having to go through cumbersome SEC procedures to register securities.
In an open meeting webcast on Wednesday morning, the five Commissioners each described the proposal (embedded below) and then voted to approve it, which will launch a public comment period that will lead to the final rule going into effect.
One Commissioner said the agency had decided to “unleash the wisdom of crowds,” in describing the SEC’s long-awaited step to implement a new phase of the JOBS Act, a law intended to overhaul America’s financial regulations and make it easier for companies to raise money.
While other parts of the JOBS Act have gone into effect, such as permitting firms to advertise online to accredited investors (a move that Om said “changes everything)”, the crowdfunding proposal has been delayed for almost a year, in part because of concerns about fraud and how to implement the procedures.
Under the proposal approved on Wednesday, a key role falls to so-called “funding portals,” which are required intermediaries between companies and investors — they will be responsible in part for ensuring that investors meet the limits for participating. Right now, the U.S. has many such portals — like Kickstarter — but, while investors can donate money to projects, they can only receive in-kind rewards in return, not cash.
Under the new model, investors with a net worth or annual income of less than $100,000 can only contribute $2,000 or 5 percent of their income; the companies issuing the investment can raise up to $1 million in a 12 month period. The level of oversight increases on the basis of how much a company wants to raise; for funding rounds of less than $100,000, an officer must simply produce a financial statement, while higher amounts require sign-off from an accountant and, if more than $500,000, an auditor.