An SEC Rule Change Opens A New Era For Crowdfunding

Potential investors will soon begin seeing opportunities pop up in their Facebook news feeds and in their email inboxes thanks to a major rule change from the Securities and Exchange Commission. In September, the agency removed the decades-old ban on public solicitation for private investments. This means private investments can now be marketed to the general public, which will allow entrepreneurs to reach a much broader audience than securities law used to allow.

The nascent crowdfunding market, which uses the Internet to pool small investments from many investors, stands to benefit significantly from this rule change. Right now, crowdfunding sites like Kickstarter and Indiegogo are not subject to securities laws because they allow people to give money to support projects and individual initiatives, not invest in them. In the roughly four years they’ve been in existence, these two sites have raised close to $1 billion in contributions for thousands of projects.

Startups and businesses have taken notice. They have begun to use similar online crowdfunding platforms—but to gather investments. And thanks in part to the SEC’s new rule, the equity crowdfunding market is poised for rapid growth over the next decade. Deloitte expects all forms of crowdfunding to hit $3 billion globally this year and to grow at a compound annual growth rate of 100% over the near term. Equity crowdfunding is expected to perform even better, with a compound annual growth rate of 114%, according to the crowdfunding advisory firm Massolution.

To be sure, the SEC’s change to Rule 506 doesn’t allow just anyone to invest. Only “accredited” investors—with a net worth of more than $1 million, or who earn at least $200,000 a year—can continue to participate in equity crowdfunding. The new rules require proof, whereas self-attestment sufficed previously. Many hope that the SEC will issue additional regulations that would let smaller investors get in on the action.

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