As of May 16, 2016, the Securities and Exchange Commission (SEC) approved its final rules on the Regulation Crowdfunding law, making it now legal for businesses to raise up to a $1 million a year with the aid of crowdfunding platforms. As a product of Title III of the JOBS Act, equity crowdfunding has been officially recognized as a valid form of raising money for businesses, both big and small, established and new. Any business that meets the legal requirements can now sell stock and offer shares publicly. Here are the facts:
Companies may raise up to $1 million in any rolling 12-month period. Investors are also limited in the amount of securities they can buy. Within a given year, those with and annual income or net worth of less than $100,000 can invest up to $2,000 or 5% of their annual income or net worth, depending on which is greater. For those with incomes or net worth above $100,000, they are allowed to invest up to 10% of their income or net worth or up to $100,000 each year.
All crowdfunding must be done through an online intermediary. Only funding platforms that have registered with the SEC and FINRA are allowed to participate. These intermediaries are responsible for collecting and checking all relevant data from interested businesses in order to cut down on fraud.
Plenty of disclosure will be required at every stage from companies seeking equity crowdfunding. They will have to provide financial statements and other key fiscal information at the outset and as a business funding campaign gets underway, they will provide ongoing status reports.
While crowdfunding is not ideal for every type of company, these new regulations will hopefully help fulfill the business finance needs of many firms who have had a hard time in the past getting business loans from traditional sources.