Three years later, the SEC has finally approved equity crowdfunding rules, which are set to take affect in 2016.
In a 3-1 vote Friday morning (October 30th), the Securities and Exchange Commission voted to approve the new equity crowdfunding rules as part of Title III from the original JOBS Act. The new rules are more extensive than ones that currently exist.
Specifically, small businesses and startups would now be allowed to take in up to $1 million per year from the general public (non-accredited investors) via online platforms. Up to now, raising funds has been limited to the accredited investor crowd: those with 200K+ annual income or at least $1 million of net worth.
Although basically anyone will be able to invest, grandma can’t necessarily dump her life savings into your company if she’s not accredited – there are rules to protect neophyte investors. If both net worth and annual income are below $100,000, one will only be able to invest $2,000 – or 5% of annual income or net worth in a 12-month time frame. If your income and net worth surpass the $100,000 ceiling, you would be able to make an investment of 10% of annual income or net worth (not to surpass $100,000).
You can read more about the technicalities here.
In an effort to make the proposed rules a reality prior to today, some states passed their own rules which made it somewhat tricky to fully take advantage of the internet’s broad reach.
Specifically, Washington state and Oregon passed their own laws within the past year allowing for equity crowdfunding. The details were tricky though. In most cases, the company and investor had to be located in the same state. There was also a set of strict parameters about the kind of platform you could use and how the funding was done, given that the internet lends itself to a global audience.
Certain industries and business types could not participate as well, including real estate programs and equipment leasing operations.
What Does it Mean for Startups?
For startups and many small businesses, this day has been a long time coming. As most startups find out quickly, raising capital is no small task. Angel investors and VC firms have traditionally been the obvious target for raising capital, and likely will still be until we see how these new rules shake out.
Platforms like Kickstarter and IndieGoGo have blazed a path over the past several years for those seeking an alternative route. Equity was never an option though, as all of those websites rely on a rewards-based system. Platforms like Fundable can help you raise money for equity, albeit strictly through accredited investors, which requires a level of vetting that you must pay for when you use that system.
Sites like AngelList have also changed the game a bit with their investment syndicates. This is where a lead investor can pick and choose investments while other people put money into their decisions and receive varying levels of return.
What this really means for startups is that the doors will soon be blown wide open to alternative forms of fundraising. For most, unless you’re in a major Angel/VC market, it can be very hard to get your company on their radar without significant traction or press prior.
Ultimately, time will tell whether or not it’s going to pay off with the “thousand small fish” approach vs. “one big fish” in the sea of equity fundraising. I for one would love to see the fundraising options continue to diversify for small businesses and startups, especially for areas where access to traditional investment capital is harder to come by.