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New Crowdfunding Rule: A Treat, or a Trick?

November 13, 2015

On October 30, the SEC finally adopted its long-anticipated Regulation Crowdfunding rules — a move that may have been seen as an early Halloween treat by smaller companies looking to raise capital (and investors looking to offer it).  The SEC voted 3-1 to approve equity-based crowdfunding rules, just three years after its original deadline to do so. Republican SEC Commissioner Michael Piwowar voted against the crowdfunding initiative, saying that the new rules were too strict, will discourage many companies from participating, and is overly paternalistic. Piwowar further contended that, by restricting the amount that people can invest, the SEC “cannot trust ordinary Americans … to be able to exercise appropriate judgment in how to spend or invest their resources.”

Under the new rule, small businesses will be allowed to raise up to $1 million per year from the general public through online platforms. Until now, the rules were limited to “accredited investors,” or those with either net worth of at least $1 million or had an annual income of at least $200,000. But now, or at least once the rules go into effect in 2016, just about anybody will be able to invest. In fact, in order to protect smaller investors from, for instance, putting all of their retirement savings into a promising investment that doesn’t pan out, the SEC approved very specific rules to limit how much a non-accredited investor can invest per 12-month period.

A Crowdfunding Website That Foresees the Benefits of the New Rule

Some equity-based crowdfunding platforms open to qualifying investors, such as Crowdfunder and Fundable, had already existed. However, the new rule makes it easier for small businesses and individual investors to participate, possibly even on bigger fundraising sites such as Indiegogo, which has been lobbying for crowdfunding for years and is enthusiastic about the new rule. Slava Rubin, CEO and co-founder of Indiegogo, stated that “[a]ll of us at Indiegogo are excited that the SEC is formally expanding the way in which everyone will be able participate in the entrepreneurial ecosystem through the amazing power of crowdfunding … We’re now exploring how equity crowdfunding may play a role in Indiegogo’s business model.” Rubin continued, “[i]t’s going to benefit a whole lot of companies – it could be the local coffee shop, and there will [be] opportunities for really interesting hardware and tech companies.”

This is the Sort of Thing That the New Crowdfunding Rule Is Seeking to Avoid

Had the new rule been in place years ago, investors in popular crowdfunding platform Kickstarter might have seen a return on their investments. In one example documented by the LA Times, virtual reality headset developer Oculus raised $2.4 million from nearly 10,000 investors on Kickstarter in 2012. After Facebook subsequently bought Oculus for $2 billion, the investors found out that they were never really investing in Oculus but, instead, merely received a “thank you” from the company or an unassembled prototype of the company’s Rift headset.

Initial Doubts

Even as many embraced the new rule, some wondered if it was less a Halloween treat than a trick.  The LA Times reported that many start-ups fail, and the new rule will allow inexperienced investors to invest in firms that have little oversight. Some critics warn this can be a problem, despite the SEC’s assertions that it will supervise the evolving crowdfunding environment. Other critics, including the Huffington Post’s Business Blog, have expressed their own doubts about the new rule, comparing its adoption to what happened during the Great Depression of the 1930s, when the SEC was formed in an effort to regain market stability.

Several crowdfunding websites not only have their doubts about the new rule, but they are also refusing to get on board with it. According to Financial Times, such websites, including Kickstarter, have stated that they will not open up their platforms to enable entrepreneurs  to raise equity following the SEC’s “liberalization.” AngelList, a similar platform that is aimed at more experienced and “accredited” investors, has noted that it will not lower its wealth threshold.

What You Need to Know Now

The SEC rule will go into effect 180 days after they are published in the Federal Register, and portals will be able to register with the SEC on January 29, 2016.

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