Startups and other small businesses will be free to raise money by selling stock over the Internet under new rules adopted by the Securities and Exchange Commission.
Equity crowdfunding standards approved on a 3-1 vote Friday lay out how such firms can raise as much as $1 million annually by offering shares to investors online. The funding model is based on platforms such as those developed by Kickstarter Inc. and Indiegogo Inc. that allow entrepreneurs, artists and engineers to solicit donations for projects ranging from virtual-reality headsets to music festivals.
“This rulemaking has generated tremendous interest from potential issuers, investors and intermediaries,” SEC Chairwoman Mary Jo White said before commissioners voted on the rules. The framework “strives to be workable for issuers and delivers a strong set of investor protections,” she said.
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The SEC is required to permit equity crowdfunding under the 2012 Jumpstart our Business Startups Act, which promised an easier way to raise money for firms that can't get bank loans or venture capital. Even so, it took the SEC more than three years to adapt the concept to securities markets, as regulators struggled to balance demands for fewer requirements with warnings about potential fraud.
$1 MILLION MAX
A company using equity crowdfunding is limited to raising a maximum of $1 million per year. Those raising smaller amounts would have to share financial statements and income-tax returns with investors. In a change from a proposal released in October 2013, the agency will allow a business raising more than $500,000 to provide financial results that have been reviewed by an accountant rather than formally audited.
“These investor protections are not just important to the college student, to the grandmother and to the working mom who jump on the Internet wanting to experiment with crowdfunding,” said Commissioner Kara Stein, a Democrat. “They also protect the small businesses that want a reliable market to raise capital.”
Crowdfunded shares will be open to any investor regardless of their income or net worth. Those who buy stock will have to hold it for at least one year before trying to sell. Under the rules, crowdfunding must be done online through a broker or funding portal that provides financial information about the companies and discloses how much money it makes for selling the shares.
WEALTH THRESHOLDS
People whose income or net worth is less than $100,000 would be limited to investing a maximum of $5,000 annually. Investors with income and net worth greater than $100,000 could contribute as much as 10% of their annual income or net worth, up to a maximum of $100,000 in one year. The restrictions are intended to limit the downside for shareholders who take stakes in riskier companies that provide less information to investors than public companies.
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The investment limitations are slightly more strict than what the SEC outlined in its 2013 proposal and drew a stern objection from Republican Commissioner Michael Piwowar.
“Even if you are Warren Buffett or Bill Gates, you are limited to investing no more than $100,000 during any 12-month period,” said Mr. Piwowar, who voted against the rule. “While crowdfunding was intended to be a treat for the smallest and least sophisticated companies seeking to raise capital, today's rules are full of tricks.”
Mr. Piwowar also dissented from a proposed rule, passed on a 3-1 vote at the same meeting, that would loosen restrictions on stock offerings sold to residents of a single state. The changes would make it easier for companies to conduct local crowdfunding campaigns without SEC oversight. The proposal will be open to public comment for 60 days.
Businesses would be limited to raising $5 million under the proposal, and the deals would be overseen by state regulators. Mr. Piwowar objected to a $5 million cap on fundraising.
“This is the majority of the commission telling the state legislatures and state securities regulators that they have no confidence in your willingness and ability to protect residents in your own states,” he said.
