Later this year, the Securities and Exchange Commission is expected to issue rules that will allow small businesses and new companies to raise money by selling securities to non-accredited and unsophisticated investors through crowdfunding Web sites.
When that happens, experts say, the world of startup investment may never be the same.
“Things will start to become interesting after the SEC’s implementation rules come into effect,” said Elliot Dater, an attorney with the law firm of Schnader Harrison Segal & Lewis.
The SEC's rules implementation for the Crowdfund Act will up the ante in startup investing by allowing unsophisticated investors to buy securities in nonpublic companies, potentially boosting the volume of capital flows. Indeed, crowdfunding has already made an impact on the way small businesses and entrepreneurs fund their new projects.
Online crowdfunding has been a way for entrepreneurs to raise small amounts of money from lots of people by offering rewards and other incentives. Some crowdfunding Web sites have become hugely popular. Three-year-old Kickstarter, for example, last year had 2.2 million people from 177 countries pledge $320 million in 18,000 projects.
However, some observers wonder whether the Crowdfund Act will be all it’s cracked up to be for startups and investors. The legislation, skeptics note, has strong consumer-protection features that limit fundraising to no more than $1 million per project in one 12-month period, and cap individual investments at just $2,000.
Dater notes that many successful startups will not be able to operate within these constraints, and will have to seek significant funding in the future, which will effectively dilute crowdfunding investors and give them meager returns at best.
Issuers will face heavy regulatory burdens intended to protect unaccredited investors. Moreover, they will be required to disclose sensitive business and financial information through SEC filings and on crowdfunding sites.
Meanwhile, accredited investors can now find sundry opportunities at the FundersClub and AngelList crowdfunding sites. Startups on these sites can’t advertise or announce they’re seeking funding. The two sites both received “no-action” letters from the SEC in March, allowing them to proceed with their business plans.
Neither site relies on investment crowdfunding under Title III of the JOBS Act, according to William Carleton, an attorney with McNaul, Ebel, Nawrot & Helgren. Instead, they took a more traditional route long familiar to venture capitalists, and restricted their fundraising to accredited investors so they could manage venture capital funds without registering or being regulated as broker-dealers.