The idea that the average consumer i.e. a non “high net-worth individual” could invest in a small equity round has been in the works since June but a new rule released last week now brings the US closer to true equity crowdfunding. You can check out the entire release here but, in general, it opens the door to a new form of investment.
Companies will be able to raise a maximum of $1 million in a 12-month period – arguably not much by modern investment standards – but the money can come from individuals with a net worth under $100,000. These individuals can invest “$2,000 or 5 percent of their annual income” in a 12-month period and folks with more money can invest 10 percent of their annual income. You will not be able purchase more than “$100,000 of securities through crowdfunding.”
The new rules also remove the so-called audit requirement which were originally created to ensure that the startup was solvent. This requirement would have tacked an additional $40,000 or so in costs on the process and would have ostensibly prevented investors accessing from all but the most stable startups.
Equity crowdfunding is, in short, one of the newest and most interesting funding systems in the world. While it already fairly well-known overseas, the SEC has been extremely cautious regarding its expansion and this is one of the largest moves towards a true equity crowdfunding system in the US. What does it mean for the average startup? Well, it could reduce the importance of the VC crowd by removing the barriers many startups face in networking their way into cash. However, by capping things at $1 million the SEC has effectively create a signaling system – the biggest raisers will get more interest from the traditional VC funds while small raisers will suffer a dearth of options.
This ruling is part of the JOBS Act, a law designed to “make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors.” This is one of the first results of the act.
In the end equity crowdfunding will probably be the primary vehicle for early state startups to raise money. By bringing in almost anyone – from friends, fools, and family to online fans – a popular startup could raise a solid seed round and then parlay that into further success. This ruling will come into effect in 90 days – plenty of times for folks like Slava Rubin, CEO at Indiegogo, to “explore how equity crowdfunding may play a role in our business model.”