The Securities and Exchange Commission finally offered a public ruling on crowdfunding on August 29 – nearly two months after their original planned ruling date of July 5.
The ruling, which comes in response to the JOBS Act, which President Barrack Obama signed into effect in April, is meant to encourage investments in startups, while protecting those startups from unqualified investors.
“I believe that the proposed rules fulfill Congress’s clear directive that issuers be given the ability to communicate freely to attract capital, while obligating them to take steps to ensure that this ability is not used to sell securities to those who are not qualified to participate in such offerings,” said SEC Chairman Mary Schapiro.
The SEC proposal makes major amendments to Rule 506 of Regulation D of the Securities Act, which prohibits companies from engaging in general solicitations and advertising, as they try to gain capital through security sales.
As it stands right now, companies must either register security offerings with the SEC, or use on an exemption from such registration that prohibits general soliciting or advertising of security offerings.
The JOBS Act plans to remove such limitations through Section 201 (a)(1), which will allow companies to attempt to raise capital through more public means. This would provide a potential boon to crowdfunders.
However, companies can only offer securities to “accredited investors” – a new stipulation the SEC has created mandating that all purchasers of securities must have an income exceeding $200,000 in each of the past two years, or an individual net worth of $1 million.
Full accreditation will also depend on several other factors, such as how much the purchaser plans to spend, how the purchaser learned of the security offering and the amount of information the issuing company has about the purchaser.
In essence, this makes it easier for companies to publicize their security offerings, but more difficult for smaller investors to make any purchase. The ruling has drawn a mixed reaction from the crowdfunding world, with some praising the ease with which security offerings may now be sold and others citing the accreditation process as a limiting factor.
The SEC rulings are now in the midst of a 30-day comment period, but must be finalized by December 31.