Why is the Securities and Exchange Commission getting involved in Crowdfunding?

The concept of fundraising campaigns targeted at the general public, or “crowdfunding,” has become commonplace in the era of Kickstarter, Indiegogo, and Crowdfunder. Thousands of entrepreneurs have successfully raised millions of dollars through these online platforms. So why, in October of last year, did the Securities and Exchange Commission (SEC) issue a 500-plus page release outlining its proposal for how companies can crowdfund without running afoul of securities regulations?

The answer is that crowdfunding platforms like Kickstarter typically reward donors with small gifts—often early access to the products or services the company is raising funds to develop—a fundraising method that largely skirts regulation by the SEC. Upon approval of the SEC’s proposed rules; however, companies will be able to go further and grant investors equity in exchange for their investments. Theoretically, this will provide everyone—not just certain “accredited investors” such as venture capital firms and wealthy individuals—the opportunity to purchase equity in early-stage private companies, at the same time giving companies a much broader audience for their fundraising efforts.

If the rules are adopted, certain limitations on equity crowdfunding will apply, including:

  • companies will be limited to raising $1 million per year through equity crowdfunding,
  • the amount individual investors will be allowed to invest per year will be limited based on their net worth or annual income, and
  • all crowdfunding transactions must take place through online platforms operated by SEC-registered intermediaries.

It is important to note that until the SEC’s proposed rules become final, equity crowdfunding remains illegal. We will bring you more details here on equity crowdfunding as the SEC finalizes its rules, so be sure to stay tuned.