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Equity Crowdfunding | Finally Small Investors May Get a Piece of the Action

“Crowdfunding is rapidly changing the real-estate investment market, offering developers new ways to finance projects, small investors a way in, and the socially conscious an avenue to support their local communities.” – Forbes

Housing-MovementOn Wednesday, October 23rd a unanimous vote of the five-member Securities and Exchange Commission (SEC) made headline news. The vote advanced a proposal which could re-define who gets to invest in “ground-floor” business opportunities. It could radically change how start-ups raise capital. The proposal has the potential to unlock billions of investment capital allowing investors to consolidate revenue to fund real estate portfolios or new products and ideas.

The proposed rules were introduced to support the implementation of Title III of the Jumpstart Our Business Startup (JOBS) Act. The intent of the legislation and proposed structure is to allow smaller companies to gather capital from a broader spectrum of investors, avoiding the need for high cost Initial Public Offerings (IPOs), or the pursuit of millionaire private investors.

Imagine a virtual Shark Tank, but with a lot more sharks. Instead of being limited to small panels of mega-millionaires, entrepreneurs could appeal to a virtual audience of mainstream backers, each investing blocks of capital in exchange for equity.

For the first time since the 1933 Securities Act, the proposal (if finalized) would open equity investment opportunities allowing  small investors to purchase a stake in promising start-ups. Currently such equity shares are reserved for “accredited investors” with a verifiable net worth of $1 million or earnings of $200,000/year for the most recent three years.

The SEC proposal created a structure (funding portals) for the new brand of financing and established limits for crowdfunding investors. Funding portals, will act as intermediaries linking business owners with investors online.

A company would be allowed raise a maximum of $1 million via crowdfunding per year.  Within a 12 month period investors would be bound by the following limits:

  • If annual income is less than $100,000 the limit is the greater of $2000 or 5% of annual income or net worth.
  • If annual income equals or exceeds $100,000 the limit is the greater of 10% of income or net worth. Securities purchased via crowdfunding would be capped at $100,000/year.

A major SEC concern is the potential for fraud. Many are worried that non-accredited investors may be less sophisticated and more vulnerable to deceptive offerings by scam artists.

The SEC has implemented a 90 day comment period to field questions and feedback on the proposed structure. Afterward, the Commission will review input and make a decision regarding implementation. Click here to register a comment with the SEC.

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