New Crowdfunding Rules Proposed by SEC

By Aditi Mukherji, JD on October 29, 2013 | Last updated on March 21, 2019

Companies in Silicon Valley and beyond have been waiting with baited breath for this day: The Securities and Exchange Commission unanimously approved a proposal of crowdfunding rules to last year's Jumpstart Our Business Startups (JOBS) Act.

If your company funds its ventures online or is considering using crowdfunding as a litigation aid, it's time to pull out your reading glasses and peruse the 538-paged proposal before you weigh in on the matter and comment on the proposed rules.

Here are a few notable highlights of the proposed rules:

  • Small companies can raise up to $1 million a year through crowdfunding without the expense of becoming publicly traded, reports The New York Times.
  • Crowdfunding caps the amount a person can invest in all crowdfundings over a 12-month period at 10% of annual income or net worth (incomes of $100,000 or more) or the greater of $2,000 or 5% of annual income or net worth (incomes of less than $100,000).
  • Crowdfunding must be done through a registered broker-dealer or registered "funding portal" (e.g. Kickstarter, IndieGoGo, Prosper, etc.). Broker-dealers and funding portals may not solicit investments, offer investment advice or compensate employees based on sales.
  • Portals will be required to go through an intensive registration process handled by both the SEC and the Financial Industry Regulatory Authority; they will be required to follow record-keeping and anti-money laundering procedures.
  • Companies selling stock must make some disclosures not explicitly required in the original JOBS Act law about risk factors and how much debt they carry. The crowdfunding disclosure document must be filed with the SEC at least 21 days prior to first sale.
  • Companies seeking more than $500,000 must release audited financial statements.
  • Crowdfunding does not allow advertising except solely to direct investors to the appropriate broker/funding portal.
  • Annual reports must be filed with the SEC by a company that completes a crowdfunding round.

Public comments in response to the proposal are already pouring in -- particularly about the more costly provisions including the financial statement requirements and the mandatory filing of annual reports with the SEC. It could be at least another six months before the agency issues final rules, reports The Times.

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