The SEC Moves One Step Closer to Permitting Equity Crowdfunding

23 Oct
By: Jessica R. Sudweeks

Earlier today, a five member panel of the SEC unanimously approved the release of proposed “crowdfunding” rules, which, if approved, would allow ordinary investors to buy stock directly from companies using online crowdfunding exchanges (think Kickstarter campaigns to sell shares of stock). The proposed rule will be open for public comment over the next 90 days, at which time the SEC is anticipated to implement a final rule.

If approved, companies will be able to raise up to $1 million per year from ordinary (i.e. non-accredited) investors. The proposed rule is also likely to place limitations on individual investment amounts, based on an individual’s income or net worth. For example, a person earning less than $100,000 per year may be only able to invest $2,000, or 5% of their income. However, unlike general solicitation, the proposed rule is not expected to require companies to verify the income levels and net worth of investors in crowdfunding. Securities purchased through a crowdfunding exchange will be restricted, and subject to the 12-month holding period under Rule 144.

Smaller reporting companies, in particular, should be excited about the opportunity crowdfunding offers. Companies will be able to access a large, previously unavailable group of investors, with minimal cost, as publically traded companies already make disclosures anticipated to be required for a crowdfunding raise in their 10-Ks, 10-Qs and 8-Ks. Moreover, the $1 million per year limitation will likely limit competition for investor dollars from larger companies. We will keep a close watch on this matter during the public comment period, and will update The Public Company Report once the proposed rule is released and as it moves closer to final form.


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