Los Angeles Business Journal

SEC Proposes Crowdfunding Rules

By Natalie Jarvey Wednesday, October 23, 2013

Crowdfunding platforms have been waiting eagerly for the Securities and Exchange Commission to hand down new rules that open up equity investing to non-accredited investors. Today, those companies are one step closer to their utopia of startup investing for all.

The SEC unanimously voted to propose rules that would allow startups to raise money from non-accredited investors in exchange for company equity. Under the current rules a person must be an accredited investor – someone with a net worth of at least $1 million or an annual income of more than $200,000 – to invest in a private company.

Crowdfunding is the third piece of the Jumpstart Our Business Startups Act that Congress approved last year. The SEC already lifted a ban on general solicitation as part of the JOBS Act last month.

The proposed rules would limit the amount that a company can raise from non-accredited investors to $1 million a year.

Meanwhile, non-accredited investors with an annual income and net worth less than $100,000, would be limited to investing $2,000 or 5 percent of their annual income or net worth, whichever is higher. Non-accredited investors with an annual income or net worth greater than $100,000 would be allowed to invest 10 percent of their annual income or net worth, whichever is higher. The SEC would impose a $100,000 annual limit on those investors.

Jilliene Helman, chief executive of L.A. real estate crowdfunding platform Realty Mogul, said the limit to crowdfunding investments would make it difficult for large real estate deals to be funded in that way.

"We're working on $16 million transactions," she said. "To limit non-accredited investors so they can't benefit from economies of scale concerns me. The limitation is going to be a negative thing for non-accredited investors."

The SEC rules would also require companies to disclose some basic details with the SEC and investors. Those disclosures include information about directors, a list of investors that own more than 20 percent of the company and financial statements.

Furthermore, the SEC would also require that deals are conducted through a registered crowdfunding platform. Those platforms would be required to provide investors with educational materials and reduce the risk of fraud, among other stipulations.

In the proposed rules, the SEC said it sought to find a balance between rules that would promote crowdfunding and rules that would make crowdfunding risky for non-accredited investors.

"Rules that are unduly burdensome could discourage participation in crowdfunding," it wrote. "Rules that are too permissive, however, may increase the risks for individual investors, thereby undermining the facilitation of capital raising for startups and small businesses."

The proposed rules will now be open to 90 days of public comment. After the commenting period ends, the SEC will review the public input and decide whether to adopt the rules.

Helman said she expects the SEC to formally adopt the rules sometime during the first quarter next year.

"There's been a lot of uncertainty for companies like ours," she said. "I don't want to start programming anything into our platform just yet. We're playing a wait-and-see game."