The Securities and Exchange Commission has voted on new rules on crowdfunding that will make it possible for startups to sell up to $50 million worth of stock online to anyone who wants to buy it. It’s what equity crowdfunding companies have been waiting for and opens up a whole new realm of possibility for startups looking for cash but unable to get any from the traditional venture capital and angel investor sources.
The unanimous vote by the SEC changes the rules from where only accredited investors, those with at $200,000 a year in income or worth more than $1 million, could invest in startups without jumping through a lot of extra hoops. Now the equity crowdfunding platforms that had been limited to the relatively small group that fit that bill can start offering investment opportunities to anyone willing to put up to 10 percent of their net worth into a startup.
The good news is that the new rules will let smaller investors connect with smaller companies, giving the startups access to the funding they might not normally get. For people without the capital to be a major investor, it’s an opportunity to get in the investing game, and with a financial stake in the company as opposed to the Kickstarter version of crowdfunding. It would eliminate the chance of another Oculus VR event, where people who helped crowdfund the company were annoyed and angry when Facebook bought it and they didn’t get anything for their previous investment. If, as the World Bank suggests, equity crowdfunding will be worth $93 billion in ten years, then this is a watershed moment.
The SEC approving the rules gets the ball rolling on creating all of the details to support the new equity crowdfunding system. Pretty soon startups and platform companies will be able to apply for the right to get smaller investors to send them money.
The qualifications for startups to get access to equity crowdfunding won’t be as stringent as the old rules, but it still won’t be automatic. The goal is to make sure that people don’t get scammed by fake companies. The same applies to online equity platfroms, who will have to register as broker-dealers and be regulated as such.
The new rules won’t make startup investing any less risky though. It’s going to be tough to find a balance between opening up the chance for investment and making sure that it’s not used as a way to fleece $50 million out of small-time investors. Still, if it works out the way the SEC hopes, there could be a real flowering of startups, succeeding thanks to the capital that would have been locked away before the rule change.