In a major expansion of equity crowdfunding, the U.S. Securities and Exchange Commission has approved final rules allowing small investors to buy shares of private companies.
Crowdfunding had been open only to “accredited” investors, defined as individuals who have more than $1 million in assets, excluding their primary residence, or have maintained an income of more than $200,000 for at least two years.
With the new rules, mandated by Title III of the 2012 Jump-Start Our Business Start-Ups Act, the SEC has brought nonaccredited investors into the fold, allowing those with modest wealth to invest in startups.
“As equity crowdfunding with non-accredited investors under Title III comes into effect, it will have massive implications for startups and investors alike,” Forbes said. “This will open up a tremendous amount of capital to early stage companies.”
Crowdfunding was already expected to surpass venture capital in 2016 at $34 billion.
“There’s no question that there’s a lot of pent-up demand from ordinary investors,” Ryan Feit, CEO of the investment portal SeedInvest, told The New York Times. “At the end of the day, that means there will be more capital available for small business.”
The amount of money backers will be allowed to invest depends on their income. Those with an annual income or net worth of less than $100,000 will be allowed to invest up to $2,000 in a 12-month period, or 5% of the lesser of their income or net worth, whichever is greater. Those with an income and net worth of more than $100,000 will be permitted to invest up to 10% of the lesser of their annual income or net worth.
The Times noted that regulators had struggled to write rules stringent enough to protect investors but flexible enough to allow for meaningful fundraising.
“I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need,” SEC Chair Mary Jo White said in a news release.
But some critics are skeptical about the quality of the investments that will be available. “Ninety-nine percent of these deals will prove to be unprofitable,” Andrew Stoltmann, a lawyer who specializes in securities fraud, told The Times. “This is a disaster waiting to happen.”