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October 25, 2013

SEC moves forward with crowdfunded equity

Nearly 18 months after U.S. President Barack Obama introduced the JOBS Act, and with it the promise of crowdfunded equity, on Wednesday the U.S. Securities and Exchange Commission (SEC) voted unanimously to propose rules that will bring American investors one step closer to being able to do so.  There’s still a 90-day comment period to get through but it’s nonetheless good news for small and medium sized businesses looking to raise capital, and investors looking to fund them.

As I write in an August 2013 report entitled Crowdfunding: Catalyzing growth, investment, and access-to-capital,

Equity crowdfunding offers significant potential  to open up a new funding source for entrepreneurs, and a new avenue for investment for investors. In so doing, this nascent platform will help facilitate job creation and innovation by ensuring that good ideas don’t die on the kitchen tables of would-be entrepreneurs….The potential pool of funding from these sources could provide billion-dollar inputs into the operations and growth of SMEs. And given broad consensus related to the “valley of death” that afflicts many SMEs and condemns a great many to failure, this new source of capital could unleash significant long-term employment and economic gains.


The SEC’s move brings the US one step closer to enabling this potential. As per the SEC, “under the proposed rules a company would be able to raise a maximum aggregate amount of $1  million through crowdfunding offerings in a 12-month period. Investors, over the course of a 12-month period, would be permitted to invest up to: $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000; or 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000.During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.”

Such transactions will only be allowed to be conducted via approved third-party platforms. In order to mitigate the risks inherent with a democratized model of equity (I write more about this in our August 2013 paper on Crowdfunding – download here), the proposed rules would require these third-party intermediaries or platforms to provide investors with education materials and take measures to reduce the risk of fraud.

You can read the full set of proposed rules *568 pages of them* here:http://www.sec.gov/rules/proposed/2013/33-9470.pdf

Ultimately it’s one step closer for Americans, and a further reminder to policy makers on this side of the border that fully enabling SMEs requires some creativity, a sound regulatory framework, and a willingness to experiment. Here’s hoping we see similar activity from the Ontario Securities Commission by the end of the year. Given the Government of Ontario’s focus on youth employment, and ongoing attention to SME financing at all levels of government in Canada, there’s no excuse for inaction.


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