Next year, the Securities and Exchange Commission (SEC) will establish new crowdfunding rules, in which small businesses will be permitted to raise up to $1 million dollars from the general public using online platforms.
In the past, rules had limited companies to only accept online donations from accredited investors, or people with a net worth of at least $1 million or who have an annual income of at least $200,000.
The new rules are known as Title III rules, and they were originally contained in the 2012 JOBS Act. With the new policy, virtually anyone will be able to invest in small companies.
However, there will be some restrictions put into place in order to protect small-time investors.
For instance, if one’s net worth and annual income are both under $100,000, they will only be allowed to invest up to $2,000 per year. People with greater incomes or a greater net worth will be allowed to invest 10% of either their annual income or net worth, whichever is greater. Still, this amount cannot exceed $100,000.
Such offerings can be made using newly regulated “funding portals”, which will go into effect on January 29th of next year. Companies that want to get involved will be required to provide necessary information and go through a background check in order to participate. Investors will be able to access such information. This process is designed to prevent fraud.
Another major change with the new policies is that not all companies receiving investments will be required to go through an annual audited financial review by an accredited official. Any company that receives investments of only $100,000 or less will only be required to provide financial statements that have been certified by their own financial officers.
Companies that raise anywhere between $100,000 and $500,000 must have their finances examined by an outside accounting firm. Furthermore, companies raising anywhere between $500,000 and $1 million will need to have their finances examined by an official outside auditor, but they still do not need to obtain audited financial statements.
As another safety mechanism, companies offering investment opportunities will need to provide prospective investors with a basic description of their business, as well as their offerings.
Additionally, the companies can choose to go through a question-and-answer program, where they will answer the questions of prospective investors.
Most businesses and investors are excited about the new program, saying that it will provide businesses with new opportunities for investment and make getting involved in investing easier than ever before.