Changes in Crowdfunding Rules Will Allow Investments by a Broader Pool of Investors

Published on October 25, 2013

As of September 23, startups could start publicly advertising their needs for capital to accredited investors as the Title II section of the JOBS Act was implemented. Now, as reported by the Associated Press on ABC News, the U.S. Securities and Exchange Commission voted 5-0 in favor a proposal that would help small businesses find funding from a broader pool of investors.

The SEC’s proposal, which details the amount people may invest and how much companies must divulge will go out for public comment and, according to the report, final rules about crowdfunding could be approved next year. The JOBS Act with its crowdfunding provision was signed into legislation in 2012 but has yet to be thrust into full throttle. Right now only accredited investors may provide equity funding to early-stage companies. When Title III of the JOBS Act is fully implemented, companies will be able to offer stock in exchange for capital to smaller investors as well.

An article on Inc.com details what’s new under the SEC’s proposal:

• People with annual income and net worth of less than $100,000 could invest a maximum of $2000 or 5 percent of their yearly income or net worth every year.
• Those with higher incomes could invest up to 10 percent.
• Companies would be required to provide information to prospective investors about their business plan and financial condition, and a list of their officers, directors and those who own at least 20 percent of the company. This is to ensure investors understand what they are buying and the potential risk involved.
• Securities would need to be purchased through online crowdfunding portals–a new class created by the SEC. Those securities would have to be held for a year before being sold.
• A company could raise up to $1 million for equity through crowdfunding each year; any company that raises more than $500,000 must file more detailed information to the SEC.

After the 90-day public comment period, another SEC vote is required for the proposal to go into effect.

Crowdfunding and Self-Directed IRAs

Many individuals are already doing “friends and family” investing and lending—why not do so through a self-directed retirement plan? Investing in startups through your self-directed retirement account is one of the many ways individuals can build retirement wealth through alternative strategies. And once the new crowdfunding rules are implemented, investors will not have to meet the high-net-worth, accredited investor criteria that currently limits equity funding. Self-direction already opens more investment doors to account holders; perhaps in the coming months, these investors will have additional avenues by which to build tax-deferred retirement wealth.

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