SEC OKs crowdfunding rules, even as Colorado's law has few takers

Chairman Mary Jo White and commissioners Kara Stein and Louis Aguilar voted in favor of the new rule and proposed amendments; Commissioner Michael Piwowar opposed the full slate.

The rules - three years in the making - would complete the Commission's major rulemaking mandated under the Jumpstart Our Business Startups (JOBS) Act.

But while many crowdfunding advocates are celebrating the new rules as a revolution in their business, there's still reason to be skeptical about how well they protect small investors.

The Title III equity crowdfunding ruling that was approved Friday will allow non-accredited (mom and pop) investors to invest in crowdfunding offerings subject to certain limits and rules set by the SEC.

In addition the draft regulations require annual financial audits for companies raising more than $500,000; portals have issuer liabilities in case of wrongdoing, portals need to use established criteria to "vet" deals; and finally, nebulous rules on success-based compensation for portals.

Under the new rules, people with annual income or net worth less than $100,000 will be allowed to invest a maximum of 5 percent of their yearly income or net worth, or $2,000 if that is greater. An individual can't invest a total of more than $100,000 in all crowdfunding offerings during a 12-month period.

"The SEC has done a nice job balancing adequate controls with nimbleness", said Tobin Arthur, CEO of funding portal AngelMD, which has forged ahead with the crowdfunding of healthcare companies for a more specialized set of investors. Crowdfunding portals would also have to comply with a number of rules to monitor investors and businesses to help reduce risk and fraud. And, as another example, the new rules would provide an optional Q&A format that issuers could use to provide the required disclosure.

The list of those to thank is long and inter-divisional, reflecting both the complexity and importance of the rules which will provide issuers and the public with a new offering regime under the federal securities laws. That barred average people from investing in small businesses legally. "They also protect the small businesses that want a reliable market to raise capital".

"Today's landmark decision by the SEC will change the landscape for the options Startups will have in financing their businesses".

"I fear that many traps for the unwary are hidden in the regulations, creating potential nightmares for small business owners that fail to place regulatory compliance at the top of their business plans", he said. Currently, such crowdfunding platforms allow companies to raise funds from customers who do not take an equity position in the company. The recommended rule proposal would retain the key feature of existing Rule 147 - its intrastate character, which permits companies to raise money from investors within their state without concurrently registering the offers and sales at the federal level. Earlier this year, Title IV enabled companies to raise more money under a limited public offering.

Previously, the SEC restricted those kinds of investments only to high-net worth investors. "I feel like a starving man who waited 3 ½ years for a feast and who was just given a handful of rice", said Orloff. They must either have a net worth of $1 million, excluding the value of their primary home, or have generated income of $200,000 or more in each of the last two years. "Allowing reviewed financial statements instead of audited ones lowers the cost for startups who are seeking to raise funding".