Entrepreneurs trying to get their start-ups off the ground have had to wade through sometimes dense and obtuse federal regulations to solicit capital from investors through the online and social media vehicle known as crowdfunding.
However, the degree of difficulty necessary to get working capital via crowdfunding, and likewise the difficulty small investors have had sending their dollars to start-ups they like through the same, is about to get a whole lot easier.
The Securities and Exchange Commission voted Oct. 23 to loosen rules regarding income verification for crowdfunding. Prior to the rule change, businesses were required to verify the income of investors willing to buy into the enterprise.
The SEC also voted to propose creating a sanctioned “portal” through which investors can access agency-approved crowdfunding websites.
News of the verification proposal was reported by Bloomberg Businessweek’s Nick Summers in an Oct. 18 post to the news service’s website.
Summers noted that when crowdfunding was incorporated into the Jumpstart Our Business Startups Act of 2012, Congress attempted to add some consumer safeguards by limiting investment. Investors making less than $100,000 annually are limited to a $2,000 (5%) equity purchase through crowdfunding vehicles — a rule that still stands. More importantly, Congress also tasked businesses with verifying the income level of potential investors to insure that maximum investment guidelines would be met.
Under the loosened regulations, businesses would no longer have to verify investors’ income. In theory, that will speed up the machinery of transferring capital from investor to enterprise — a boon to cash-hungry start-ups — and make it more inviting for the small investor to get into the start-up game.
The newly relaxed regulatory scheme will also benefit crowdfunding websites like Kickstarter, IndieGoGo and CircleUp Network that will register with the SEC and join the sanctioned portal — a one-stop shop for crowdfunding websites that is expected to grow to 50 in number.
While the crowdfunding rules have been proposed to ease access to capital by start-up entrepreneurs, some investment analysts and experts fear the well-intended law will also ease access to unwitting investors by scammers and con artists. At the least, novice investors can readily be encouraged to put their money into honest but bad business models.
“What we are talking about are companies that in all likelihood are not going to be winners, and they are being invested in by people who clearly don’t have the expertise and financial smarts of venture capitalists,” former SEC chief accountant Lynn Turner told Bloomberg. “You put those together and you are creating a real opportunity for scams and fraud and significant losses.”
Summers, Nick. “Crowdfunding Rules Set to Become Even More Indulgent“. Bloomberg Business Week. 10/18/13.