SEC proposes crowdfunding rules

That legislation called for crowdfunding that would limit issuers to raising US$1 million in a 12-month period; and, restrict the amounts investors could risk (to the greater of US$2,000, or 5% of annual income or net worth, if the investor’s annual income or net worth is less than US$100,000; and, 10% of annual income or net worth (up to US$100,000), if their annual income or net worth is more than US$100,000).

The proposal also establishes a framework for the regulation of registered funding portals and brokers that issuers are required to use as intermediaries. And, it sets disclosure obligations for issuers.

In its proposal, the SEC says that its proposed rules are intended to align these sorts of transactions with the original concept of crowdfunding — which is to rely on the so-called “wisdom of the crowd” to help evaluate investment ideas. To that end, the proposed rules would require that all crowdfunding transactions be conducted through a registered intermediary on a website “to help ensure that the offering is accessible to the public and that members of the crowd can share information and opinions.”

The rules would require that intermediaries facilitate the sharing of information that will allow the crowd to decide whether or not to fund an idea or business. A potential investor would be required to open an account with an intermediary before posting comments on the intermediary’s platform; but they would not need an account in order to view an issuer’s disclosure. The rules also provide intermediaries a means to facilitate the trading in securities without registering as brokers.

“There is a great deal of excitement in the marketplace about the crowdfunding exemption. And I am pleased that we are in in a position today to adopt a rule proposal that would, upon adoption, permit crowdfunding to begin,” said SEC chair, Mary Jo White, at an SEC meeting to introduce the proposed rules. “We want this market to thrive, in a safe manner for investors.”

Indeed, there has been a good deal of criticism of the idea from investor advocates, and others, who worry that crowdfunding will expose too many unsophisticated investors to fraud, or just excessive losses due to the inherently very speculative nature of startup investments. The SEC notes that it intends to continue studying whether it has struck the right balance in its rules.

“Rules that are unduly burdensome could discourage participation in crowdfunding. Rules that are too permissive, however, may increase the risks for individual investors, thereby undermining the facilitation of capital raising for startups and small businesses,” the SEC notes in its proposal. So, it is going to be monitoring the use of the crowdfunding exemption to see whether it is promoting new capital formation and providing investor protection.

The crowdfunding concept has also been occupying regulators in Canada. Saskatchewan was the first jurisdiction to propose a new exemption to allow this sort of capital raising earlier this month. The Ontario Securities Commission (OSC) is developing its own exemption, and several other provinces are looking at it too. However, investor advocates, and some in the mainstream investment industry here, have also expressed serious doubts about the concept.