Long-awaited rules that would allow small businesses and startups to solicit private securities investments from the general public for the first time in decades will soon be enacted.
According to a story in Business News Daily, the rules would enable small businesses to raise up to $1 million in capital investments each year from virtually anyone in the United States through online platforms. To put it simply, companies would be able to sell shares of equity in their business to pretty much anyone willing to invest.
It would be the first time since the passage of the Securities Act of 1933 that so-called nonaccredited investors (those who have a net worth of less than $1 million and made less than $200,000 in each of the past two years) would be able to invest in private securities offerings.
“The gist is, entrepreneurs would be able to raise money in the U.S. from anybody — rich or poor, accredited or unaccredited,” Doug Ellenoff, a corporate and securities attorney who is working with the [U.S. Securities and Exchange Commission] and the Financial Industry Regulatory Authority (FINRA) on the Title III rules, told Business News Daily. “It’s a real revolutionary change in securities law. Consequently, the proposed rules that need to be fashioned by SEC … are complex and not obvious.”
The rules would likely be announced later this month, with some changes intended to make the cost of compliance more manageable for small business owners, Ellenoff said. For example, he said an audit requirement might be relaxed if the SEC determined it proved too stringent a demand on certain companies.
Under the new rules, small businesses and startups would be able to solicit up to $1 million annually in crowdfunded securities investments, according to a copy of the federal legislation. In a bid to deter investment fraud, Congress placed restrictions on the amount that individuals would be able to invest in this way. Further, those investments would be required to go through intermediaries known as “funding portals,” which would be subject to certain restrictions, and would be required to both register with the SEC and be a member of FINRA. However, funding portals cannot register until the SEC has adopted the final crowdfunding rules.
The rules could give small business owners an entirely new way to generate capital. Ellenoff offered some advice to small business owners looking to capitalize on the rule change.
“Raising money online remains a securities transaction, and you need to be responsible in how you sell your securities to investors,” he said. “And they need to make sure they work with qualified professionals to do it in an informed way that won’t harm investors.”
The rules were originally proposed as part of the Jumpstart Our Business Startups (JOBS) Act that was signed into law by President Barack Obama in April 2012. However, the section known as Title III has languished as the SEC finalizes the rules governing the sale of private securities through “equity crowdfunding.”
As a result, the SEC’s 585 pages of proposed rules from October 2013 have not yet moved forward, despite a long past congressional deadline of January 2013. The crowdfunding provision, known as Title III, remains the only provision in the JOBS Act not yet implemented.
However, at a Sept. 23 meeting of the Small Business Advisory Committee, SEC Chairwoman Mary Jo White confirmed that the final rules on Title III are right around the corner.
“On the subject of the JOBS Act crowdfunding rulemaking, the staff has been working very hard on final rule recommendations for the commission, and I anticipate that you will see something on that front from us in the very near term,” White told the committee.
This story was published by BusinessNewsDaily