The SEC voted unanimously to propose rules regulating the offering and selling of securities through “crowdfunding”. Crowdfunding – a method of raising money through small sums contributed by many individuals – has become an internet mainstay. But so far, crowdfunding websites (such as Kickstarter or Indiegogo) constructed their platforms so as to avoid falling under SEC regulation. In particular, the traditional crowdfunding method does not offer financial returns on an investment or a share in a company’s profits.

The proposed rules (read them in their entirety) would allow companies to raise up to $1 million through crowdfunding platforms within a 12-month period. Other features of the proposed rules include:

  • Investors will be subject to income-based limits on the total amount of securities they can purchase through crowdfunding within a 12-month period. No investor will be able to invest more than $100,000 in crowdfunding-based securities within a 12-month period.
  • Certain companies will be ineligible to raise funds through crowdfunding, including: companies that are already SEC-reporting companies, non-U.S. companies, companies with no specific business plan, and certain investment companies.
  • Companies will be required to file certain information with the SEC.
  • Companies are required to disclose certain information to the crowdfunding platform and prospective investors, such as financial statements, related-party transactions, the company’s business plan, and description of the offering.
  • Crowdfunding platforms will have to become registered with the SEC, either as broker-dealers or funding portals.

The rules were proposed as directed by the Jumpstart Our Business Startups Act (JOBS Act), which was passed in part to assist small-business fundraising and directs the SEC to draft an exemption for crowdfunding platforms from the securities laws. The rules will be subject to comment for 90 days. The SEC includes prompts in the proposed rules for comments, which can be submitted electronically.