SEC Says You Can Crowdfund Startups This Summer

Now you can own a piece of a startup doing the next-big-thing or invest seed money in an idea that looks promising starting May this year.

Last week, the SEC released an investor bulletin on crowdfunding for retail investors and said that “Starting May 16, 2016, companies can use crowdfunding to offer and sell securities to the investing public.”

In October last year, the regulator adopted rules permitting companies to offer securities and raise a maximum of a million dollars a year through crowdfunding platforms. Individual investors with annual income or net worth less than $100,000 can invest no more than $2,000 but less than 5 percent of their annual income and not more than 10 percent for investors with income and net worth of over $100,000 in a twelve-month period. 

Investors are allowed to invest in these ventures strictly through an online platform including mobile app of a broker-dealer or a funding portal registered with the SEC and a member of FINRA.

This is a major step in recognizing crowdfunding as a legitimate means of raising capital, which thus far has been typically used to solicit charitable donations or raise funds for artistic projects like movies, music and social projects.

The SEC warned investors of the risks involved with such investments like limited disclosure, illiquidity, opacity in valuation and capitalization that is associated with private companies. Investors are also prohibited from reselling their stake for the first year unless it’s a transfer to the company, an accredited investor or a family member.