3 Things You May Not Know about Investment Crowdfunding

11/24/2015 04:30 pm ET Updated Dec 06, 2017

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Friday, October 30th 2015, has become a historical milestone for all startup businesses, small to medium-sized companies, and investors in the United States. It is the day that the Securities and Exchange Commission (SEC) finalized the investment crowdfunding law supported by the JOBS Act, permitting companies to offer and sell shares through the online method of capital raising. The new rules create a federal exemption for such investments, although under fixed limitations.

While this regulation was voted 3-1 by the SEC members, further public comment will be sought in the next 60 days. The final review of these comments will lead to the official approval of the laws. Furthermore, the new crowdfunding procedures will become effective after 180 days from their insertion in the Federal Register. This will also be a period of debate among the specialists in the equity crowdfunding landscape and the latest news will be covered by Times Realty News.

1. Crowdfunding becomes more accessible
Prior to the amendment proposal of the Title III under the JOBS Act, private companies could only raise funds from accredited investors with a net worth of at least $1 million or an annual revenue of over $200,000. This measure prevented smaller startups and even mom-and-pop stores to solicit a higher capital that could help flourish their business. The new regulations will allow the more humble investors to pursue their interest in a developing startup by funding up to 10 percent of their yearly income or net worth, if these figures exceed $100,000. Should their annual revenue be less than that, they will only be able to invest a maximum of 5 percent of that sum into a company of their choice. This measure increases the chances for a startup to avoid failure by including a larger segment of population in the original pool of accredited investors.

In recent years, crowdfunding has rapidly caught the interest of many capitalists across the United States. Thus, it was SEC's responsibility to offer this type of investment opportunity to a larger audience, and at the same time to create a regulatory framework that would offer investors a higher level of protection. One of these new rules prevents any individual from investing more than $100,000 during a 12-month period. SEC also defined mandatory for such an investment to be processed by an intermediary, which can be in the form of a broker-dealer or a registered crowdfunding platform. Times Realty News offers a complete report on the top realty crowdfunding portals that will provide all interested investors with a detailed analysis of the real estate equity sector.

2. New demands for crowdfunding platforms
The new regulations come with a higher degree of stability for investors, but also with new statutory and operational obligations for all the parties included. For instance, crowdfunding platforms will not be able to support an offering that has already been listed on a separate portal, nor will they be able to host a launch party for a promotion, as this will be considered as investment advice. Both practices are considered illegal.

Requirements made to the platforms do not end there. These portals will have to provide investors with the proper information regarding company information, educational materials and complete maintenance of their funds. All platforms will be able to register with SEC after 29 January 2016, when the mandatory forms will be effective.

3. Full disclosure
Protection is an important highlight of the new amendment. In order to favor transparency in the equity crowdfunding sector, companies that solicit investments are required to disclose their financial situation. This means that every aspect of a company's activity that might influence the capital brought in by an investor will be made public. Full disclosure is a safeguard for investors, since they will be able to track the movements of their funds during each step of development. Some startup businesses might find this measure a bit overwhelming; however, they will be grateful that the exorbitant audit requirement has been eliminated for the newcomers on the market.

There are less than 180 days until the approval of these amendments will usher the crowdfunding market into a new era of development. A high potential of investment diversification seems to be at the core of these new regulations. Just as I had anticipated in my latest book, this highly regulated framework will open new opportunities to most of the highest rewarding business ideas, and also to some of the risky projects that, so far, have found it impossible to attract reasonable funding.

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