New Crowdfunding Rules Effective Now
New rules crowdfunding rules effective Monday, 16 May allow Americans earning less than $100-K a year to invest in small businesses and startups.
Investors can now risk $2,000 a year or more investing in small companies in exchange for a stake in the business. Companies can raise up to $1-M a year this way in a 12-month period.
“The SEC has really created a credibility crisis for crowdfunding,” said Patrick McHenry, the Republican Vice-Chairman of the House financial services committee. “It’s as if regulators don’t have trust and confidence that this marketplace can work. It seems like they have no trust that we can successfully invest in each other.”
The crowdfunding rules change, 4 years in the making, “represents an enormous shift, one that essentially permits anyone to become a venture capitalist, with all the attendant risks of losing one’s shirt on a company that fails. Until now, only accredited investors, meaning those with an annual income of at least $200-K or a net worth of at least $1-M, have been permitted to take equity stakes in most private companies.
It took a long time for the SEC to iron out the details, in part because it was concerned that ordinary people could lose their life savings because of fraud or naïveté.
There are also other risks for the investors themselves.
A lawyer who specializes in securities law, believes the companies that choose to crowdfund will be leftovers and also-rans: opportunities rejected by professional investors, the data supports that outlook for such new ventures.
“This is a high-risk asset class,” the co-founder of Crowdability, an aggregator of offerings on top crowdfunding sites which offers Crowdability IQ, a 9-point rating of crowdfunding opportunities.
“Most startups, whether they’re VC-funded, bootstrapped or just raised Angel money, will go out of business, most VCs lose money on 60% to 70% of their investments, and they are supposed to be the best investors in the space.
Critics of the new law say that many of the companies that need the money the most will not get it.
The Big Q: What companies would these be?
The Big A: Companies that are providing products and services to their customers. Important, but not that exciting. They are manufacturers of equipment, resellers of parts and fabricators of materials. They are landscapers, roofers, pizza shops, gas stations, healthcare staffing agencies and logistics firms. They are mostly family-owned businesses or partnerships. Their customers are primarily other businesses. And none of them are likely to benefit from the new crowdfunding rules. They are too boring.