By Dow Jones Business News, October 23, 2013, 11:35:00 AM EDT
WASHINGTON--Startups and entrepreneurs would be able to tap large numbers of ordinary investors for small amounts of
capital under long-delayed "crowdfunding" rules regulators advanced Wednesday.
The five members of the Securities and Exchange Commission voted unanimously to propose rules aimed at helping
startups sell shares through online "portals," where supporters say thousands of investors could pore over the business
plans of small companies and choose promising investments. The proposal would implement a key provision from last year's
Jumpstart Our Business Startups Act, a law meant to spur business activity.
"We want this market to thrive, in a safe manner for investors," SEC Chairman Mary Jo White said.
The JOBS Act requires the SEC to alter its rules so companies can raise up to $1 million annually through crowdfunding
sites. Currently, companies are barred from issuing shares in exchange for capital without first registering with the
SEC. They also can't sell investments in privately held companies to investors who aren't "accredited," or wealthy.
Supporters believe equity crowdfunding will provide new sources of capital for companies overlooked by venture
capitalists because they are too small. They point to success on existing crowdfunding platforms such as Kickstarter,
where entrepreneurs collected over $10 million in donations for the Pebble digital watch, among other ventures.
"This is game-changing," said Sherwood Neiss, principal at consulting firm Crowdfund Capital Advisors, ahead of the
Critics say the rules make it easier for bad actors to pitch fraudulent schemes to unsophisticated investors.
Crowdfunding could lead to an increase in so-called affinity fraud, in which individuals of specific religious or ethnic
communities are targeted by wrongdoers, warned Luis Aguilar, a Democrat commissioner, prior to the vote.
"You've got leftovers being sold to people who are chasing this pot of gold at the end of the rainbow," former SEC
Chief Accountant Lynn Turner said. "You'd have to be an idiot to think anything other than the pot of gold is going to
turn into a bag of coal."
The five-member SEC will collect comments on Wednesday's proposal and would have to vote on it a second time before
its provisions can go into effect.
The SEC's proposal is the second major JOBS Act provision the agency has advanced. In July, the SEC voted to lift an
80-year-old advertising ban that barred privately-held companies from marketing themselves to potential investors. The
lifting of the ad ban went into effect last month.
Supporters say Wednesday's proposal marks a significant departure from the SEC's historic role of mandating public
companies adhere to an extensive disclosure regimen before they can sell their shares in public markets. Companies that
use crowdfunding to raise money will still face regulation, but the aim is to rely on the wisdom of crowds to decide
which ideas warrant equity investment based on relatively limited disclosure.
Wednesday's proposal doesn't require companies to verify that individuals meet income thresholds set by the law,
officials said. Instead, the SEC asks for comment on whether verification steps are needed. Crowdfunding advocates have
complained verification would be costly and difficult. Under the JOBS Act, companies are allowed to raise up to $5,000
annually from individuals with incomes less than $100,000. Wealthier investors could contribute a maximum of $100,000
Caroline Freedman, the founder and chief executive of NurturMe, an Austin, Texas-based organic baby-food company, said
the shift toward online capital raising is far more efficient for smaller companies like her own, which previously had
to pound the pavement to pitch flesh-and-blood accredited investors.
But even advocates of online capital raising concede there are valid concerns about crowdfunding.
Ryan Caldbeck, co-founder and chief executive of CircleUp Network Inc., a third-party platform that connects
accredited investors with consumer and retail businesses, said investors should take into consideration that
crowdfunding investments are by their nature a "high risk, illiquid asset class."
"Fraud is an important issue for crowdfunding platforms to consider, but it's just one consideration when evaluating
alternative assets," Mr. Caldbeck said.
Write to Andrew Ackerman at firstname.lastname@example.org
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