(Corrects 5th paragraph to show that small businesses couldraise "up to $1 million a year," not "over $1 million"; theerror also appeared in UPDATE 1)
By Sarah N. Lynch
WASHINGTON, Oct 23 (Reuters) - Entrepreneurs and start-upcompanies looking for backing will be able to solicit smallinvestments over the Internet from the general public under anew proposal to be released by U.S. regulators on Wednesday.
The Securities and Exchange Commission's "crowdfunding" planis a requirement in the Jumpstart Our Business Startups (JOBS)Act, a 2012 law enacted with wide bipartisan support thatrelaxes federal regulations to help spur small business growth.
Equity crowdfunding lets small companies raise money bypooling together tiny investments from people around the countryin exchange for a potential financial return.
If adopted by the five-member SEC, the rule would be a majorshift in how small U.S. companies can raise money in the privatesecurities market.
Private companies are now only allowed to solicit investors deemed to be "accredited," meaning they have a net worth of $1million, excluding the value of their home, or an individualannual income over $200,000. The crowdfunding rule would letsmall businesses raise up to $1 million a year by tappingunaccredited investors.
Companies could sell stakes to mom-and-pop investors withoutregistering the securities with the SEC, a move designed to makeit cheaper and less cumbersome for struggling startups trying toget their businesses off the ground. They would still berequired to raise the money through regulated broker-dealerssuch as CircleUp or through crowdfunding portals.
How many entities might register as crowdfunding portals isstill unknown, as many are holding off making any decisionsuntil they see how the SEC's rules shape up.
Companies using crowdfunding would also have to make somedisclosures about their businesses, and how much they couldraise from an unaccredited investor would be limited based oncertain income thresholds.
The prospect of opening up capital raising to a wider swathof investors has excited many startups.
But the SEC has struggled with how to craft a workable rulethat strikes a balance between helping to knock down barriersfor startups, while also protecting investors from fraud.
Prior to Congress passing the law, a raft of measures wereadded to the bill that investors advocates say will help protectconsumers.
One provision requires companies raising more than $500,000through crowdfunding to provide audited financial statements.The measure is designed to give investors more information aboutthe deal. But critics say it is simply too expensive, notingmany startups do not have the money to hire lawyers oraccountants to help them.
Another area that advocates of crowdfunding will be watchingcarefully is how the SEC ensures investors do not exceed thelimits on how much they can contribute. The law says investorswith a net worth or income of less than $100,000 can onlycontribute $2,000, or 5 percent, of their income. Those with anet worth or income over $100,000 can contribute more.
Many experts have argued that companies and crowdfundingportals should not have to verify income and net worth, sayingit would be too cost-prohibitive. Industry experts are expectingthe SEC to consider easing this burden by allowing them tosimply rely on the information that investors provide. (Reporting by Sarah N. Lynch; Editing by Karey Van Hall andAndre Grenon)
- Small Businesses