You can be on Entrepreneur’s cover!

SEC Releases Long-Awaited Rules on Crowdfunding More than a year after President Obama signed the JOBS Act into law, the Commission released rules for regulating equity crowdfunding. Here's what you need to know.

By Catherine Clifford

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Equity crowdfunding for unaccredited investors took one giant step forward today.

The Securities and Exchange Commission announced rules that will make it legal for entrepreneurs and startups to raise money by selling pieces of their company to everyday, mom-and-pop investors.

The proposed rules were released this morning and the Commission voted to adopt them. The rules will now be available for public comment for 90 days before a final set is drafted and adopted.

The crowdfunding community has been anxiously awaiting the release of the rules, which were due December 31, 2012 -- 270 days after the Jumpstart Our Business Startups (JOBS) Act was signed into law on April 5 last year. The rules were delayed by leadership changes at the SEC and struggles by regulators to determine how to best protect unaccredited investors.

Related: Regulators Wrangle Over How to Protect Crowdfunding Investors

The crowdfunding community was pleased to finally see movement from the SEC. "Proposing the rules now demonstrates a commitment to making the law operational. It is a very tough challenge, and these are workable rules that can form the basis of a functioning market," says Rory Eakin, co-founder and chief operating officer of crowdfunding platform CircleUp, in a statement. CircleUp has been intimately involved in the rulemaking process for equity crowdfunding, having testified before Congress about the needs of the community.

To be sure, pressure on the SEC has been mounting. Earlier this week, a bipartisan group of eight senators wrote a letter to the SEC Commissioner Mary Jo White pressing her for the rules. "It has now been over 530 days since the JOBS Act became law, and we have not seen a proposal from the SEC on crowdfunding. We are concerned that so much time has passed without action," the letter said. "In particular, we have heard from entrepreneurs who have created crowdfunding platforms and those who want to raise capital via this new mechanism, both of whom have been hurt by the delay."

Related: What Entrepreneurs Need to Know About the Historic Change in General Solicitation Law That Goes Into Effect September 23

While the proposed rules are better than no rules at all, some in the community fret that the requirements proposed today are overly burdensome and will blunt the potential benefit of the law change. "This is an exciting development and we welcome it, however, raising capital under the proposed new Title III rules restricts the amount of capital that companies can raise, and imposes certain burdens on the issuers," said Andrew Farquharson, co-founder of investment portal VentureHealth, in a statement.

Farquharson says that as written, the laws may have limited reach. "Over the months and years ahead, however, today's action by the SEC, in conjunction with its recent lift on public solicitation, will be seen as the beginning of a tectonic shift in how young companies raise capital."

Related: What the U.S. Can Learn From the Netherlands About Equity Crowdfunding

Here is a rundown of the key highlights of the proposed regulations. These rules still have to be made final and could be altered depending on public comments.

1. Entrepreneurs could raise $1 million per year. In any 12-month period, a company would be allowed to raise no more than $1 million in aggregate from all crowdfunding portals.

2. The amount individuals could invest would be capped depending on their net worth. In any 12-month period, an individual could invest $2,000 or 5 percent of his or her annual income or net worth, whichever is greater, if both annual income and net worth are less than $100,000. Meanwhile, for those investors whose annual income or net worth are more than $100,000, an individual could opt to invest as much as 10 percent of their annual income or net worth, whichever is greater. Investors could buy no more than $100,000 worth of securities in companies through crowdfunding in any 12-month period.

3. Equity in a company must be held for one year. If an investor purchases securities in a company via crowdfunding, he or she would not be permitted to sell that equity for one year.

Related: AngelList CEO Says Being Accredited Is Not Enough

4. Transactions must be supervised by an SEC-registered intermediary. Crowdfunding online would be required to be processed by a registered broker-dealer or funding portal that has to be registered by the SEC. To be registered as such an intermediary, broker-dealers or portals would be required to provide potential investors education materials, make efforts to reduce the risks of fraud and refrain from making any sort of investment advice or recommendations, among other rules.

Eakin says that having compliance regulations for intermediaries is a positive and "will help lay the foundation for a healthy market."

5. Not all companies would be eligible to crowdfund. Under the rules proposed by the SEC, only U.S.-based companies would be able to crowdfund online. Also, companies without a specific business plan would be ineligible, as would companies that are essentially investment companies and any company that fails to submit required financial documentation.

6. Financial disclosure requirements. Companies that participate in online equity crowdfunding would need to disclose who are their primary officers and directors and anyone who owns more than 20 percent of the company. Entrepreneurs seeking funding through equity crowdfunding also must disclose how they would use the money they raise, a description of the financial health of the company and depending on how much equity is sold in a 12-month period, a copy of the company's tax returns.

The disclosure requirements worry Eakin, who says they may discourage quality companies.

Related: Pouncing on New SEC Rules, Entrepreneurs Develop Tech-Based Solutions for Accrediting Investors

Catherine Clifford

Senior Entrepreneurship Writer at CNBC

Catherine Clifford is senior entrepreneurship writer at CNBC. She was formerly a senior writer at Entrepreneur.com, the small business reporter at CNNMoney and an assistant in the New York bureau for CNN. Clifford attended Columbia University where she earned a bachelor's degree. She lives in Brooklyn, N.Y. You can follow her on Twitter at @CatClifford.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Leadership

What We Have to Gain By Talking About Grief and Loss At Work

I lost my husband to cancer during Covid — here's how it changed how I lead at work.

Money & Finance

5 Simple Wealth-Building Tips For This Generation's Forward-Thinkers

Explore practical finance tips for young professionals striving to overcome economic challenges.

Fundraising

Avoid These 9 Pitch Deck Mistakes When Asking Others For Money

Crafting an efficient pitch deck requires serious effort, but at least it's not wandering in the dark since certain rules are shaped by decades of relationships between startups and investors.

Business News

Mark Zuckerberg Says This CEO Is the 'Taylor Swift' of Tech

Meta's CEO posed with Nvidia CEO Jensen Huang on Instagram Wednesday.

Growing a Business

To Achieve Sustainable Success, You Need to Stop Focusing on Disruption. Here's Why — and What You Must Focus on Instead.

Instead of zeroing in solely on disruptive innovation, embrace a pragmatic approach to innovation, recognizing and leveraging the potential within ongoing industry shifts.

Real Estate

3 Emerging Trends Shaping the Future of Real Estate

These three innovations are reshaping the real estate industry — discover tips for effectively covering these trends.