Equity Crowdfunding Rules Are Finally Coming to a Vote On Friday. Here's What You Need to Know. The Securities and Exchange Commission will consider long-awaited rules to set in motion the next generation of crowdfunding.

By Catherine Clifford

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Andrew Pons | StockSnap.io

Friday will be a pivotal day in the evolution of the way that entrepreneurs raise capital to start and grow their businesses: They will get a new point of access to the $34 billion industry of crowdfunding.

The Securities and Exchange Commission will vote on whether or not to accept the most recent version of rules for next-generation equity crowdfunding, a method of fundraising in which entrepreneurs exchange portions of their company for cash. Currently, equity crowdfunding is only legal for accredited investors, or those individuals who meet certain levels of assets and income. The new rules would make it legal for entrepreneurs to raise money in exchange for pieces of their company from anyone who has the interest to invest and the cash available.

The JOBS, or Jumpstart Our Business Startups, Act, signed by President Obama in April 2012, made equity crowdfunding for unaccredited investors legal, along with a half dozen other pieces of legislation, all aimed at making access to capital more available to small business owners and entrepreneurs. Initially, the SEC was given 270 days from April 5, 2012, to write rules to implement equity crowdfunding. Clearly, it's taken longer than that.

Related: The JOBS Act: What You Need To Know

As it turns out, writing rules that fundamentally overhaul an eight-decade-old securities law is complicated.

The first effort federal regulators made at writing rules for equity crowdfunding were released in October of 2013. But those rules were met with a fiery debate and some pretty intense resistance from stakeholders in the community. The SEC received literally hundreds of public comments in response to their first attempt to write the rules for equity crowdfunding, but it appears the agency has listened. Now, 3 ½ years later, regulators are finally coming to the table with a second set of rules to implement the equity crowdfunding legislation.

Will the rules pass the SEC vote?

This new set of rules are expected to pass the SEC. Friday "is a vote but there is no chance it will get turned down. It should be more of a formality," says Ryan Feit, the CEO and co-founder of SeedInvest, an online-investing platform for startups. Sherwood Neiss, principal at crowdfunding-strategy firm Crowdfund Capital Advisors, also expects that the SEC will pass the rules on Friday.

"From what we understand there is general agreement within the SEC that this is something that should be done now," Neiss says. "We believe there is no need for the SEC to be holding it back any further."

Related: Déjà Vu 2012: A Zombie-Frankenstein JOBS Act 2.0 Is in the Works

Alon Hillel-Tuch, the co-founder of the crowdfunding platform RocketHub, is also optimistic about the hearing on Friday, though he is less sure that the process will be signed, sealed and delivered neatly with a bow on top by this weekend. "We expect the SEC to adopt these rules on Friday, but want to note that they may also propose amendments. If there is a vote of "no' by the SEC I would expect a swift Congressional hearing to follow to understand the disconnect," he says. Hillel-Tuch has been intimately involved in the rule-writing of the equity crowdfunding rules, working with the SEC and federal legislators throughout the process. RocketHub was recently acquired by entrepreneurship resource center EFactor in a deal worth $15 million.

What does the vote mean to investors and entrepreneurs?

It's a good thing the SEC is moving forward with these rules. Entrepreneurs and investors are chomping at the bit. "Just the rules. I want the rules. I can hardly wait for the rules. Whatever they are, no matter how high the bar, no matter how rigorous the reporting and auditing, no matter how complicated the portal applications, WHATEVER…just tell me what we have to do so that America can take the next bold step forward in the democratization of investing," says Marshall Saunders, the co-founder of Minneapolis, Minn.-based real estate investment platform Saunders Dailey. "Bring it on!"

Saunders just in June launched the online investment platform, and while he says that he would still be in business without being able to tap into the unaccredited investor market, he also would not have started his company without knowing that the SEC was eventually going to pass the rules expected on Friday. "If unaccredited investors were never allowed we could be successful and run just fine…except it would be a hell of a lot less fun. Frankly, I would not have started this company a year ago if the idea of unaccredited investors was not in our future somewhere."

Related: Regulators Wrangle Over How to Protect Crowdfunding Investors

Neiss, who has testified in front of Congress as the rules have been negotiated and hammered out, says that he is "ecstatic" to see the SEC come to a vote on these rules. "To see the light at the end of the tunnel for the regulations and the amazing opportunity that this means for entrepreneurs, investors, innovation and our country in general is beyond exciting," he says.

What key provisions will stakeholders be obsessing over?

As the rules are released to the public, entrepreneurs and investors will be paying ultra-close attention to a couple of key pain points they were sure to point out in the first iteration of the equity crowdfunding rules.

Philosophically, at the root of opening up equity crowdfunding up to unsophisticated investors is a question of the role of government. Should government regulators be held liable to protect your neighbor, grandmother or brother from losing all of his or her savings by making a bad bet on a startup? Is the job of government? Or should you be able to invest your money however you want, without the government being involved?

In an effort to protect investors, the first set of rules from the SEC included a provision that mandates that startups receive a financial audit before they equity crowdfund from unsophisticated investors. The idea is to prevent insolvent or unstable startups from raising money from your grandmother. In practice, however, a financial audit costs between $35,000 and $50,000. That's an insurmountable financial roadblock for the sorts of startups who would be likely to raise money through equity crowdfunding.

Bill Clark, the founder and CEO of the Austin-based online startup investment platform MicroVentures says that he will be looking for that audit requirement to be removed in the new rules on Friday. "The cost and time needed to complete an audit is the issue that I see as a problem," says Clark. "Early stage startups have limited financials and going through the audit process that early on in a company takes a lot of time, is expensive and doesn't accomplish as much as an audit later in a company's life would when they have more going on with revenue and expenses."

Related: Crowdfunding's Next Hot Frontier: Real Estate

Also, stakeholders will look for clarity on the role of the portals in the exchange, says Neiss. For example, will crowdfunding platforms be able to levy a commission on the deals closed? Will portals be able to curate the deals they feature without being perceived of as giving investment advice? And, perhaps most consequential, will portals be held liable for the information -- and potential misinformation -- that startups advertise on their platforms? Neiss says he doesn't think they should be.

"A funding portal is not a broker-dealer and hence not compensated to do the diligence (nor have the expertise, time or resources to diligence) the underlying companies," Neiss says. "Funding portals essentially act as a matching service. The premise of crowdfunding is the crowd reviews this information and makes their own decision. Hence, portals should not be held accountable for misstatements by the issuers. Issuers need to be held accountable for those misstatements."

Entrepreneurs, investors, and, to be sure, this reporter, will be tuning in to the livestream of the SEC's meeting on Friday morning. Crowdfunding is already something of a wild, wild west, but it's about to get a whole new frontier.

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

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