SEC opens door to startup investing for all
Everyday people will soon be able to invest thousands of dollars in small companies and receive an ownership stake under new rules passed by the Securities and Exchange Commission Friday.
The SEC approved a set of long-awaited regulations that will allow companies to "crowdfund" up to $1 million from investors online. It also will allow people with moderate incomes and assets to make risky investments in startups.
"There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need," SEC chairwoman Mary Jo White said.
Under current rules, only "accredited investors" who meet certain wealth thresholds can fund startups. They must either have a net worth of $1 million, excluding the value of their primary home, or have generated income of $200,000 or more in each of the last two years.
The new rules allow individuals to invest up to $5,000 in startups in any 12-month period. Investors whose annual income and net worth both exceed $100,000 can invest more — up to $100,000, depending on their income and wealth. The rules go into effect in about six months.
Nick Tommarello, who cofounded the equity crowdfunding website WeFunder in Cambridge in 2011, said his company has had to limit itself to "rich people crowdfunding." Once new regulations go into effect, he said, small businesses like coffee shops could use it to raise capital.
"The wisdom of the crowd is going to be really, really powerful," said Tommarello, whose firm is now based in San Francisco. "We expect we'll be live the first day we can."
Many individual states, including Massachusetts, had made regulations to allow equity crowdfunding within their own borders. Under rules developed by Secretary of State William Galvin earlier this year, companies are allowed to crowdsource $1 million from investors, or $2 million if their finances are audited. Investor income and net-worth thresholds are almost identical to those under US rules.
However, Galvin has shown concern about certain types of investments. In a 2012 letter to US regulators, he warned of "the pitfalls of relying on the wisdom of crowds."
A spokesman for Galvin declined to comment Friday, saying he was still reviewing the federal rules.
Few firms have raised money under state rules; according to the North American Securities Administrators Association, just 118 had filed to do so as of August.
Equity crowdfunding entails high risk, given that a majority of startups fail. Some critics also warn that investment crowdfunding is ripe for fraud.
The new SEC rules won't prevent the types of fraud that can arise in conventional online scams, said Mercer Bullard, a law professor at the University of Mississippi who is a mutual-fund investor advocate.
There could also be risks for companies, however. John Sten, a Boston attorney at the firm McDermott Will & Emery, said startups must be clearer about the risks their investors face.
"You have to be much more careful with what you say and how you say it," he said.
Material from the Associated Press was used in this report.