Equity Crowdfunding Good to Go

The SEC has approved rules allowing startups and other businesses to solicit investments from accredited investors starting September 23, 2013. What does this mean for your business?

Background
The Jumpstart Our Business Startups (JOBS) Act passed last year directed the SEC to revise its rules so that small businesses would be able to solicit investors without having to go through complicated and costly procedures, such as registration. Now final rules have been accepted. The final rules pave the way for equity crowdfunding, which is a financing tool to raise small amounts of capital from large numbers of people.
Who is an accredited investor?
An accredited investor is a person:
  • Whose individual net worth, or joint net worth with that person's spouse, exceeds $1 million, excluding the value of the person's primary residence (the "net worth test"); OR
  • Who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person's spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year (the "income test").
You must take "reasonable steps" to verify that an investor is accredited. The final rules provide a non-exclusive list of methods that can be used to verify the accredited investor status of natural persons. You (or someone acting for you) must take into account all the facts and circumstances, including:
  • The nature of the purchaser and the type of accredited investor that the purchaser claims to be;
  • The amount and type of information that you have about the purchaser; and
  • The nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.
This information can be verified in a number of ways, such as viewing pay stubs or relying on verification by third parties.
 
Other rules apply to broker-dealers and other "non-person" investors.
 
Where do you solicit?
You can't simply post requests for equity investments on your own website. You must use a government-approved intermediary (a qualified website) for this purpose. On these sites, you create a company profile, detail what you want to raise, and what the investor gets in return. Typically, you pay for your listing but don't share with the portal any part of the money you raise.
Examples of portals:
Is equity crowdfunding for you?
It depends on your needs and the ability to raise capital in other ways. You may want to become a corporation if you are not already a corporation so you can easily issue new shares to investors. Discuss your situation with a business advisor before you turn to equity crowdfunding.

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