SEC Releases Proposed Equity Crowdfunding Rules

Yesterday the SEC released its long awaited crowdfunding rules.  The Proposed Rules are available here (and SEC’s press release here), and at 585 pages will make labored reading.   I’ve seen plenty of press coverage on the topic and most stories have taken the premise that equity crowdfunding (which the SEC is calling “Regulation Crowdfunding”) is something that the SEC is “considering” allowing.  I want to dispel that notion, and as I’ve discussed before (and here), the JOBS Act passed by Congress directs the SEC to promulgate regulations to allow equity crowdfunding.  The SEC has no choice in the matter, although it did take its time (these proposed rules were supposed to be issued by the end of last year – 2012).  And unfortunately the SEC can make compliance with the Regulation Crowdfunding rules so difficult that very few issuers will choose to use them to raise capital.

The big difference between Regulation Crowdfunding (i.e. equity crowdfunding) and regular crowdfunding is that the former will allow individuals to purchase shares in the company while the latter has been only a donation or pre-purchase model. The proposed SEC rules apply to the equity crowdfunding model.

Now, public advertising is already allowed for companies seeking to raise money by selling equity (via Rule 506(c)), but the only investors that can purchase shares must qualify as “accredited investors.”  The proposed Regulation Crowdfunding rules would change that and allow any individual to purchase shares in a company, through a different regulatory scheme.  There will be many restrictions and income limits, etc to contend with however.

The fear is that the Regulation Crowdfunding rules will be so burdensome or difficult to comply with that companies will forego them and continue to raise money from accredited investors only.  My initial look at the rules gives me fear that that is the case.  In fact, the proposed rules, at first blush seem to merely be reciting what was outlined about equity crowdfunding in the JOBS Act (the SEC is a little overworked)

After I wade through them, I will do a follow up post with my impressions of the proposed crowdfunding rules, and any comments that I think should be submitted to the SEC.  There is now a 90 day window for the public to submit comments on the proposed crowdfunding rule.