Small and medium businesses on the growth track will soon be able to turn to the general public for help.
This week, the United States Securities and Exchange Commission, which regulates the securities industry, approved new rules to allow what’s called "equity crowdfunding."
The idea behind equity crowdfunding is similar to popular fundraising websites such as Kickstarter. But instead of collecting donations from the “crowd,” private companies sell stock to the general public.
Only “accredited investors,” or wealthy, financially savvy individuals, have been allowed by law to become shareholders in a private company. The SEC’s decision this week will lift that limitation and open up such investment opportunities to everyone.
Jonathan Frutkin, attorney and founder of Phoenix-based Frutkin Law Firm, said the SEC’s decision will open new doors for corporate growth and job creation.
“This is a big change because it allows the general public to invest in private deals, which they could never do before,” said Frutkin, who also recently wrote a book about equity crowdfunding and founded Cricca Funding to help private companies with handling securities offerings and working with shareholders on the back end.
He said the SEC’s ruling was also surprising.
A portion of the Jumpstart Our Business Start-Ups Act, also known as the JOBS Act, signed by President Barack Obama in 2012, required the SEC to enact new rules to allow equity crowdfunding nationwide.
The deadline to do so passed at the end of 2012, but the SEC dragged its heels and gave little indication as to its next move.
Thus, several states, including Arizona this year, started putting on the political pressure by passing their own laws.
Those state laws allow crowdfunding in small amounts - $1 million to $2 million limit per company, per year in Arizona – companies and investors must be located within that state.
But with the new SEC rules, companies can raise up to $50 million from anyone, anywhere in the U.S.
Frutkin said the challenge for shareholders is they won’t have much freedom with their money.
“And so investors need to be aware that this isn’t like buying Exxon Mobil or Apple on TD Ameritrade,” he said. “You are buying something that you are going to have to hold on to for the medium to long term.”
The downside for businesses, he said, is the upfront costs. Companies must first go through a review and approval process by the SEC prior to issuing shares, which involves filing fees, attorney’s fees and hiring accountants to perform audits. Frutkin said that can add up to hundreds of thousands of dollars to the company.
The new rules should go into effect within the next 60 days.
