On Friday, the Securities and Exchange Commission voted 3-1 to allow small investors to buy stock in startup companies via online crowdfunding, reports Reuters and the Associated Press.
Before the new rules, private companies could seek money only from "accredited investors." That's defined as individuals who own more than $1 million in assets, excluding their primary residence, or have maintained an income of more than $200,000 for at least two years.
Under the new rules, those with more modest wealth will be able to invest in startups, with limits.
People with annual income or net worth less than $100,000 will be allowed to invest a maximum of 5 percent of their yearly income or net worth, or $2,000 if that is greater. Those with higher incomes can invest up to 10 percent. An individual can't invest a total of more than $100,000 in all crowdfunding offerings during a 12-month period. Investors generally couldn't resell their crowdfunding securities for one year.
Companies will be able to gather up to $1 million in crowdfunding cash per year without registering with the SEC. They'll have to provide investors details about their business, how they'll use the money, a list of officers and directors, and disclose anyone who owns at least 20 percent of the company.
The new rules were called for in the 2012 JOBS Act, which relaxed various federal regulations in order to spur job growth. The SEC was left with latitude about how exactly the rules should look.
Commissioner Michael Piwowar, currently the sole Republican commissioner, voted against the crowdfunding rules, arguing they were too strict.
While individual investors may dream of getting in on the ground floor of the next Uber or Twitter, it's a high-risk activity. Most small businesses ultimately fail. The rule of thumb for tech startups is that out of 10 startups, only one or two will produce significant returns.
Some experts have warned that crowd-funded investments could be ripe for scams, as well. SEC Chair Mary Jo White said that agency staff "will begin immediately to keep a watchful eye on how this market develops."
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