Equity crowdfunding is about to lift off in the US as regulators have removed the final hurdles that stopped investors buying a stake in start-up businesses.
The US Securities and Exchange Commission (SEC) has lifted restrictions on crowdfunding platforms offering equity based investments.
Until now, US investors could only offer donations or give money to pitches in return for rewards.
Financial experts and crowdfunding platforms argued this severely limited the ability of entrepreneurs to raise funding for start-ups.
How US equity crowdfunding will work
The new rules do have some safeguards for investors –
- A company can only raise $1 million from crowdfunding in any 12 month period
- Investors with an annual income or net worth of less than $100,000 can only invest up to $2,000 or 5% of their net worth
- Investors with income and net worth to $100,000 or more can invest 10% of their annual income or net worth, whichever is lowest, in any 12 month period
- No investor can put more than $100,000 into their aggregated equity crowdfunding holdings in any 12 month period
The rules also have extensive qualifying requirements for companies – with companies from outside of the US barred from equity crowdfunding.
“Crowdfunding has a lot of support in the market place from investors and businesses and these new rules are aimed at encouraging companies to raise capital while protecting investors at the same time,” said an SEC spokesman.
Equity crowdfunding in the US becomes legal 180 days after they are published on the Federal Register – which is expected to allow platforms to offer deals from mid-2016.
Crowdfunding platforms can start registering from January 29, 2016.
The SEC is also inviting comments about the new rules in a 60 day consultation period.
Equity crowdfunding has sat on the US statute book awaiting implementation since July 2012, when President Barak Obama signed off the JOBS Act.
UK crowdfunding platform Seedrs has already announced intentions to open a US equity investment service as soon as possible.
“Equity crowdfunding has been a major success in the UK and Europe and I have no doubt the same result will follow in the US,” said Seedrs CEO Jeff Lynn.