New rules would allow small businesses to bypass banks and tap ordinary people for financing

Wall Street Journal (October 27, 2015 6:08 pm) -- The Securities and Exchange Commission is expected to approve on Friday its final set of rules governing crowdfunding, allowing small businesses to bypass banks and tap ordinary people in their communities to raise funds to expand their operations.

The proposed rules would expand the range of investors who can participate in equity crowdfunding—an alternative way to raise capital using the Internet to fund innovative products, movies and other ventures. Under current rules, only “accredited investors”—those whose net worth exceeds $1 million, excluding their primary residence, or who earn more than $200,000 a year—are allowed to participate in crowdfunding. The new rule would allow anyone to invest up to $2,000 or 5% of their annual income or net worth, whichever is greater, in small-scale fundraising projects up to $1 million in a 12-month period.

“You are going to find more demand from Main Street businesses—restaurants, cafes and bars—marketing to their existing customers. It will be an alternative to bank financing,” said Richard Swart, a researcher specializing in alternative finance at the University of California, Berkeley, and a longtime advocate for crowdfunding. The relatively high cost of raising capital through small-scale crowdfunding makes it unappealing for high-growth companies such as Silicon Valley startups, he said.

The new rules stem from the 2012 Jumpstart Our Business Startups Act, or JOBS Act, which aims to help startups and small businesses to raise capital from a wide range of potential investors. Small-business owners and providers of crowdfunding platforms have pushed the SEC for a quick adoption of the rules for the past few years, while investor advocates warned of the risks associated with offering such illiquid products to ordinary investors.

The SEC said Tuesday the commission will hold a meeting on Friday to consider the crowdfunding rules. SEC Chairman Mary Jo White has said that adopting the rules is a “priority for 2015,” and industry executives and analysts expect the commission to approve them.

Industry executives are hoping that the SEC’s final rules will include easier requirements for the issuing companies in areas like auditing and liabilities compared to those proposed by the commission two years ago.

Investor advocates have raised concerns about making what could be illiquid and risky products available to ordinary investors as well as insufficient regulation to monitor how brokers determine an investor’s eligibility.