SEC Proposes New Rules for Crowdfunding

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There are many ways to finance a startup, but after last week, U.S. entrepreneurs may soon be able to add selling shares over the Internet to the list of financing options. The new form of crowdfunding has been on the horizon since the passage of the Jumpstart Our Business Startups Act in April, but now the details are a bit more clear. In this roundup, we will look at the new crowdfunding rules and other options still available for financing a startup.

What It Means

Rules of the game. After some frustrating delays, the U.S. Securities and Exchange Commission, the federal agency that regulates investing and trading of stocks, outlined the rules that entrepreneurs must follow when offering stock over the Internet on sites like Fundable, Gambitious, and Indiegogo. The catch? Investors will need to be accredited. Venture Beat

Unexpected outcomes. Perhaps the emphasis on experienced investors implied by the SEC guidelines is a good idea after all. This post takes a look at the risks inherent in a new era of crowdfunding, especially for inexperienced investors. From shiny new idea to execution, enthusiastic but unsophisticated business backers could become discouraged when results very different than what was advertised. TechDirt

A taxing situation. Business owners using crowdfunding must remember that the money they receive is taxable, unless expenses negate the overall gains, or the funds can be considered a donation or gift. Under the new SEC rules, investment would be considered “capital contributions” and thus not taxable when received. Reuters

Where It’s Headed

Three sites to watch. As we mentioned earlier, inventive entrepreneurs haven’t waited for the SEC to approve regulations before moving ahead with the powerful crowdfunding process as a way to raise money for projects. Here are three sites extremely important to the crowdfunding revolution and a bit more on what each of them offer. Bus!

Take your pick. One of the most perplexing parts of the new crowdfunding trend is the use of the term itself. Crowdfunding has come to signify many things to many people, and so varied are these meanings that a detailed explanation of the different types of crowdfunding seems in order. Startup Professionals Musings

A source of good ideas. Another exciting aspect of the online crowdfunding revolution is the transparency it has brought to the startup process. With so many entrepreneurs now pitching their ideas publicly online, and more likely to do so in the near future, Iven Widjaya takes us on a tour of some of the projects that most inspire him. Noobpreneur

Other Funding Options

Bootstrap it. One last option small business owners and entrepreneurs take more often than is generally realized is that of bootstrapping, starting a business with little or no money and no outside investment. In the bootstrapping scenario, explains blogger Benjy Portnoy, startups leverage opportunities rather than investment dollars to get their businesses up and running. Small Business Elevator

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3 Reactions
  1. Why should the SEC have any say in what someone can invest in? The little guy has been shut out of the private equity markets because of the accredited investor rules and the high minumum investment requirement. The small business owner or start up has been shut out of the capital markets because of the SEC requirements under Reg D and the OLD BOY network on Wall Street. The whole thought that the SEC knows best for small investors is descriminatory. Crowdfunding will even the playing feild and offer opportunity to everyone.

  2. The SEC was created in response to devious, misleading, and flat out fraudulent practices that led up to the Great Depression, but equal protection means equal protection. If a business is looking to raise capital through a public offering, it’s not enough for the SEC to protect the public from the business and its promoters. The SEC is equally obligated to protect the business from the public. When an uninformed idiot puts his money in a business he doesn’t know anything about odds are he’s going to lose it. And when he does he’s not going to say “I knew the risk” or “I should figure out why”. He’s an idiot. He’s going to say “I was defrauded.” But whose fault was it anyway? By the time that question becomes important the truth will be anyone’s guess. But the SEC knows that you can’t shut out the little guy entirely. That’s why Regs A and D have various little guy allowances designed to work only in scenarios where the chance of a lawsuit in the absence of real fraud are minimal.