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New SEC Rule Doesn’t Enable True Crowdfunding

new sec rule

The Federal Security Exchange Commission this week announced [1] (PDF) changes in the rules for private sale of stock in startups and other companies.

The rules will now make it easier to market these private shares by promoting them in email blasts or over social media…or even through media advertisement. Previously shares could only be sold to angel investors, VC (Venture Capital) funds or other investors with whom the seller has an established relationship.

The new SEC rule change comes on the heels of last year’s Jumpstart our Business Startups (JOBS) Act. It’s aimed at, among other things, improving funding options for business, including better enabling crowdfunding [2].

But if small businesses hoped the new SEC rule change would enable true crowdfunding, as most people understand it, they’re mistaken, the New York Times reports [3].

What the New SEC Rule Change Doesn’t Do

The crowdfunding most people are familiar with involves sites like Kickstarter and Indiegogo. Crowdfunding campaigns raise money from site visitors [4] usually in exchange for an incentive. This could include anything from a thank you on the project website to crowdfunders getting a copy of the product [5], once developed.

But the new SEC rule does not allow just anyone to buy a share of your company. Instead, investors must be accredited. That means with an income of $200,000 or more or with a net worth greater than $1 million, the New York Times reports.

Of course, the rule does make it easier to sell shares privately. That means without filing with the SEC or publicly disclosing financials.

And that is something that may interest smaller businesses. What do you think?

Crowdfunding [6] Photo via Shutterstock