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SEC OKs Kickstarter-on-steroids websites selling shares in private startups
Iain Thomson in San Francisco Fri 30 Oct 2015 // 21:28 UTC
America's financial watchdog says anyone with spare cash will be able to buy a slice of a startup online without having to fill out mountains of paperwork.
Until now, if you fancied plowing your some of savings into a fledging biz – say a trendy but privately held San Francisco tech upstart – there are all sorts of requirements and red tape you must overcome, all pretty much put in place after the 1929 US stock market crash.
Under new rules from the SEC, a startup can raise $1m a year by selling stock in itself to investors, although the individual amounts will be regulated. Those with an annual income of up to $100,000 can spend either $2,000 a year or five per cent of their net worth in startups, or 10 per cent if they make more than a hundred grand.
"There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need," said SEC chairwoman Mary Jo White.
"With these rules, the Commission has completed all of the major rulemaking mandated under the JOBS Act."
The Jumpstart Our Business Startups Act or JOBS Act, which came into force in 2012, was designed to open up business funding using crowdfunding. The new equity rules stem from that law, and will come into effect next year, so expect a flood of adverts inviting you to invest in the next "BIG thing."
There are going to be some restrictions on this, however. Investments will have to be made via a certified brokerage, although crowdfunding-like websites can be set up to sell slices of private startups, if they pass muster with the SEC. Companies seeking funding in this way will have to submit a full set of independently audited accounts to the SEC.
Once you've bought your shares you'll be stuck with them for at least a year. But after that, trading can commence even before the startup goes for an IPO. The system will be similar to the secondary trading markets venture capitalists currently use.
While it's possible that you might be able to invest in the next Google or Facebook, the odds are very long indeed. Startups fail more often than new restaurants, and even good ideas can get squashed if they go up against industry leaders.
There are also going to be scammers out there who will look to small investors to fund their startup lifestyle and then fail to deliver a finished product. The SEC will regulate the market, it says, but you can bet there will be a few slip-ups along the way. ®
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