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Startups Await SEC Crowdfunding Rules

By Deanne Katz, Esq. on October 26, 2012 | Last updated on March 21, 2019

The Jumpstart Our Business Startups Act came into being in April but companies are still waiting for the SEC to publish their eagerly awaited crowdfunding rules.

A provision of the JOBS act allows startups to raise funds through funding portals by selling shares directly to investors. Traditionally companies were required to sell shares only through an established broker-dealer which left many small and new companies out in the cold.

The JOBS act authorized it but until the SEC publishes its rules, companies have no way to register as funding portals. But crowdfunding is still happening.

The most common kind of crowdfunding model currently is the kind used by websites like Kickstarter. 'Investors' donate money to a company or product in exchange for a reward.

It's a good way to raise funds but it's not like a traditional investor model since instead of having part ownership of the company, donators receive a one-time gift.

New crowdfunding rules would ideally allow companies to sell equity without having to go through a broker. A company could register as a funding portal with the SEC and then receive investments from people who wouldn't traditionally be able to act as investors.

Not sure if this kind of financing model is good for your company? It's never a bad idea to talk it over with your attorney who can walk you through the legal pros and cons of financing options.

The main concern that SEC regulations are likely to target is fraud, reports San Francisco Chronicle.

The fraud that most concerns that SEC is fraud by a company by improper disclosures. The SEC's current requirement that investors be 'accredited' is designed to ensure that business investors are savvy business people who understand the risk of investing.

There is some concern that companies who are not bound by traditional SEC regulations could defraud investors, notes Forbes. Unscrupulous companies could present a 'business investment' that is little more than a ponzi scheme in an effort to get crowd funds.

Investor fraud is relatively easy to track given the SEC's current system for tracking business investments. Any new regulations will likely address the issue of how to protect investors that use this less formal system.

For businesses that are interested in crowdfunding, don't jump in before the rules are published. In this case overexcitement could lead to SEC prosecution.

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