SEC Approves Landmark Crowdfunding Rules. This One Is Big.

The SEC just approved changes to crowdfunding rules that will allow small companies looking to raise money to seek investment from small, non-accredited investors. Who are those non-accredited potential investors? Just to give you an idea, that's about 91 percent of American households.

The traditional model required complicated underwriting processes for equity investing. The new crowdfunding changes are some of the most sweeping made to the model of buying and selling securities to date.

JOBS Act

In 2012, President Obama signed the JOBS Act, which allowed the SEC to pursue crowdfunding rules that would expand access to the general public. Up until that point, investing in new ventures -- traditionally seen as highly risky -- was the exclusive purview of wealthy individuals and venture capital types.

The "crowdfunding" section of the Act, Article III, is the most significant -- and controversial -- aspect of the law. It aims to make venture investing opportunities pretty much accessible to anyone.

Hold your Horses

The new rule is still not in effect, but is scheduled to take effect 180 days after it has been entered into the Federal Register. It doesn't exactly open the floodgates, either. Indeed, there are several important limitations.

• Limits on Companies: The new rule includes a prohibition of raising more than $1,000,000 a year through the process. Mercifully, however, certain first time companies who use the technique will not be required to provide audited financial statements.
• Limits on Investors: Additionally, persons whose yearly income is less than $100,000 will be limited to 5 percent of their income devoted to crowdfunding investments. Those who earn more than $100,000 may invest up to 10 percent of their annual income.

Invest at Your Own Peril

Many economists are likely to applaud the move for enabling the movement of capital through the markets. However, detractors have warned that crowdfunding is just another uncharted land that provides crooks more opportunity to swindle the unwary and inexperienced. Mercer Bullard of University of Mississippi Law School said that the SEC rules don't prevent fraud. "You can embezzle someone's money in the guise of making a securities offering," Bullard told the Associated Press.

Bullard's words are a prescient word of caution for those getting ready to invest their life savings on the next promising start up. Did you know that about 90 percent of Silicon Valley startups go belly up?

Related Resources:

• U.S. SEC Approves New Crowdfunding Rules (Reuters)
• Think Twice Before Using Crowdfunding and Litigation Investments (FindLaw's Strategist)
• Crowdfunding Police Brutality Cases: Justice or Just a Business? (FindLaw's Blotter)
• Top 5 Tips for Pursuing Crowdfunding (FindLaw's Free Enterprise)