Until now, crowdfunding has been anamazing way for people with great ideas or causes to raise money from strangers, with sites like GoFundMe and Indiegogo providing a platform for donations. What would take a massive movement 30 years ago takes the tapping of a few buttons now. You could raise millions of dollars with the click of a mouse. Unfortunately, you could also get ripped off or financially overextended pretty easily.
The endless and unfettered world of crowdfunding has met its match, the SEC (Securities and Exchange Commission) in this case. You can read the 400+ page ruling here. But the quick and dirty is that the unchecked marketplace of crowdfunding is no more.
Before now, potential investors could give a small dollar amount and receive a coffee mug or a T-shirt, and many people were fine with that. Sites even cropped up for people who wanted their investors to have verifiable financial stability. The SEC says this was not enough.
With the new rules, companies will have a 12-month time frame to raise up to $1 million. And instead of offering trinkets in return for donations, stock options will be made available. In addition, the following rules are in effect:
- Investors with annual incomes or a net worth below $100,000 can only invest $2,000 or 5 percent of their annual income or net worth, whichever is higher.
- Investors with annual incomes or a net worth above $100,000 can only invest up to 10 percent of that annual income or net worth.
- Transactions must be conducted through an intermediary. Intermediaries include registered brokers and “funding portals.”
The rules handed down this week were a long time coming. With an unchecked marketplace, there will always be people trying to scam other people. The new rules aim to curb that.
The days of the crowdfunding “wild west” are gone. Adios, vaqueros.
- Casey Whittington