WSJ’s Andrew Ackerman explains how startups could potentially benefit from new « crowdfunding » rules that were cleared by the Securities and Exchange Commission on Wednesday. Photo: Kickstarter.
The Securities and Exchange Commission, in a 5-0 vote, outlined a plan aimed at helping startup companies sell shares online, allowing them to pool together small amounts of capital from ordinary investors.
Supporters say the long-delayed plan could spur significant growth in the young crowdfunding marketplace.
Slava Rubin, chief executive of Indiegogo Inc., a crowdfunding site launched in San Francisco in 2008, said the rules could « create a whole new wave of users for online fundraisers. »
Under the proposal, investors could visit an online « portal » to review the business plans of small companies and purchase equity.
SEC Chairman Mary Jo White Reuters
Crowdfunding firms such as Kickstarter and SeedInvest already are operating but can only work with wealthy investors or accept cash donations when financing other companies.
Mhelpdesk in Dulles, Va., a provider of software that helps small businesses manage service calls, is among the firms looking to raise funds once the SEC completes the rules.
« We want to be able to let a lot of people in, » said Ryan Shank, chief operating officer of Mhelpdesk.
Mr. Shank said he hopes that individuals who invest in the company will be « champions for our brand, » helping the three-year-old firm sell its services to appliance repair shops, carpet cleaners, plumbers and other service providers.
Mhelpdesk’s founders currently are using sales revenue to fund the company’s growth and have shied away from raising funds from venture capital firms, Mr. Shank said, because they don’t want to give up control of the firm.
The SEC proposal, spurred by the 2012 Jumpstart Our Business Startups Act, marks a shift for the agency’s role of mandating that companies adhere to an extensive disclosure regimen before selling shares publicly.
Companies using crowdfunding still will face oversight but will have the chance to pitch their business ideas to investors based on relatively limited disclosure.
The proposal would allow companies to raise up to $1 million annually via crowdfunding. Companies could raise up to $5,000 annually from individuals with incomes under $100,000 while wealthier investors could contribute up to $100,000 annually.
The SEC proposal is an attempt to make it easier for startups to raise capital while protecting investors from potential fraud.
« We want this market to thrive, in a safe manner for investors, » SEC Chairman Mary Jo White said.
Critics warn the rules could make it easier for bad actors to pitch fraudulent schemes to unsophisticated investors. « You’ve got leftovers being sold to people who are chasing this pot of gold at the end of the rainbow, » said former SEC chief accountant Lynn Turner.
In addition to concerns about fraud, investors should understand startups are high-risk investments that are often illiquid, said Bill Beatty, president-elect of the North American Securities Administrators Association and the Washington state securities director. « Investors should be aware of that before they jump in, » he said.
The SEC plans to use the Financial Industry Regulatory Authority, Wall Street’s self-regulator, to oversee crowdfunding portals and regulate them like brokerage firms.
The agency also will require firms to release financial statements and those seeking to raise $500,000 or more must have their financial reports audited. Not included in the proposal is a requirement that companies verify investors meet minimum income thresholds, but the SEC asked for feedback on whether such a requirement should be included.
Crowdfunding advocates warned these requirements could prove too costly to smaller companies.
« It’s an expensive mandate to be put on small companies to raise relatively small amounts of capital, » said Mat Dellorso, founder and chief executive of WealthForge LLC, a broker-dealer that operates a crowdfunding platform.
Still, raising capital through crowdfunding has widened the potential investing pool for some small startups.
Caroline Freedman, founder and chief executive of NurturMe, an Austin, Texas-based organic-baby-food company, said pitching investments to the public online is far more efficient for smaller companies like her own that had previously had to pound the pavement to pitch flesh-and-blood investors.
Successful crowdfunded ventures include the more than $10 million in contributions Pebble raised for its digital watch and more than $1 million for a meal-replacement shake manufacturer called Soylent.
The SEC is collecting comments on hundreds of questions in Wednesday’s 600-page proposal and must vote again to put the rules into effect.