- Self-attestation of wealth. No doubt influenced by how the UK is treating the topic, the SEC proposed that investors willing to invest via equity crowdfunding portals shall fill in a self-attestation of wealth. For some, this is too low a barrier that would not protect investors from making imprudent investments.
- Required paperwork. The proposed regulation indicates that entrepreneurs willing to raise capital through equity crowdfunding shall present a considerable amount of disclosure paperwork to SEC. This includes, among other requirements, information about the company, its financial status, its planned activity, its owners and an audit of the company's financial health conducted by a third party. According to many who replied to the SEC’s open call for comments, the costs to comply with those requirements would be too high for an average startup or small business, thus deterring many entrepreneurs from using equity crowdfunding.
- Fraud prevention. One of the “hottest topics” is which party will be responsible to prevent fraud. Currently, the proposed regulation states that crowdfunding platforms should be held responsible for fraudulent campaigns. Some respondents to SEC’s open call for comments pointed out that this makes the liability risk too high for many of the future equity crowdfunding platforms. As a consequence, it is very likely that only a few big players will enter the market, making the marketplace a lot less vibrant than expected.
- Investment cap. The SEC fixed a cap on the amount that investors can invest via equity crowdfunding portals. In particular, for those whose annual income and net worth is less than $100,000, the cap is set at $2,000 or 5 percent of their annual income or net worth, whichever is greater. For those investors, instead, whose annual income or net worth is equal to or more than $100,000, the limit is set at 10 percent of their annual income or net worth, whichever is greater. Furthermore, during any 12-month period, investors cannot buy more than $100,000 of securities through crowdfunding. Many think this cap should be higher or should not exist, since in this way, they say, crowdfunding loses potential as a powerful funding source.
Clifford, C. (2014). In Crowdfunding, Who is Responsible for Preventing Fraud?. Entrepreneur.
As Comment Period Closes, Debate Over Equity Crowdfunding Rules Rages On. Reuters. (2014)
Photo credit to: Securities and Exchange Commission. http://bit.ly/1m23Dko
Born and raised in Milan, Italy, Irene is an International Business graduate, with a strong interest for innovative ideas that can simplify our lives.
During her studies, she co-founded an online community for sportspeople and worked in marketing positions at Ogilvy & Mather Advertising and at the European Business Angel Network, in Brussels. She is a passionate blogger about crowdfunding and the startup ecosystem.