SEC Sends "Crowdfunding" Rules Out for Public Comment

The SEC is getting closer to allowing companies, in particular start-ups, to raise money through so-called "crowdfunding."  In crowdfunding, even small, non-accredited investors can make small investments in start-ups or other similar companies without the companies needing to register their securities.  The Commission voted last week to send preliminary rules out for comment.  Under the proposed rules, investors with incomes and net worth under $100,000 to invest up to 5% of their incomes, and persons with higher incomes up to 10%.  Companies would be limited to raising $1,000,000 -- but importantly, companies raising over $500,000 would be required to supply investors with annual audited financials.  The new rules require that companies ask investors about income and net worth but no verification is required.  While the new rules will open the doors to start-up investing to a much larger segment of the population and allow easier means for companies to raise capital, the new funding mechanism may also provide opportunity for fraud and perhaps rampant litigation when crowdfunded start-ups fail -- as most start-ups ultimately do.