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Regulation and Compliance > Federal Regulation > SEC

SEC Issues Crowdfunding Alert

By Melanie Waddell

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As the May effective date for the Securities and Exchange Commission’s crowdfunding rules draws closer, the agency has released a primer for investors who wish to participate in such ventures.

On Tuesday, the SEC released an Investor Alert detailing the parameters – and potential risks — associated with crowdfunding.

Companies can use crowdfunding to offer and sell securities to the investing public starting May 16. Funding portals could begin registering with the Commission in late January. 

The alert notes that while anyone can invest in crowdfunding, there are numerous risks involved because crowdfunded projects are early-stage ventures, and there are limits to how much a person can invest during any 12-month period in these transactions. 

The SEC alert notes the limits depend on net worth and annual income.

  • If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth. 

  • If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000. 

Crowdfunding investments can only be made through an online platform, such as a website or a mobile app, of a broker-dealer or a funding portal; companies will be prohibited from offering direct crowdfunding investments.

The Financial Industry Regulatory Authority, which is charged with regulating broker-dealers that intend to develop Internet funding portals, filed with the SEC on Oct. 22 its proposed rule changes for funding portals, including the registration rules. The SEC approved in January FINRA’s proposed Funding Portal Rules and related forms for SEC-registered funding portals that become FINRA members pursuant to the crowdfunding provisions of Title III of the JOBS Act and the SEC’s Regulation Crowdfunding.

FINRA’s funding portal rules became effective on Jan. 29, which aligns with the effective date of the SEC’s registration rules under Regulation Crowdfunding. Funding portals are required to register with the Commission and to become FINRA members.

The alert notes that investing in crowdfunding is different than being a shareholder in a publicly listed company. “For one thing, you cannot sell your shares at any time as you would be able to do if you held shares in a publicly listed company,” the alert notes.

In fact, it states, the investor is restricted from reselling their shares for the first year, unless the shares are transferred to the company that issued the securities, to an accredited investor, to a family member, in connection with the investor’s death or divorce or other similar circumstance, to a trust controlled by the investor or a trust created for the benefit of a family member, or as part of an offering registered with the SEC.

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