Want to invest $2K in a startup? New crowdfunding rules in effect
Want to invest $2K in a startup? New crowdfunding rules in effect
Federally approved equity crowdfunding rules that went into effect Monday drew a mixed reaction from the business community after years of anticipation.
The rules that enable unaccredited investors to take equity stakes in companies were approved by the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority. The rules, known as Title III, give everyday investors a chance to take equity stakes in early-stage companies in a way that was previously reserved only for wealthy accredited investors.
The changes enable anyone — regardless of personal wealth — to invest up to $2,000 or 5 percent of their annual income, whichever is greater, in crowdfunding deals worth as much as $1 million during any 12-month period.
The National Venture Capital Association said the rule changes are beneficial to backing startup companies but there’s also a need for strong initial public offerings to enable investors to get cash out of such deals.
“The bipartisan JOBS Act was a great first step in helping to provide startups with greater access to capital; however more is yet to be done,” NVCA President and CEO Bobby Franklin said in a statement.“As a next step, we urge lawmakers to consider ways we can build on the bipartisan momentum to improve the vibrancy of the IPO market as well as address liquidity challenges facing companies after they onramp to the public markets.”
The Title III rules could make it more difficult for later-stage funding rounds because follow-on investors may shy away from putting money into companies with large numbers of early-stage investors. Crowdfunding is more suitable to early-stage ventures more than real estate deals because the limits are too small for real estate deals, said Bryan Hancock, CEO of Austin-based Realstarter.co LLC, a year-old commercial and residential real estate crowdfunding platform.
Traditionally, privately held companies were prohibited from soliciting the public for investment capital because it could take undue advantage of unsophisticated investors. Startups are limited to private placements with accredited investors such as angel groups or VCs. The approach is designed to protect unsophisticated investors but it also limits the sources of capital available to innovators and entrepreneurs.
The SEC vote comes three years after the federal JOBS Act — or the Jumpstart Our Business Startups Act — included crowdfunding rule changes in an attempt to spark innovation and revitalize the national economy during the recession. Some states such as Texas are requesting exemptions to the proposed federal rules and establishing their own guidelines.
In October 2014, the Texas State Securities Board approved rules to regulate the way startups and investors conduct equity crowdfunding. It OK’d restrictions designed to enable unaccredited investors to invest as much as $5,000 a year in startups without requiring proof of high-income levels — in exchange for equity.
Last year, a report by David Altounian, an assistant professor of entrepreneurship at St. Edward’s University in Austin, found that although the city ranks No. 1 in the nation for the density of startups, the city is No. 12 for sources of growth-stage capital — the money companies use to grow after seed funding.
Investment in venture-backed Central Texas companies declined 7.2 percent, or $61.9 million, to $791.4 million in 2015, compared with $853.3 million in 2014, according to Dow Jones VentureSource.
