What the New SEC Regulations Really Mean to Entrepreneurs

In the aftermath of all the crowdfunding hoopla, enthused entrepreneurs assumed that the Securities and Exchange Commission, the governing body that regulates the sale of equities, was about to take the lid off longstanding regulations to allow a new era of crowdfunding: stock sales over the Internet. That has not been the case – yet. The JOBS Act relaxes the restrictions on advertising private stock placements – equities that are sold without registering with the SEC and hence without the disclosures the SEC requires if stock is sold to the general public. However, this new regulation does not open the door for companies to use the Internet to offer private stock placements to the general public.

The many crowdfunding supporters who see it as a boon to cash-strapped small businesses have been confused and frustrated by the slow pace of the SEC’s response to crowdfunding. They want to see the SEC set some ground rules for this new groundbreaking financing mechanism, and they want some action soon. Many had hoped that the new regulation, which was announced in September, was part of this effort. But the reality is that the SEC has yet to propose rules for a new crowdfunding market, let alone approve and release them. The SEC has overshot its initial deadline significantly (set for Dec. 31, 2012 by the JOBS Act) to come up with these new rules. 

Although it doesn’t open the flood gates to wholesale equity crowdfunding, the September revision does offer some advantages to entrepreneurs and smaller companies. It frees up some existing ways of raising capital via private placements. Start-ups often use private stock offerings to generate funding from venture capitalists or “angel” investors. Companies that use these investors are not required to register the private offering with the SEC, and thereby they avoid the mandatory disclosures required in a public stock offering.

Formerly, these private stock offerings were bought by entities and people who already had some existing relationship or knowledge about the start-up because no advertising was permitted. Following the new ruling, which lifts the ban on advertising, issuing companies may advertise private stock sales in newspapers or through social networks or e-mail.

However, private stock offerings may only be purchased by “accredited” (that is knowledgeable) investors. To the SEC that is someone with an annual income of at least $200,000 or a net worth of more than $1 million. This means entrepreneurs (and any company that issues private offerings) will have more freedom to solicit funding from within this group of wealthier investors, but it does not allow private stock sales to the general public.  

When might we expect the SEC to address the larger issue of public crowdfunding stock offerings? The SEC moves slowly, and observers expect it will take some time before any such new rules will be rolled out. 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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