Washington, October 31

A new form of crowdfunding is coming soon that will allow start-ups to raise money by selling stock to Main Street investors.

The US Securities and Exchange Commission (SEC) on Friday adopted rules implementing a 2012 law that opened the door to securities crowdfunding. The vote was three-one at a public meeting.

For years, artists, charities and entrepreneurs have used the power of the internet to generate money for projects. Starting in mid-2016, businesses will be able to offer investors a piece of their company by legally selling stock online.

For investors, it’s a chance to make a small profit and possibly get in early on the next Twitter, Instagram or Uber. But it also entails high risk, given that a majority of start-ups fail. About half of all small businesses shut down within the first five years. Some critics also warn that investment crowdfunding is ripe for fraud.

The new SEC rules won’t prevent the types of fraud that can arise in conventional online scams, said Mercer Bullard, a law professor at the University of Mississippi who is a mutual-fund investor advocate. “You can embezzle someone’s money in the guise of making a securities offering.”

With an eye to protecting investors, the crowdfunding securities offerings can only be made through brokerage firms or new internet funding portals that must be registered with the SEC. The portals will be expected to provide investors with materials explaining the process, investment limits and resale restrictions. To reduce fraud risks, the portals are charged with vetting the companies and the prospective investors.

SEC Chair Mary Jo White said before the vote that agency staff ‘will begin immediately to keep a watchful eye on how this market develops’.

They will assess what kinds of companies use the new crowdfunding offerings, how closely they follow the rules and whether the new practice promotes the raising of capital while also protecting investors.

SEC proposed the crowdfunding rules two years ago. Waiting at the starting gate for final rules to take effect: legions of start-ups in areas like packaged food, medical and biotechnology, restaurants and real estate.

Under the new rules, people with annual income or net worth less than $100,000 will be allowed to invest a maximum of five per cent of their yearly income or net worth, or $2,000 if that is greater. Those with higher incomes can invest up to 10 per cent. An individual can’t invest a total of more than $100,000 in all crowdfunding offerings during a 12-month period.