There’s big news in the crowdfunding world. The Securities and Exchange Commission (SEC) announced that they are (finally) voting on final rules Friday that would make investment crowdfunding legal.
Other types of crowdfunding — funding a venture with small amounts of money solicited from a large group of people — have been around for a while. The biggest crowdfunding site has even seen its name become a verb – as in “we’re Kickstarting our indie film.” And while one typically thinks of crowdfunding as a creature of the Internet, the concept has a long history. The Statue of Liberty stands in New York Harbor because of a successful crowdfunding effort, although in those days they called it taking subscriptions for donations, and the campaign was done door-to-door and not, of course, online.
But crowdfunding has been limited legally. Organizations raising money through crowdfunding, including for-profit corporations, have been restricted in what they can give in exchange for funds provided through online solicitations. Things like t‑shirts have been popular thank-you gifts, while creators of innovative products, like the Pebble Watch, have offered pre-sales of their coveted inventions.
But offering any kind of return on investment, including the opportunity to buy a piece of the company, has been off limits. That’s because securities offered for sale in the U.S. must be registered with the relevant regulators, including the SEC and any state regulator in the states in which the securities will be offered. Any offering that deviates from this rule must fall under one of the laws’ exemptions. For example, there is an exemption that can apply when an issuer sells only to accredited investors (broadly speaking, institutional investors and wealthy individuals). Until now, there hasn’t been an exemption for crowdfunding.