SEC Passes Long Awaited Crowdfunding Rules

The SEC just approved the long-awaited final crowdfunding rules, paving the way for startups to raise capital from retail investors without some of the expenses and red tape normally associated with raising capital by more traditional means.

The new measures will allow private companies to raise up to $1 million over a 12-month period through crowdfunding, while capping amounts an individual investor can invest. The rules also establish the regulatory foundation for the funding portals that connect investors with issuers looking to raise capital.

The new rules also allow for the sale of stocks and bonds to the public without the normal registration process, which has been a key part of securities law since the 1930s.

These measures aim to protect investors – for example, if an investor’s income or net worth is less than $100,000, then they only will be permitted to invest up to 5% of either figure. If their income or net worth exceeds $100,000, then they can invest up to 10% of whichever figure is less. Further, the SEC has relaxed the requirement to provide investors with audited financial statements. Finally, crowdfunding portals will be prohibited from giving investment advice or from handling investor funds.

Notwithstanding these purported investor protections, we are concerned that the new crowdfunding rules will subject even more investors to fraudulent conduct. Without audited financials, it can be very difficult to determine the legitimacy of a company. And because the companies raising money through crowdfunding generally will be small and thinly capitalized, investors may have no ability to recover their money if they are defrauded.

Contact Us Today

The attorneys at Dimond Kaplan & Rothstein, P.A. have helped recover more than $100 million from some of the largest banks and brokerage firms in the world. If you have questions about how crowdfunding will work, or if you have lost money on a crowdfunding venture, you may have certain legal rights that require your immediate attention. Contact us to schedule an appointment or consultation today.


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