On Monday, new rules approved by the Security and Exchange Commission brought the investment world a bit deeper into the Internet age.As a result, Instead of offering shirts or swag to investors in projects looking to procure capital on crowdfunding sites like Kickstarter and Indiegogo, companies can offer another option:
“This is the culmination of what investors and companies were waiting for,” said David Sorin, head of the McCarter & English venture capital and emerging growth companies practice.
For one, it widens an early stage company’s access to capital by giving non-accredited investors, who are individual investors with a net worth of less than $1 million and an annual income of less than $200,000, the opportunity to purchase securities.
“There’s a dramatic democratization of investment opportunities,” Sorin said. “These opportunities were, historically, reserved only for the wealthiest and best-connected investors and, by utilizing the new technologies, these Internet platforms, we can have companies reach a far broader audience far more effectively.”
There’s another big benefit for companies, based on one of the most widely known rules of economics: supply and demand.
“By enabling non-accredited investors to participate in this end of the market, in theory what you do is dramatically increase the demand for securities from this segment of the marketplace,” Sorin said. “If you increase demand without increasing supply, the price to those demanding goes up.
“From the company’s perspective, that means the ability to raise more money while giving up less of the company.”
As a protective measure, the SEC set limits on how much and to what extent accredited investors can participate in a crowdfunding transaction. These rules are set on the basis of income percentages and net worth.
For both accredited and non-accredited investors, the SEC put an aggregate annual ceiling on how much crowdfunding investment anybody could do in a given year.
The SEC also set limits on the liquidity of the purchased securities.
“When an investor purchases stock in a crowdfunding action, these shares are not freely tradable,” he said. “They have to be held for at least a year before they may be resold.”
Mostly, for Sorin, these new rules represent a step forward in recognizing technology’s role in the marketplace, the very same innovation that allows these crowdfunding situations to occur.
“Job and wealth creation in this country remain, primarily, in the domain of the entrepreneurial startup,” he said. “I think that this is an important recognition that, if we want to have a sustainable marketplace for job creation and wealth creation, we needed to make capital raising a bit easier, but do so without creating unnecessary risk in the marketplace for those who can least afford it.”