Northwest entrepreneurs will soon have another way to raise money for small and new businesses. The Securities and Exchange Commission on Wednesday put out long-delayed draft rules for something called "equity crowdfunding."
So far, crowdfunding has been a vehicle mostly for artists, charities, and startups to solicit donors online. Supporters usually get a modest reward of some sort. Now, the SEC has detailed how crowdfunding could expand. Proposed new rules would allow startup companies to sell actual stock over the Internet to small-time investors.
"A lot of people are excited about the idea," said Joe Wallin, the editor of the Startup Law Blog and a partner at the Seattle law firm Davis Wright Tremaine LLP. "I think there will be companies who use it. I think it will be beneficial. But it's an experiment and we're going to find out and see.”
Wallin said equity crowdfunding could appeal to startups with an identifiable fan base, such as a brew pub or a cooperative grocery; "Companies that want to encourage patronage, perhaps by offering their patrons the ability to buy some shares in the company."
The Oregon Department of Consumer and Business Services is one of many finance watchdogs that urge investors to proceed with "extreme caution." In an advisory, it warned, "All investments have risk, but small business investments have even greater risk than normal.”
To address concerns about risk and possible fraud, the SEC's proposed rules require entrepreneurial companies to seek investors only through registered intermediaries called "funding portals." The online portals will be required to run background checks on stock issuers and enforce limits on the size of the investments by individual investors.
Wallin expects compliance, marketing, and shareholder management costs will mount up, which could deter some potential startups from choosing this fundraising path.
The SEC opened a 90-day public comment period following the publication of its proposed equity crowdfunding rules Wednesday. Final rules could be approved next year.
