The Securities and Exchange Committee (SEC) recently voted to adopt a new set of rules that allows for Regulation Crowdfunding (officially, “debt and equity crowdfunding”). Regulation Crowdfunding is a term used to define a middle ground between crowdfunding platforms (like Kickstarter) and public offerings (like IPO’s). While the former sees little regulation, and the latter sees a ton of it, Regulation Crowdfunding sits somewhere in between, and allows small start-ups the chance to raise money while offering securities to investors.

And that is the key: Regulation Crowdfunding is not Kickstarter, where a random person gives you money for a mug, or nothing. But where the new rules really open previously locked doors is their allowance of “unaccredited investors.” Now, essentially anybody can invest at least $2,000 in your start-up. However, investments more than $2,000 are restricted by income and net-worth. And these new rules only apply to funding targets that do not exceed one million dollars.

The new rules also contain other key provisions that start-ups, and potential investors, should be aware of. For one, each offering must include a business plan—so these rules do not apply to “investment vehicles.” Also, investors can change their mind up to 48 hours prior to closing. Part of this rule includes a provision that requires the start-ups to disclose anything that may have a “material impact” on a potential investor’s decision to invest. While the rule does not require first time crowdfunders to pay for an audit, financial records pertaining to your business would certainly fall under the “material impact” rule and should be disclosed to potential investors. Finally, the new rules do not swallow up other avenues of funding. As long as a business keeps themcompletely separate, it can offer both a Regulated Crowdfunding offer, and another offering (like a Title II offering for accredited investors). This allows start-ups to raise money beyond the new one million dollar cap.

While not as onerous as IPO regulations, these new SEC rules are still relatively expansive. In fact, the final rules tip the scales at 685 pages. It’s important for start-ups seeking to raise money under these new rules to understand what they must do to comply, because the full power of the SEC backs their enforcement. If you or someone you know needs help navigating this new regulation, or seeks advice on ways to raise money for a new business, give our Expert Corporate Attorneys a call at 231-714-0100.