US Startups Can Now Raise Capital in Exchange of Equity By Online Crowdfunding

The United States market regulator has proposed rules that will allow companies to crowd fund capital in exchange of equity. This will allow companies, especially startups, to raise capital without taking the traditional Venture Capital route or a public offering.

Members of the United States Securities and Exchanges Commission voted unanimously to allow equity crowdfunding over an online exchange.

These are the rules proposed by the SEC to protect investors:

  • A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.

Investors, over the course of a 12-month period, would be permitted to invest up to:

  • $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
  • 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.

Under the proposed rules, the offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, the SEC said in a statement.

Intermediaries need to provide investors with educational material, take measures to reduce risk of fraud, make information about the issuer available and provide communication channels. The rules prohibit funding portals from offering investment advice or making recommendations, soliciting purchases, sales or offers, imposing restrictions on compensating people for solicitations and handling investor funds or securities.

The Jumpstart Our Business Startups Act (Jobs) cleared by the Obama government proposed equity crowd funding in startups.  The commission will now seek public comment on the rules for 90 days and review the proposal.

Crowdfunding in IndiaCrowdfunding

Online crowdfunding in India is still in early stages with a dozen or so such platforms acting helping creative and charitable projects raise funds online. Equity crowdfunding in India is illegal. Donation or reward based crowdfunding and charity based crowdfunding is allowed in India. For equity based crowdfunding to become a reality, India’s market regulator, the Securities & Exchanges Bureau of India (SEBI) and Reserve Bank of India (RBI) would need to formulate rules.

Indian companies like Connovate Technologies have successfully raised funds on US based crowdfunding platform Indiegogo. Kannada film Lucia also raised lakhs of rupees by crowdsourcing.

Crowdfunding is essentially commodifying capital and making access to capital easier for startups. Its an attractive proposition for startups looking to raise money. Will we see more Indian startups moving to the US?

Recommended Read: Of Gecko’s Crowdfunding Success & Commodification of Capital

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