SEC to Vote on Crowdfunding Proposal to Ease Investor Verification Requirements

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On October 23, 2013, the United States Securities and Exchange Commission (the “SEC”) is expected to vote on a SEC proposal that would ease investor verification requirements under the crowdfunding rule. The crowdfunding rule, authorized as part of the 2012 Jumpstart Our Business Startups Act, is intended to benefit small businesses and startups too small to attract funding from banks or venture capitalists.

The SEC’s proposal would allow small businesses raising money by selling shares over the Internet not to have to verify that a person’s investment is a greater share of their income or net worth than allowed by law. Under the law, businesses using crowdfunding could raise no more than $5,000 a year from someone whose net worth is less than $100,000. Investors with a net worth greater than $100,000 could contribute as much as ten percent of their annual income or net worth, up to a maximum of $100,000 in one year.  Additionally, the SEC’s proposal would not require companies or brokers to verify compliance with the limits.  This is good news for Internet funders as they have argued that investor investment verification is impractical.

If the SEC’s five members approve the proposal, the proposal will be open to public comment before the SEC votes on a final version. Once the SEC proposal is issued, the Financial Industry Regulatory Authority, or FINRA, will propose detailed rules for funding portals that aren’t registered as brokerages.