Ever wonder why Kickstarter and other crowdfuding sites offered prizes and never actual equity in a company or project? Well, it's illegal. In fact, the standard crowdfunding approach may not be exactly legal -- it is at least in a legal gray area.
In a wonderful bit of classism supposedly designed to protect us poor ignorant people from our foolish gambling ways, private investing is only open to those who have $1 million in assets not including their primary home, and individuals with a yearly income of $200,000 or more -- $300,000 joint income for couples. This makes sense; it's not like well-educated rich people would destroy the economy with wreckless investing. Rich Dad taught them well.
The crowdfunding space is about to change for better and worse as the SEC is set to finally publish their crowdfunding guidelines. I say "finally," because the do-nothing congress actually agreed on something and passed the Jumpstart Our Business Startups (JOBS) Act on April 5, 2012. The SEC was given 270 days to enact the crowdfunding provision. It has been 566. This has Oregon's Senator Jeff Merkely and others quite displeased.
The hope is the new rules will codify crowdfunding as a legitimate investment tool. This will give startups new capital pools and open investing up to the 99%. As opposed to savings accounts with an average 6% returns and stock markets with 9%, seed capital averages 27% returns. The untapped crowdfunding inevestor market is estimated to be worth $2 Trillion!
So having the SEC recognize crowdfunding as a legitmiate form of investment should be great, right? You can invest in that new taco stand that opened down the block and support local business while eating tacos in the wonderful circle of investment life. You won't just get a prize for helping Zach Braff fund his next movie, but a box office stake. Amazing? Well, sort of.
A combination of investors' lobbyists protecting their clients' monopoly on seed funding and consumer adovocates worried about fraud have filled the SEC rules with...rules.
Crowdfunding portals will be required to register with the SEC and follow strict guidelines. This means no Mom and Pop crowdfunding sites as you'll need a team of lawyers and accountants for SEC filings. Companies that raise over $500,000 will have to pay for independent audits, further cutting into the funds raised and enriching the lawyers and accountants. Finally, lest you forget your place, the SEC will only let individuals with less than $100,000 in annual income invest 5% of their income or $2,000 annually. The Wild West of crowdfunding could become a ghost town of regulations and compliance paperwork.
What do you think? Will the SEC rules herald a crowdfunding boon that makes us all a fat cat investor class or will new restrictions stifle the crowdfunding space?