Retail investors to self-certify for crowdfunding investments

The crowdfunding community has been buzzing lately due to a Bloomberg report which indicated that the SEC was going to allow self-certification of income levels for non-accredited investors participating in crowdinvesting.

Title III of the JOBS Act will allow non-accredited investors, for the first time ever, to invest in emerging growth companies through online raises. Many investor advocates had concerns that these retail investors would be getting in over their heads. In an effort to prevent these investors from investing more than they could reasonably afford, congress implemented an investing cap based on income.  Individuals who make $100,000 or less per year may invest $2,000 or up to 5% of their income in a Title III crowdfunding offering. If they make over $100,000 they may invest up to 10% of their income. It was not clear whether individuals who meet the income standards of an accredited investor would be subject to any limits.

How are crowdfunding platforms supposed to know how much an individual investor makes? Are they going to be required to certify the incomes of individual investors? Congress decided to leave these decisions to the SEC as they write the detailed rules. This past week the SEC hinted that they would allow self-certification of income for individual investors doing a Title III crowdfunding offering. This means that retail investors will be able to voluntarily declare their annual income without a verification from a broker dealer or a crowdfunding platform. This is significant for a couple of reasons:

1)     Income verification, while relatively simple to do, would create huge administrative costs that would have to be passed on to entrepreneurs and shareholders. This cost would not have provided a significant benefit other than complying with the law.

2)     Allowing individuals to declare their own income presumably relieves broker dealers and crowdfunding portals from the liability risk of an investor lying about their income and investing more than they were allowed to by law.  This means fewer lawsuits and cheaper insurance premiums for broker dealers and crowdfunding portals.

While this is significant news for the industry, the fact that the SEC is finally addressing items in Title III of the JOBS Act is much more important. On Monday the SEC announced that there would be an open meeting On October 23 to address Title III.  Does this mean we will finally get crowdinvesting rules? That seems to be the case, but no one can be sure.  While the news is definitely exciting, it’s important to remember that even if we did get the proposed rules on Wednesday, there are many more things that must occur before Title III crowdfunding is open for use. My best guess is that we have at least 6 months but probably closer to a year before Title III crowdfunding is available for use.  However, no one can say for certain at this time.

Justin Maddox is the CEO of CrowdTrust a due diligence company that provides verified crowdfunding data for crowdfunding platforms based in Washington, DC.  If you would like to learn more about crowdfunding please join the Crowdgoers meetup group: http://www.meetup.com/CrowdGoersDC/

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