Crowdfunding in the USA has just seen a massive sea change as a new law is on the way which will allow startups and small businesses to raise funds as equity stakes.
Until now, investment rules in the USA have stopped crowdfunding platforms from dealing in shares.
The new law, approved by markets regulator the Securities and Exchange Commission (SEC) will let entrepreneurs pitch on crowdfunding platforms to raise up to $50 million by issuing shares in their businesses.
The SEC Regulation A+ was approved specifically to allow small companies to make initial public offerings (IPO) on crowdfunding platforms.
Old rules allowed American corporations and projects to seek up to $5 million via crowdfunding IPOs, but the measure was hardly used.
Business drained away
Instead, many organisations looked to the UK and European crowdfunding platforms to raise larger sums. British crowdfunding platforms have offered equity investments for some time.
The result was a flood of business and finance leaving the USA.
Another drawback was the old regulations forced entrepreneurs to register their pitches in every state where they raised funding, which made the system time-consuming and expensive and severely eroded the $5 million cash on offer.
The new regulations lift the state registration requirement.
The SEC and state securities commissions had a long running spat about the rule change as local regulators saw the new rules leading to a loss of revenue.
Another long-running discussion about equity crowdfunding in the States has involved who should be allowed to invest.
Indiegogo hails law
Various definitions were discussed by lawmakers relating to ‘qualified’ or ‘accredited’ investors, but issues of how to identify these people led to a simpler rule allowing anyone to invest 10% of their net worth in equity crowdfunding.
The new rules should be published on the Federal Register by the end of June 2015, which will allow the law to come into force.
US crowdfunding giant Indiegogo has already taken centre stage by announcing the platform will move into equities.
However, rival Kickstarter says that the platform will not move into equity crowdfunding in the foreseeable future.
Indiegogo CEO Slava Rubin argues that the new regulations open equity crowdfunding to ordinary investors rather than a select group of wealthy individuals.
“We believe these are balanced and fair rules that will help the industry and entrepreneurs prosper by democratising finance and investment,” he said.