SEC May Relax Crowd Funding Income Verification Rules

SEC May Relax Crowd Funding Income Verification Rules
By U.S. Government [Public domain], via Wikimedia Commons

The Securities and Exchange Commission (SEC) may loosen income verification rules to make crowd funding more attractive for small businesses, reports Dave Michaels for Bloomberg. The plan has not been formally announced and is subject to a vote scheduled for October 23.

SEC May Relax Crowd Funding Income Verification Rules

SEC’s crowd funding concern

Crowd funding, one part of the JOBS Act, is meant to give small businesses a way to raise money from people that don’t normally invest in stocks. This has raised concerns about crowd funding being used to defraud people who aren’t financially savvy. On the other hand, income verification could be so expensive that small businesses are unable to make use of crowd funding. The new SEC rule, if it is adopted, would leave the investment caps in place, but it would not require companies to determine whether investors were exceeding the cap relative to his or her income.

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The SEC is trying to strike a balance between protecting consumers and giving small businesses space to operate, but many of the businesses that will be using crowd funding will be new and unproven. The high chance of fraud makes it seem like the regulatory body should err in favor of caution. One of the biggest arguments against financial regulation is that the professionals know their business better than the government, but the professionals aren’t really affected by crowd funding. Combining a large number of companies that have a high chance of failing with a large number of first-time investors doesn’t sound like a great idea, but that may be the path we’re heading down.

Individual investors to disclose income

Individuals are supposed to be able to invest up to $5,000 per year for investors with a net worth less than $100,000, and 10 percent of income after that with a hard cap at $100,000. Individuals will still have to disclose their income to get involved with crowd funding, but the amount they disclose will not be verified.

So far, crowd funding has happened through portals like Kickstarter, in which people can give donations. However, these are understood to be gifts, not investments. There is no guarantee of receiving anything in return. Crowd funding rules in the JOBS Act will establish a framework for gathering  investments in a similar way, something that is already being done in both the UK and Australia.

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