New SEC Rules Play to the Crowd

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"Hogarth Marillion Paris 2005" by Laurent Franchi
“Hogarth Marillion Paris 2005” by Laurent Franchi

Crowdfunding, a method of raising money over the Internet, usually in modest increments from large numbers of individuals, has been around for almost 20 years. Informed cultural critics (and now, readers of this blog) often point to British neo-prog rock band Marillion’s 1997 email plea to fans for advance album orders as the genesis of crowdfunding. Marillion raised about $60,000 and went on to write and record the album “This Strange Engine,” which featured the single “Man of a Thousand Faces,” which seemed to speak to the budding consequence of crowds of stakeholders: “I’m the man of a thousand faces/A little piece of me in every part I take/I hold the tape for a thousand races/A different point of view in every speech I make.”

In the ensuing 20 years, crowdfunding has emerged as a powerful tool for artists and musicians, entrepreneurs, and dreamers. This blog has shared how crowdfunding can allow small businesses and community economic development projects to access capital as well as how crowdfunding is being used to fund civic projects. This blog has also detailed how a North Carolina brewery used crowdfunding for its initial startup capital, which it then leveraged to attract an angel investor and, ultimately, traditional financing.

Beginning this spring, crowdfunding will enter a new phase: non-accredited investors will be able to make equity investments in businesses. Equity investment has historically been restricted to individuals with high incomes or high net worth, supposedly to protect low and middle-income individuals from losing or being defrauded of what little they had. Long-awaited new SEC rules explain how the federal government will regulate such “equity crowdfunding,” which the 2012 JOBS Act made legal (but not operative), as explained in detail in this blog post on federal and North Carolina securities law.

According to the SEC, the new rules will:

  • Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
  • Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
    • If either their annual income or net worth is less than $100,000, than the greater of:
      • $2,000 or
      • 5 percent of the lesser of their annual income or net worth.
    • If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
  • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Not all companies can solicit investments from non-accredited investors, though. The SEC rules prohibit the participation of:

  • Non-U.S. companies,
  • Exchange Act reporting companies,
  • Certain investment companies,
  • Companies that are subject to disqualification under Regulation Crowdfunding,
  • Companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and
  • Companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Companies that conduct a crowdfunding offering also must disclose a good deal of information to the SEC and potential investors to increase the ability of individual investors to make informed decisions about investing their money.


Importantly, these rules also require that all transactions “take place through an SEC-registered intermediary, either a broker-dealer or a funding portal.” Traditional crowdfunding sites such as Kickstarter will probably not be facilitating these deals, though: the SEC rules require funding platforms to, among other things, take reasonable precautions against fraud and not make any recommendations to investors.


The rules usher in a new era for crowdfunding, and offer a potentially lucrative way for community members to support local enterprises. They also give local businesses and startups with good ideas access to new, potentially more attractive sources of capital. As Marillion’s Steve Hogarth, wrapped in a feather boa, sang in 2007, “Aha aha/All the things I would do/If I had a little money.”

Andrew Trump is a student in the Master of City and Regional Planning and Master of Public Administration programs at UNC-Chapel Hill and a fellow at the Development Finance Initiative.


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