Today, new rules go into effect that allow anyone to invest in a startup and receive shares of that startup. Previously, the Securities and Exchange Commission required investors backing private companies to have a certain amount of net worth.
A Washington University in St. Louis faculty member says the new rules, put into place under the federal JOBS Act, will expand the entrepreneurial playing field, to a point.
“Due to concerns for consumer protection from fraud, the SEC has historically restricted the right to invest in startups and other private investments to wealthy ‘accredited investors.’ The new rules going into effect this week open the door slightly to allow non-accredited investors to invest small amounts into startups under certain limits and with additional regulatory and reporting requirements for the entrepreneurs,” said Cliff Holekamp, senior lecturer in entrepreneurship and director of the entrepreneurship platform at the Olin Business School.
The major shift enables crowdfunding for debt and equity. Startups raising seed money through SEC-approved online sites will now be able to sell shares to people regardless of their wealth. Previously, those companies were limited to rewarding backers solicited from crowdfunding sites with in-kind types of rewards, such as branding materials or early product prototypes.
While the change is seen as a way to make the entrepreneurial investment process more equitable, Holekamp says don’t expect a free-for-all.
“These rules do not bust the door wide open to wild-west wheeling and dealing that many detractors had feared, nor does it open up the capital markets to the degree that many entrepreneurs had hoped. It does, however, offer an incremental step toward a more even playing field where average investors would have the same rights as the wealthy,” Holekamp said.
Holekamp is available for interviews and may be reached at holekampc@wustl.edu.
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