It lets artists and innovators collect money from people online, which they used to develop new projects and products. In exchange, funders would get a token of the creator's success, like a t-shirt or a copy of an album.
Investors, however, have so far not been able to buy a share of a company that yielded financial returns or profits.
The 585-page draft rule unveiled on Wednesday tries to bring investing up to speed with modern technology.
The effort is part of the SEC’s effort to implement the Jumpstart Our Business Startups (JOBS) Act, which was passed in 2012 to make it easier for small companies to raise money.
“The intent was to try to make it easier for businesses to raise capital from a wide range of potential investors and to provide additional investment opportunities for investors,” said SEC Chairwoman Mary Jo White, according to prepared remarks.
The law called for the SEC to issue the rule within 270 days, but nearly twice that much time has passed.
Crowdfunding would allow small businesses to avoid the costs and complications of going through a normal initial public offering process.
The new regulation requires companies to disclose information to investors, outlines when securities can be sold and mandates that transactions are conducted through registered brokers or a new funding portal.
It limits companies to raising $1 million per year through crowdfunding.
The draft rule also sets caps on individual investments, barring someone with a net worth or annual income under $100,000 from investing more than $2,000 or 5 percent of their annual income or net worth, whichever is greater. Investors with a net worth greater that $100,000 would be able to invest 10 percent of their annual income or net worth.
“The intent was to try to make it easier for businesses to raise capital from a wide range of potential investors and to provide additional investment opportunities for investors,” White said.
President Obama has also been a strong supporter of the provision.
In a ceremony signing the JOBS Act in the White House Rose Garden last year, he said that “start-ups and small business will now have access to a big, new pool of potential investors -- namely, the American people.
“For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
The SEC is accepting public comments and criticisms on the proposal for 90 days. After that, the SEC will determine whether or not to adopt the regulation.