The Securities and Exchange Commission on Friday approved crowdfunding rules that will give small investors the opportunity to buy a stake in private companies looking to raise money.
The rules have been years in the making after President Obama signed the Jumpstart Our Business Startups Act in 2012, which authorized the commission to write the crowdfunding rules.
"This rulemaking has generated tremendous interest from potential issuers, investors, and intermediaries," Chairwoman Mary Jo White said in prepared remarks.
So-called equity crowdfunding differs from the model already offered by popular sites like Kickstarter, in which a campaign solicits donations but does not offer equity in return. In most cases, those current crowdfunding campaigns offer small rewards for donations, like an early look at the product being offered.
Online crowdfunding campaigns, which encourage investment in exchange for a small stake in a new company, have largely been impractical for small investors because it would have triggered burdensome securities law that requires private investors to have an above-average income.
The 2012 law offered up an exception for crowdfunding, and the Friday regulations map out how businesses, small investors and websites that host the campaigns will operate.
Businesses looking to crowdfund for equity would not be allowed to raise more than $1 million a year through the process. Finance disclosure requirements would apply, but certain first-time companies using crowdfunding would not have to disclosure audited financial statements.
Small investors would not be able to invest more than 5 percent of their income on crowdfunding investments. People who make more than $100,000 a year would be able to invest up to 10 percent of their annual income.
All the crowdfunding transactions would have to be made through a portal registered with the commission. Crowdfunding portals would also have to comply with a number of rules to monitor investors and businesses to help reduce risk and fraud.
— This post has been updated.