The rise of crowdfunding as a viable alternative to traditional securities trading came a step closer with guidelines from Securities and Exchange Commission (SEC), and shows institutional activity in this market will remain limited.
Crowdfunding, the practice of raising capital through the internet, often directly with individual investors, has gained increasing popularity as a funding mechanism for small enterprising and individuals.
The SEC’s guidelines, released late in October, relate to Title III of the Jumpstart Our Business Startups (JOBS) Act, and stipulate limits for funding and requirements for trading ‘portals’ – which will likely be run by the Financial Industry Regulatory Authority (FINRA).
The proposal states a company can raise a maximum of US$1 million through crowdfunding over a 12-month period and introduced caps on investors’ related to net worth and annual income, skewing the market to retail investors.
“For institutional investors, crowdfunding is not a viable avenue for investment at this stage, but these guidelines in part set a trajectory that could lead to greater institutional involvement in the long-term future,” commented Adam Sussman, partner and director of research for consultancy TABB Group, who has followed closely the development of crowdfunding.
Sussman said asset managers would focus on private equity for investments outside traditional securities trading, but said some funds could play a role in crowdfunding in the near future.
“Clarification around investment thresholds and the selection of FINRA to oversee the investment portals are positive signs for proponents of crowdfunding, but it’s still at a very early stage.”