Small firms, including many start-ups, need financial backing beyond their own financial resources. Today, through the Internet, such companies have access to a rather new phenomenon known as “crowdfunding”. This enables them to raise more money than than the traditional loan structure has allowed — with fewer restrictions.
As described at Mashable: “Crowdfunding (alternately crowd financing, equity crowdfunding, or hyper funding) describes the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations. Crowdfunding is used in support of a wide variety of activities, including disaster relief, citizen journalism, support of artists by fans, political campaigns, start-up company funding, movie or free software development, and scientific research. Crowdfunding can also refer to the funding of a company by selling small amounts of equity to many investors. This form of crowdfunding has recently received attention from policymakers in the United States with direct mention in the JOBS Act; legislation that allows for a wider pool of small investors with fewer restrictions. The JOBS Act was signed into law by President Obama on April 5, 2012.”
At the Mashable link above, there are dozens of stories related to crowdfunding. To learn more, read a few of them.
In crowdfunding, the opportunity to raise money from many small investors is clear. So, what’s the problem?
According to Jean Eaglesham, writing for the Wall Street Journal: “Regulators are scrutinizing about 200 Web sites set up by entrepreneurs to profit from a more lenient law on the sale of shares in small companies. State securities officials identified the Web sites after a sweep of thousands of Internet addresses for possible threats to investors following the looming change. The probe was triggered by the Jumpstart Our Business Startups, or JOBS, Act, which dismantles many of the legal constraints on small companies selling shares on the Internet. Securities laws currently prohibit private companies from advertising or selling shares to investors who aren’t relatively wealthy. The JOBS Act will allow companies to raise up to $1 million a year through small share sales to ordinary investors.” While supporters predict a boost for capital-starved small companies, some regulators are concerned that forthcoming rules to relax existing controls might present opportunities for fraud. The Securities and Exchange Commission missed a Jan. 1 deadline in the law to write crowdfunding rules, but a spokesman said the agency is working to adopt effective rules ‘as soon as possible.’ In anticipation of the rules, the North American Securities Administrators Association, which represents state securities regulators, is taking steps to try to weed out possible problems lurking among thousands of nascent crowdfunding operations.”
Click the photo for a WSJ video on crowdfunding.