SEC may let startups use social networks to raise money

April 9, 2011 3:47 PM
Dean Takahashi
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The Securities and Exchange Commission may adopt rules to let internet-age technologies be used in fund-raising.

The agency is considering whether to let fast-growing companies use social networks such as Facebook and Twitter to raise funding by tapping thousands of investors for small amounts of money, the Wall Street Journal reported.

The move is part of a larger review by the Securities and Exchange Commission into whether to ease decades-old constraints on how companies can issue new shares to the public. The new funding techniques, known as “crowd funding,” could usher in a new era of capital abundance for Silicon Valley’s startups.

The technique has spread from artists looking to fund their creative works to entrepreneurs trying to bootstrap companies without giving up control to venture capitalists. Typically, a company might raise $100,000 from an internet site where users could sign up to buy $100 worth of shares.

Crowd funding could be a cheap source of cash, competing with angel investors who specialize in giving seed rounds to start-ups. Since the amounts of money are small, the downside risk isn’t too bad for investors. But the trick will be in protecting the public from scammers who have no intention of following through on promises.

Crowd funding could also be appealing to larger companies that are popular with consumers. Those companies wouldn’t have to go through all of the onerous legal disclosures required under securities laws. Mary Schapiro, chairman of the SEC, said in a letter to a law maker on Wednesday that the agency has been discussing crowd funding with small businesses and state regulators. A petition allowing crowd funding up to $100,000 has been backed by 150 organizations and individuals.

In 1992, the SEC allowed small companies to issue shares valued as much as $1 million to ordinary investors without full disclosure of financial information and other legal limits. That effort was abandoned in 1999 because of fraud concerns.

[image credit: Small Business Trends]

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  • http://profiles.google.com/businesssensse Business SENSSE

    How can we help make this happen? Is there a page or address to send comments?

  • elliottdahan

    Sponsoring Organizations will provide the “heavy lifting” and validity for their Sponsored Companies – incubators, accelerators, tech transfers . . . will “vouch” for their portfolio companies. A bio/med venture being incubated at DU Hatch (Duke University) using Duke IP carries a lot of credibility. A startup vetted and mentored at Launchbox in Durham carries a lot of credibility.

  • http://www.startupexemption.com Sherwood Neiss

    Yes there is. Here is the petition we have created where we currently have over 1600 signatures: http://www.startupexemption.comIf we all work together we'll be able to make this exemption a reality which will do great things for rejuvenating this economy.

  • http://www.nuanceinteligence.com nuance_intelligence

    Dean, thanks for the report. Important info, to be sure. I'd like to challenge your statement, “The new funding techniques, known as “ crowd funding,” could usher in a new era of capital abundance for Silicon Valley’s startups.”Actually, it's even more important for startups OUTSIDE of Silicon Valley. In SV, there's no shortage of angels and funding opportunities. One might believe that almost anything can get funded inside that bubble. However, smart entrepreneurs are everywhere (beyond the US, even!), and none of them have the density of angel investors and available seed capital seen in SV.These folks will benefit hugely from the ability to access a new capital market. Let's hope there's some wisdom left at the SEC, so we can thread this needle without creating a scam marketplace. At W1SDØM, that's just what we're up to.

  • http://www.startupexemption.com Sherwood Neiss

    You bring up some very important points! This is also extremely important for non-tech companies to be able to access capital to launch and expand operations (including companies outside Silicon Valley as you mention). In order to get the economy growing again we need to free up the access to capital while ensuring safeguards are in place to protect against fraud. The SEC has the power to do something important here. Lets hope they can follow through.

  • http://profiles.google.com/businesssensse Business SENSSE

    Bravo! Will post and share that link too! Do you know if sites like Kickstater would be included in this proposed change?

  • http://twitter.com/woodien Crowd Fund Investing

    Thank you! We imagine that if/when the legislation goes thru, sites like Kickstarter will be able to offer crowd fund investing as well. It would be a natural addition to the crowd funding they already do.

  • http://profiles.google.com/businesssensse Business SENSSE

    I wholeheartedly agree! This would be a great avenue to route more investment capital to local businesses all over the US.

  • http://profiles.google.com/businesssensse Business SENSSE

    Is there a deadline to have comments or the petition in by?I'm getting the word out but will remind people as the date gets closer.

  • http://www.business-strategy-innovation.com/wordpress/2011/06/7-reasons-why-capital-markets-need-to-innovate-2/ Blogging Innovation » 7 Reasons Why Capital Markets Need to Innovate

    [...] Allowing some form of crowdsourcing to raise smaller amounts of capital from a larger group of investors. (via Mashable and VentureBeat) [...]

  • http://businessjournalism.org/2011/07/15/what-are-crowdfunders-financing-in-your-market/ What are crowdfunders financing in your market? : BusinessJournalism.org Reynolds Center for Business Journalism

    [...] rules that limit shareholders in private companies; that’s potential hurdle those who would like to offer equity stakes face.  Along with tax implications, it’s a good idea to mention these caveats in any [...]

  • http://venturecompany.com/blog/2011/04/free-vc/ Free VC | The Venture Company

    [...] it would not need to divert to crowd-funding with fraud concerns in order to free it. [Links: VentureBeat] TweetVote on HN This entry was posted in Venture Capital by Georges van Hoegaerden. Bookmark [...]

  • http://albertqian.com/?p=259 Social Media Funding | Albert Qian: The Social Media Dude

    [...] From VentureBeat:  [...]

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