Crowdfunding new business

We've seen that the venture capital industry had had difficulty achieving any positive returns in recent years, partly because it's tended to engage in "me-too" incremental investment in the latest trends.

Now here's a huge development. A new law throws open the doors to raising money online from small investors.

 

One of the most controversial provisions of the JOBS Act allows for crowdfunding, a way for entrepreneurs to solicit capital from non-accredited investors. This provision allows for companies to raise up to $1 million in capital per year via Web sites from individual investors without registering with the Securities and Exchange Commission (SEC). Prospective investors with an annual income less than $100,000 may invest up to $2,000 or 5 percent of their income to a single issuer.

Investors with an annual income greater than $100,000 may invest up to 10 percent of their income up to $100,000 in a single issuer. While the companies themselves will not be subject to SEC regulations, the trading platform Web sites will be heavily regulated. The SEC has 270 days to define what these regulations will be. All companies that receive crowdfunding will be required to issue financial statements annually, at a minimum. Financial statement requirements are based on the amount of capital raised.

Small business owners are not excited about it yet, partly because it's not yet clear how it will work. And it could raise the risk of scammers and small investors losing a lot of money. It is going to take some time for this to shake out properly.

But it could be one more way in which the role of gatekeepers in the economy is reduced. It's also possible that it could work better than VC expertise in many cases, because if there is one thing that markets are very good at, it's rapidly aggregating views.