Social media has made it cheaper and easier for small business owners to market their companies. Now, social media companies might be making it easier for small businesses to raise capital, too.
Back in January, I posted on Small Business Trends about the rise of crowdfunding as a possible solution for small business owners seeking financing. Closely related to peer-to-peer lending sites, such as Prosper.com, crowdfunding goes one step further. While peer-to-peer lending focuses on individual transactions, crowdfunding uses the Internet to encourage many individual investors to contribute small amounts, adding up to substantial capital.
Today, individual investors are clamoring for a piece of hot social media companies like Facebook and Twitter, but those companies don’t want to go through the complex legal disclosures current securities laws require. As a result of this demand, reports VentureBeat, the Securities and Exchange Commission (SEC) has decided to study the crowdfunding issue. “[The] staff is taking a fresh look at our rules to develop ideas for the Commission about ways to reduce the regulatory burdens on small business capital formation in a manner consistent with investor protection,” says SEC Chairman Mary Schapiro.
Easing restrictions on crowdfunding would let Facebook and Twitter raise money from thousands of investors –and could also benefit small business owners looking to bootstrap their businesses without having to give up control to venture capitalists. For example, if you wanted to raise $100,000, you could sell $100 shares to 1,000 individual investors via Facebook.
Of course, although these individual investors are investing only small amounts of money, there’s still a risk involved–and that’s what the SEC is concerned about. Back in 1992, the SEC allowed small companies to issue shares of up to $1 million to ordinary investors without any going through the usual regulatory hoops, such as full disclosure of the company’s financial information. In 1999, however, that regulation was changed because of concerns about fraud.
A petition that would allow crowdfunding of up to $100,000 has been backed by 150 organizations and individuals. What do you think about the SEC’s move?
I understand why the SEC is trying to protect individual investors against fraud and I’m sure there are many people in the world today that have been burned (Enron investors, Bernie Madoff investors, etc). However, I question when it became the SEC’s job to perform due diligence on investments. Isn’t that the investor’s responsibility? Whenever government regulation becomes involved, all taxpayers are covering the overhead.
Another good post Rieva, and many thanks to Mr. Brady for his comment. Don’t look now, but our own government and it’s rules and regulations, may be the biggest impediment to economic grown for small business owners and entrepreneurs. When will they “get it”?
Are you in favor of SBA’s relentless drive to increase the size def. of “small” to include 99.97% of all biz’s (28 million businesses, only 17,000 don’t qualify as “small”?
Since Nov. 5 they’ve been reviewing the size standards in each category and have universally raised the limits to include very large corporations. 500 employees is considered small. You can make your voice heard by commenting on even more proposed size standard changes at regulations.gov.