The Wall Street Journal ran an interesting article on crowdfunding and the plethora of web sites that have cropped up as a result of recent law changes. Crowdfunding is a collective effort of individuals who network and pool money to support a variety of activities including start-up company funding. The Jumpstart Our Business Startups or JOBS Act signed by President Obama last April will change the law so that companies can raise up to $1 million a year by selling shares to ordinary investors (the SEC still needs to write rules regulating this new form of raising capital). Prior to the JOBS Act, private companies were prohibited from advertising the sale or their shares and could only sell shares to “qualified investors” (those with over $5,000,000 in net worth).
Supporters of the JOBS Act believe the new rules will be a game changer for capital starved companies while regulators are concerned that relaxing the rules will create opportunities for fraud. The Association of Securities Regulators found there were over 9,000 websites that contain the word “crowdfunding”. Many of these websites focus on specific sub segments of the population based on national origin, gender or religion. State regulators have initiated enforcement against a handful of these sites do to suspicion of fraud or the fact that some sites that have begun fundraising even though the new law is not yet effective.
Supporters of crowdfunding believe that those states investigating and warning about fraud are overstating the risks. They believe over regulation of this budding industry will make this new form of raising capital inoperable. On the other side, The Association of Securities Regulators believes that the JOB Act falls short of sufficiently protecting investors. They believe that without tough rules and regulations, a combination of fraud and unrealistic pie in the sky offers will ultimately fail will destroy investors desire to buy shares online.