New businesses will soon be able to raise raise money online and give investors a stake in the company.
The Securities and Exchange Commission just approved a proposal that would allow startups and small businesses to solicit relatively small sums of money on the web.
The rule would allow entrepreneurs to raise up to $1 million a year from investors. Critics say this sort of crowdfunding does not protect investors – or companies.
- Marty Schenker, executive editor of Top News for Bloomberg. He tweets @mschenker.
ROBIN YOUNG, HOST:
From NPR and WBUR Boston, I'm Robin Young. It's HERE AND NOW.
And chances are, you've received an email asking you to fund someone's project through a website like Kickstarter. This crowdfunding has financed albums, smart phone app development, watches. In return for a contribution, you get some sort of token, a video or concert tickets. Well, this week, the Securities and Exchange Commission cleared the way for startups and small businesses to use crowdfunding to raise money from investors who would then get a stake in the company. So how would that work? Marty Schenker is executive news editor at Bloomberg. And, Marty, first of all, explain the way companies traditionally raise money. There are rules and regulations, right?
MARTY SCHENKER: There are. There are very strict Securities and Exchange Commission guidelines for issuing securities in the United States to prevent fraud. And that's the traditional route many companies take and commonly known as IPOs. But you can also do venture capital funding where very well-heeled investors will give money to a company in exchange for a stake in that company. And there's also bank lending. But those are the three traditional ways companies raise money.
YOUNG: Yeah. And there's, you know, requirements in all of those exchanges. So somebody saying you have to be able to prove that you have the money to give, you know, some oversight.
SCHENKER: Yeah, there is. There are income - incomes, limits. You have to - for instance, up until now, if you were a small investor, you were defined as incomes of over $200,000 or net worth of over a million. So you would need to meet those thresholds in order to invest in startups.
YOUNG: So this is the question about this new maybe crowdfunding for companies online. How do you gauge whether investors really have what they say? What's the thinking about the online fundraising?
SCHENKER: Well, this was - it's called the JOBS Act and it sort of stands for the very clunky Jumpstart Our Business Startups Act of 2012. The idea is if you allow very small entrepreneurial operations to raise funds through the Internet, you can foster innovation and jobs growth. So the SEC adopted these rules which will take effect in 90 days if there are no changes. That will allow small companies to do just that, to reach out on the Internet and raise money.
YOUNG: And what's the protection for the companies who think they're getting the money and the investors who want to be sure that they get a return?
SCHENKER: Well, for the companies, they're just - they're all going to collect the cash. So there's really no protection that they need to worry about. It's the investors who are the ones who need protection. And there are various provisions in this act that are meant to do that, but there's still some people who think it's just not enough.
YOUNG: Well, can we tell - can we gauge from how this has gone in Britain and France? Because we understand this is already happening there.
SCHENKER: Yeah. There's been spotty efforts along these lines overseas. The U.S. is a much more formal arrangement with strict rules and guidelines. For instance, no one - no business can raise more than $50,000 a year - $5,000 a year - sorry - from someone whose income or net worth is less than $100,000. But the key thing is the only way a person who raises funds this way, all they need to do is ask how much did you earn. There is no verification. So there's a potential for some problems there.
YOUNG: Well, I would think so, if they don't have to prove it. But still, what do you think, are startups going to be racing to the Web to try it?
SCHENKER: I would think that there would be a serious effort to do - to test the waters on getting equity, because that's the key thing. You're actually - these people who invest are going to become owners of these ventures. Unlike Kickstart(ph) where you get a token, this token is truly ownership.
YOUNG: Hmm. Well, it's going to start soon. Marty Schenker, we'll have you back to see how it's playing out. How's that?
SCHENKER: Happy to do that.
YOUNG: Marty Schenker, executive news editor at Bloomberg. Thanks so much as always.
YOUNG: This is HERE AND NOW. Transcript provided by NPR, Copyright NPR.