The idea of crowdfunding, raising money from lots of people on the Internet, got a boost from Washington on Friday. The Securities and Exchange Commission approved a system that allows small businesses and startups to solicit funding from small investors.
This is not Kickstarter where people just give money to individuals or businesses to support a great idea or product and get nothing in return, except maybe a thank you. What the SEC approved is a system where small businesses and startups can seek investors, to buy their shares or give them a loan, on a regulated Internet portal.
Let's say you own a hardware store in a small town and you want to expand. You might use your customer mailing list to alert the community that you want to build another store in the next town over. You would put your business plan and financial information on the Internet portal, or a website run by an investment firm, and investors could go online and with a click of a button invest in your business.
Right now only qualified investors with high incomes or a high net worth are allowed to do this kind of crowdfund investing. But the system approved by the SEC would allow people of modest means to invest up to 10 percent of their income or net worth, which ever is lower, each year.
Some consumer watchdogs argue it's a bad idea to allow people of modest means, who may be financially unsophisticated, to invest in this way — especially since the majority of startups fail and investors could lose some or all of their money. We'll see. The system will be up and running around the middle of next year.
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