Crowdfunding has become well known thanks to popular websites like Kiva and Kickstarter so it may come as a surprise that crowd investing, investing in order to earn a return as opposed to “investing” for philanthropic reasons, remains essentially illegal. If a website like Kiva or Kickstarter tried to connect small investors with small firms it would run afoul of state and Federal laws regulating securities. As Amy Cortese writes in the NYTimes:
Under those laws, crafted largely in the 1930s, the sites would have to either limit the fund-raising to wealthy investors, who the S.E.C. deems sophisticated, or go through a registration process that would prove too costly given the small sums being sought…
In the United States, these outdated laws are cutting off a huge pool of potential capital for small, private businesses that have been all but abandoned by banks and Wall Street.
…President Obama, as part of his jobs act, advocates an exemption for sums totaling up to $1 million. Representative Patrick McHenry, a Republican from North Carolina, has drafted legislation that would allow companies to obtain up to $5 million from individuals through crowdfunded ventures, with a cap of $10,000 per investor, or 10 percent of their annual incomes, whichever is smaller.
In Britain the regulations are less onerous:
For a glimpse of what is possible, look at Britain, where securities laws are helpful to crowdfunding and several start-ups are vying to be the Facebook of finance. The year-old Funding Circle, a business-lending site based in London, raises more than $2.3 million each month for small businesses from individuals who can invest as little as $30 and earn an average yield of roughly 7.3 percent after fees. Those are loans; two other start-ups are applying the model to equity shares in small companies.
Hat tip: Daniel Lippman.