Washington (AFP) - Crowdfunding could become a hot new source of venture capital under new US rules proposed Wednesday to allow companies to make private share placements to micro-investors via the Internet.
The new Securities and Exchange Commission regulations would allow companies to raise up to $1 million a year via crowdsourcing without registering the securities.
They also would lower the bar for investors taking part in private placements, giving people with less than $200,000 a year in income the opportunity to get in on the ground floor of new ventures.
Coupled with new guidelines in July that allow companies to openly advertise private placements, including via social media, the SEC's crowdsourcing rules for finance herald a new model for financing small ventures.
Chance Barnett, chief executive of Crowdfunder.com, which hopes to get a piece of the new business, said the rules will bring "an entirely new set of financing" into the market, potentially several times larger than the $30 billion annually invested by venture capitalists in Silicon Valley.
After holding back on the rules for months, the SEC board in a hearing Wednesday cautiously endorsed the rules, which could come into effect after a 90-day period for public comment.
"We want this market to thrive, in a safe manner for investors," said SEC Chairwoman Mary Jo White.
Crowdfunding has mostly been used by artists and inventors to finance their work via micro-donations, while they retain full ownership of their work.
Five-year-old Kickstarter has funnelled some $830 million to 50,000 projects from some five million donors on this model.
But other companies like Crowdfunder have sought to use the model for venture capital-like funding from thousands of small investors -- though up until now "small" has meant "accredited investors" with incomes above $200,000, or net worth over $1 million.
The new rules would exempt companies raising no more than $1 million a year via crowdfunding from registering the issue with the SEC.
The companies would be required to make disclosures about the owners, executives, and finances, and they could only place the shares through traditional broker-dealers or "crowdfunding platforms", a new form of SEC-registered funding portal that would be banned from giving investors advice or promoting specific offerings.
Smaller investors would be able to take part, with restrictions. People with net incomes or net worth of below $100,000 could invest no more than five percent of their annual income or net worth in the issue over one year.
For those with incomes or net worth above $100,000, the maximum would be 10 percent, with a total investment limit of $100,000 over 12 months.
The investors would have to hold the shares for at least one year.
Though limiting, the restrictions are aimed at protecting small investors from fraud or other scams frequently seen in small, little-regulated markets -- which SEC officials took note of Wednesday.
SEC Commissioner Luis Aguilar spoke Wednesday of "relatively high risks of fraud" in the market, as well as lack of liquidity in the shares and self-dealing by company officials.
"Even the strongest supporters of crowdfunding acknowledge that it carries substantial risk," he warned.
But Slava Rubin, co-founder of crowdsourced funding site Indiegogo.com, cheered the proposed rules as a "democratization" of finance, "allowing anyone, anywhere to participate in starting new businesses."
Crowdfunder's Barnett acknowledged the concerns over the potential for scams to cheat unknowing investors.
But so far, he argued, the fundraising done by his company has shown that crowdsourcing offers some protections: smaller investors following respected lead investors, and more information-sharing by investors who are more likely to know each other.
Crowdfunding can generate more transparency, he said.
"It's a little more curated than people will think," he said.