It seems simple enough. Small businesses in need of cash look online for investors willing to contribute as little as a buck. It’s called “crowd funding,” and many entrepreneurs love the idea. The problem? It’s against SEC rules.
“It could help me, and it could help many other entrepreneurs,” said Miami businessman Sherwood Neiss. “People are getting behind ideas, and they’re actually happening.”
Mr. Neiss and other entrepreneurs are lobbying the Securities and Exchange Commission to update decades-old rules to make it easier for them to raise small amounts of money online. As part of the group Startup Exemption, Mr. Neiss will testify in front of the House Committee on Government Oversight and Reform in May. He already met with the SEC early this year.
Proponents say crowd funding could provide new avenues for entreprenuers to launch ideas, as financing from banks and venture capitalists dries up.
The current SEC rules, which were written in the 1930s, limit a company to 35 regular investors before it has to file expensive paperwork with the agency. The legal fees involved in the process are too costly for many startups, forcing them to operate within the investor limit.
Startup Exemption is proposing a plan built around “micro-investors” that it thinks would minimize the risk of fraud. They want the SEC to allow small businesses — with fewer than 50 employees and less than $5 million in annual gross sales — to raise up to $1 million through crowd funding. Regular investors, defined as people who make less than $200,000 a year and have a net worth below $1 million, would be capped at $10,000 or 10 percent of their adjusted gross income. But the average investor will only give about $50 to $500, they say, shielding them from large losses if fraud occurs.
“It’s not going to cause the end of their retirement,” Mr. Neiss said. “It’s not going to cause them to lose their savings.”
Websites, such as Kickstarter and IndieGoGo, already use crowd-funding techniques to raise money under the guise of donations. The group argues the SEC should open the “funding window” so donors could receive a return on investment.
“Silly that if you want to ‘donate’ $5 to a company without the SEC scrutiny that you can’t also ‘invest’ the same amount without the SEC overseeing what you are doing,” Mr. Neiss said. “This is what we are trying to change.”
But Guy Kawasaki, a former executive at Apple Inc. and a venture capitalist, is against such change.
He said the SEC rules are in place to protect “little old ladies” from being ripped off. If Bernie Madoff, a former stockbroker who stole billions of dollars from investors, slid under the radar for so long, Mr. Kawasaki wonders how well regulators will catch smaller companies that do the same thing.
“What’s worse: Precluding the little old lady living in Miami from investing in the next Google, or preventing her from getting fleeced?” he asked.
As the recession reverberates around the business community, many startups are finding it difficult to raise money through traditional sources. According to Angelsoft, a private financing group, less than 3 percent of startups get venture capital, private equity or “angel” support.
“Times are different now,” Mr. Neiss said.”Until the financial meltdown, you could say, ‘Just go to the bank,’ ” Mr. Neiss explained. “Until the financial meltdown, people could go to venture capitalists and angel investors. With the financial meltdown, all of this has disappeared.”
Michael Mayernick, co-founder of Spinnakr, a small business in the District, said the Startup Exemption’s proposal would help a number of entrepreneurs in the area.
“Certainly, that would lead to a lot more companies being able to raise not tons of money, but all the money they really need to prove their model and take it to the next level,” he said.