SEC may let startups use social networks to raise money

The Securities and Exchange Commission may adopt rules to let internet-age technologies be used in fund-raising.

The agency is considering whether to let fast-growing companies use social networks such as Facebook and Twitter to raise funding by tapping thousands of investors for small amounts of money, the Wall Street Journal reported.

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The move is part of a larger review by the Securities and Exchange Commission into whether to ease decades-old constraints on how companies can issue new shares to the public. The new funding techniques, known as “crowd funding,” could usher in a new era of capital abundance for Silicon Valley’s startups.

The technique has spread from artists looking to fund their creative works to entrepreneurs trying to bootstrap companies without giving up control to venture capitalists. Typically, a company might raise $100,000 from an internet site where users could sign up to buy $100 worth of shares.

Crowd funding could be a cheap source of cash, competing with angel investors who specialize in giving seed rounds to start-ups. Since the amounts of money are small, the downside risk isn’t too bad for investors. But the trick will be in protecting the public from scammers who have no intention of following through on promises.

Crowd funding could also be appealing to larger companies that are popular with consumers. Those companies wouldn’t have to go through all of the onerous legal disclosures required under securities laws. Mary Schapiro, chairman of the SEC, said in a letter to a law maker on Wednesday that the agency has been discussing crowd funding with small businesses and state regulators. A petition allowing crowd funding up to $100,000 has been backed by 150 organizations and individuals.

In 1992, the SEC allowed small companies to issue shares valued as much as $1 million to ordinary investors without full disclosure of financial information and other legal limits. That effort was abandoned in 1999 because of fraud concerns.

[image credit: Small Business Trends]