Social Networks and Entrepreneurship
November 2, 2011 Leave a comment
The House Financial Services committee last week backed legislation that would make it possible for small businesses to use crowd funding to raise money from investors in exchange for equity stakes.
Under the proposal, investors would be able to buy stakes of up to $10,000 a year, or 10% of their annual income, whichever is less. Companies would be able to sell up to $2 million in equity—but must provide audited financial statements if the total exceeds $1 million.
If it becomes law, the proposal would enable Brian Lamb, co-founder of a Belmont, Calif., start-up, to overcome the longtime “general solicitation” ban on advertising sales of equity without registering with the Securities and Exchange Commission, among other restrictions.
Entrepreneurs are excited about the prospect. Naturally, regulators and other busybodies are deeply worried:
“It’s dangerous,” says Heath Abshure, the commissioner of the Arkansas Securities Department. Successful investors in small businesses tend to be savvy investors with deep knowledge of a business and its market, he says. “Mom and Pop investors on the Internet don’t have the ability to make the right kinds of assessments.”
The idea that entrepreneurship involves experimentation, trial and error, and reshuffling is widely understood. Heaven forbid we should allow small investors to engage in experimentation!
Update: See further discussion here, focusing on the potential for fraud.