For all the hype around small businesses raising money by selling equity stakes to individuals online, no one knows what this type of crowdfunding will actually look like. Since Congress relaxed securities laws this spring to make it easier for entrepreneurs to fund their businesses, a slew of new middlemen are trying to position themselves to benefit. The law, called the Jumpstart Our Business Startups Act (pdf), called for a new way for private companies to raise up to $1 million online from retail investors. It also eased other regulations for businesses trying to raise capital, including rolling back the ban on “general solicitation,” or publicly seeking investment in private companies.
Now it’s up to the Securities and Exchange Commission to figure out the details of how the new law will work. The agency held a forum in Washington, D.C., on Nov. 15 to get recommendations from the small business community as it works on writing the rules to govern crowdfunding. Lots of questions remain unanswered. Here are five of the biggest, with some perspective from experts at the forum.
What will crowdfunding intermediaries look like?
The law provides for entities to connect companies raising money with people who want to invest. These can be existing securities brokers, or they can be what the law calls “funding portals.” While lots of new companies want to play this role, questions about how they can operate remain: How will they vet companies raising money? How will they make sure investors understand the risks? How will they make money?
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