Venture capital investing has traditionally been the domain of the wealthy, but that could change with the passage of new legislation that will allow entrepreneurs to raise money from a much broader swath of the public — and give ordinary investors the chance to own a piece of the next Google, Facebook, or Twitter.
Tucked inside the Jumpstart Our Business Startups (JOBS) Act that passed the House of Representatives with bipartisan support Friday are “crowdfunding” provisions that would relax federal restrictions that have been in place since the 1930’s effectively barring the non-wealthy from investing in startups.
Crowdfunding has been a hot topic recently with the dramatic success of online platforms like Kickstarter, which allows anyone to donate money to a variety of projects. Kickstarter expects to distribute over $150 million in 2012, surpassing the annual budget of the National Endowment for the Arts. But Kickstarter is about philanthropy, not investing, because donors don’t receive a stake in the projects they fund.
Currently, federal securities law limits how, and from whom, startups can raise money. First, startups are prohibited from raising funds using the internet or broadcast media. Second, the pool of possible investors is limited to so-called “accredited investors,” who must have annual income of $200,000 ($300,000 for couples), or have a net worth of at least $1 million (not including the value of their home). Needless to say, this rule excludes the vast majority of Americans from being able to participate in startup investing.