Crowdfunding 2.0: SEC Just Made It Easier To Buy Shares In Start-Ups

By James Rufus Koren
Los Angeles Times.

If you’ve ever backed a project or business on crowdfunding sites Kickstarter or Indiegogo, you probably came away with some swag, a movie ticket or a discount on a soon-to-be-released product.

Soon, you’ll be able to go to similar sites and come away with something potentially more valuable: shares of stock.

New rules approved by the Securities and Exchange Commission on Friday will make it easier for start-ups to sell shares directly to the masses.

The rules could be a boon for entrepreneurs looking to raise capital and a potential windfall — or loss — for investors hoping to be among the first to get a piece of the next Uber or Instagram.

They could also be big business for a handful of Los Angeles firms that want to act as the stock exchanges where these deals will take place.

The rules, which will take effect in about six months, allow private companies to raise up to $1 million a year from small-time investors without most of the reporting and auditing required of larger firms or companies raising more money.

They are a provision of the JOBS Act, a 2012 law championed by President Obama to boost start-up businesses.

Howard Marks, executive chairman of Start-Engine Crowdfunding, a Santa Monica firm that connects companies with private investors, said he expects thousands, even tens of thousands, of start-ups to try to raise money this way.

“It’s the democratization of capital,” he said. “That $1 million is great for a lot of start-ups. I could see where there’s a company who comes on our platform, raises $1 million, and the next thing you know Facebook buys them for $1 billion.”

That’s possible, but not the likeliest outcome. Many start-ups fail, and the new rules will allow inexperienced investors to put money into firms that have little oversight. Some critics warn that’s a recipe for trouble despite SEC vows to police the new marketplaces.

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