Would Looser Investment Rules Help Small Businesses?

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The U.S. Securities and Exchange Commission has finally noticed the five-year-old boom in online, crowdsourced or "peer" lending sites such as Prosper.com. Now, the SEC is convening a small-business committee to look at possibly loosening its investing rules.

Would that be a good thing? The owners of peer sites are excited by the prospect, as are some business owners who'd like easier access to investor money.

But there would certainly be losers if the rules change.

There are two rules SEC will evaluate:

  • The ban on advertising securities for sale to the general public
  • The requirement that companies with over $10 million in assets and 499 shareholders register with the SEC and publicly disclose their financials

In a guest post for Mashable, Bill Clark of the funding platform MicroVentures notes that changing these two rules would certainly make it easier for startups to access capital. The cost of public reporting can be steep, and the ad ban makes it harder to find investors.

Crowdsourcing platforms would probably be able to increase the maximum amount a company could raise and allow more investors to participate in funding rounds. Right now, if 500 investors put up $50 -- that's $25,000. Coincidentally, that's also the maximum amount you can raise on Prosper.

Despite their benefits, the changes might also make it easier for investors to get swindled.
Companies would be able to continue in stealth mode longer, disclosing nothing of how they're really doing financially. In that kind of darkness, deception breeds.

The argument for lifting the ad ban is that it doesn't matter if equity stakes in high-risk startups are peddled to the public as long as there's a high minimum investment required. If Joe Q. Public knows about an equity investment opportunity but $500,000 is the minimum investment, the thinking goes, most people won't qualify anyway.

But that won't keep a bunch of small investors from forming a syndicate and taking the plunge. The Internet is making it easy for like-minded investors to find each other, whether on a fundraising platform or a chat forum on LinkedIn.

What's more, problems are already cropping up under the current rules, which makes you wonder what kind of free-for-all might ensue if rules were more lax.

In a recent post about the explosion in crowdsourced funding models, finance blogger David Worrell observed entrepreneurs illegally offering equity stakes in their companies on the crowdfunding platform 40Billion. Whoops.

Final thought: If it's easier for businesses to give up equity, more of them might do that. But having investor-owners on board can be an unpleasant scenario. The current rules mean startups have to proceed with more caution in taking on investors, and that's probably a good thing.

The SEC will surely take their time considering these changes. Any new rules they propose will have a lengthy public comment period, so we're likely at least a year or two from any real change.

Should the SEC relax its funding rules? Leave a comment and give us your take.

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