Crowdfunding For Small Businesses Gets Kick-Start

By Chris Arnold

Published May 17, 2016 at 12:13 AM EDT

President Obama signs the Jumpstart Our Business Startups (JOBS) Act in 2012. Crowdfunding, long used by charities, could become a popular way for small businesses and startups to raise money.

Starting today, small companies can raise up to $1 million from ordinary investors through what are called "crowdfunding portals." These portals are different from sites like Kickstarter. As one of the portal sites SeedInvest explains on its website:

"Kickstarter promises rewards for successful projects in the form of anything that is not monetary, whereas equity crowdfunding, as its name suggests, promises a financial slice of the pie when it comes to startup and small-business investment."

So in other words, instead of just getting, say, a t-shirt, by investing through one of these portals, you get an actual equity stake in a small company that's looking to raise money and grow. You own a piece of the company. And you can make money by selling that stake down the road if it appreciates in value.

It used to be that to buy shares in a company that's too small or young to be publicly traded, you needed to be what's called an " accredited investor." That means you had to be pretty wealthy.

But as part of the JOBS Act in 2012, Congress decided there should be a way for ordinary Americans to invest in small businesses or startups too. To protect investors though, there are new rules surrounding the process.

If you're a small business owner looking to raise money this way, you have to go through a registered broker dealer or a funding portal that's been approved by regulators. Some of these new portals include NextSeed, SeedInvest, and Wefunder.

Of course there are risks for investors. The self-regulatory industry group FINRA (the Financial Industry Regulatory Authority) has posted advice for ordinary people interested in investing in an early-stage company through crowdfunding here.

For businesses, crowd-funding promises to expand the world of options for raising capital. It's possible that businesses could raise money more cheaply and/or easily by crowdfunding than through traditional bank loans or professional investors. But, fees appear to be a question mark at this point. If the fees are too high, either for investors or businesses, that might stop crowdfunding from really taking off.