SEC to review rules on 'crowd-funding'

April 9, 2011 at 10:18 AM
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WASHINGTON, April 9 (UPI) -- U.S. market regulators said they are reviewing rules that limit a smaller, private company's ability to raise funds.

At issue is firms that wish to use the social Web sites on the Internet to raise funds as small as $100,000, The Wall Street Journal reported Saturday.

The technique is referred to as "crowd funding" -- seeking many investors to chip in, for example, $100 each, rather than seeking one investor with $100,000.

Securities and Exchange Commission Chairman Mary Schapiro said in a letter to Rep. Darrell Issa, R-Calif., chairman of the House Oversight Committee that a review of the rules had just begun.

A second critical rule limits closely held companies to a maximum of 499 investors.

That rule tends to exclude the average investor, as shares for closely-held firms are often sold through brokers that limit investors to those with a net worth of $1 million, the Journal said.

What is at stake for companies is the ability to avoid a long list of regulatory hurdles and public disclosures that apply when they are seeking investors. If the rules are relaxed, companies seeking small investments can avoid regulatory scrutiny.

What is at stake for investors is the ability for ordinary investors to get in early on a growing start-up firm. But there are risks.

A similar effort to relax rules that lasted from 1992 through 1999 was abandoned in the end on concerns of investment scams.

"A whole lot of investors could be harmed," said former SEC Chief Accountant Lynn Turner, fearing firms that seek funding, although they are "more hoopla than they are substance."

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