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This is significant. While talk doesn’t necessarily lead to action, a significant shift in capitalism could be coming.

On Wednesday US SEC Chairman Mary Shapiro sent a letter to Rep. Darrell Issa, chair of the House Oversight Committee. The letter is embedded at the bottom of this post.

Many have focused on the potential from the current SEC review to relax limits on shareholders for private companies, notably the rule that if a private company has 500 investors or more it has to disclose its finances. Changes to this and related rules could have a significant impact on capital raising for private companies.

Few seem to have focused on what I think is potentially a bigger issue from the SEC moves: opening up crowdfunding as a mechanism for equity investment. The Wall Street Journal has an interesting piece called SEC Boots Up for the Internet Age. The article begins:

Federal securities regulators are weighing demands to make it easier for fast-growing companies to use social networks such as Facebook and Twitter to raise money by tapping thousands of investors for very small amounts of shares.
The Securities and Exchange Commission is looking at adapting its rules to encourage Internet-age techniques for small companies raising capital. The issue is part of a wider review by the agency into whether to ease decades-old constraints on share issues by closely held companies.

The use of “crowd-funding” techniques has spread in recent years from artists looking to fund creative works to entrepreneurs trying to expand their firms. In a typical example, a company looking to raise $100,000 would use an Internet site to invite investors to buy as much as $100 of shares each.

If all goes well, small companies can raise cash relatively cheaply, while investors get a stake in an innovative business with limited downside risk. The SEC is now considering calls to relax its rules to make it easier for companies to use crowd-funding without having to undergo the full panoply of disclosure and other legal requirements required by the securities laws for share issues.

Financial regulation in developed countries usually restricts equity investment in private companies in multiple ways, notably on the disclosure and reporting required, only giving access to ‘professional investors’ who have substantial funds or experience, and on the number of investors. The reason is primarily investor protection. However these rules preclude small companies raising money from multiple non-professional investors.

It sounds like the SEC is hardly on the verge of opening out investment regulation in a major way. However allowing large numbers of investors to put in small amounts of money – that is, crowdfunding – could provide a significant new source of funds to entrepreneurs.

Crowdfunding platforms such as Kickstarter, IndieGoGo, Sellaband and so on allow people to put money into worthy ventures, but they cannot get an equity stake for their contribution. It may be possible before long to get equity for putting money into a creative or other small venture.

These are very early days, and as has happened many times before, SEC talk may never turn into changed regulation. However if the gates crack open to crowdfunding for equity, they could later swing wider open to allow the emergence of entirely new structures. Five years ago I was interviewed for an article on the future of investment in which I described how new layers of micro-capital markets were needed.

The emergence over the last few years of new entities and funding mechanisms for seed and pre-venture capital startups could prove to be just the beginning of the emergence of a new structure for capital markets for small companies and new ventures. I dearly hope so. The current mechanisms are pretty poor at getting money to where it will create the greatest value.

While we supposedly live in a capitalist society, the potential is for new and more open structures to create far better use of capital than we have today. A more fluid form capitalism could transform business and how individuals create value.

[UPDATE:] I have written a follow-up post: Insights into the next phase of crowdfunding: tearing down legal constraints and building reputation systems

Schapiro%20Issa%20letter%204-6-11

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  • http://www.CinemaShares.com Gene Massey

    Crowdfunding as fully SEC compliant investments:

    Link to MediaShares press interview at the Tech Coast Venture Network Social in Irvine, California. (About 2-minutes)

    http://www.youtube.com/watch?v=XA0QoDlr74w

    MediaShares was a Finalist in a Silicon Valley competition for startups and here is the video of our pitch to the Venture Capitalists and their comments:

    http://www.youtube.com/watch?v=pLaAxuKi0u8

    Here is a link to MediaShares interview on Techcrunch.tv now airing on their Web site:

    http://tinyurl.com/38tbkzy

    MediaShares has perfected this methodology for the new SOCIAL MEDIA IPO. Contact: Gene Massey 310 871-3668 or gene@cinemashares.com

  • Sherwood Neiss

    Hi Ross. My name is Sherwood Neiss. I am the guy behind the Startup Exemption. I worked with Congressman Issa on the letter that went to the SEC. The questions on crowd funding actually came from me. We have a petition at http://www.startupexemption.com to make crowd fund investing legal. In it we provide a working framework that will mitigate risk for investors while getting capital to entrepreneurs. Please take a look and let people know! Regards, Sherwood

  • Pingback: Nesting Crowdfunding in the Dutch Economic « A Crowdfunding Blog()

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  • Dan Arles

    What are you going to do about strike suits from the plaintiff’s bar? Without some sort disclosure safe harbor there is going to be a lot of blood in the water.

  • Pingback: Alternative Currency, YCombinator and the Creative Knowledge Worker | OnTheSpiral()

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  • http://www.fuer-gruender.de Rene

    Hello!
    Crowd funding on the rise in Germany!
    Check out out Crowd funding monitor under http://www.fuer-gruender.de/kapital/eigenkapital/crowd-funding/monitor/

    Best wishes

    René

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Ross Dawson is globally recognized as a leading futurist, entrepreneur, keynote speaker, strategy advisor, and bestselling author. He is Founding Chairman of AHT Group, which consists of 3 companies: consulting, publishing, and ventures firm Advanced Human Technologies, future and strategy firm Future Exploration Network, and events company The Insight Exchange.

Ross is author most recently of Getting Results From Crowds, the prescient Living Networks, which anticipated the social network revolution, the Amazon.com bestseller Developing Knowledge-Based Client Relationships, and Implementing Enterprise 2.0. (click on the links for free chapter downloads). He is primarily based in Sydney with a secondary base in San Francisco.

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