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Crowdfunding For Small Businesses Gets Kick-Start

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. Carolyn Kaster/AP hide caption

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Carolyn Kaster/AP

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.

Carolyn Kaster/AP

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.