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If you've ever donated to someone raising money online for a business idea, chances are you haven't gotten a lot for it - maybe a thank you via email. Well, next year, a new type of crowdfunding system could give you an actual stake in a startup or a small business. NPR's John Ydstie reports on the move today by the Securities and Exchange Commission.
JOHN YDSTIE, BYLINE: It's been more than three and a half years since Congress told the SEC to write rules for a system that matches small businesses with small investors. But it finally became a reality when SEC Chair Mary Jo White called for a vote today.
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MARY JO WHITE: We'll start with a recommendation to adopt final rules for crowdfunding.
YDSTIE: The commission voted 3 to 1 to approve. Now, this is not Kickstarter, where people just give their money to individuals or companies to get an interesting idea off the ground. What was approved today was a system where small businesses and startups can seek investors to buy their shares or give them a loan on a regulated Internet portal. Woody Neiss is one of the authors of the original framework that Congress approved. He explains how the system will work when it's up and running next summer.
WOODY NEISS: Let's say I'm a main street business in the middle of Louisiana, and we're doing really well. We're a community, a hardware store, and we want to expand our operations. This would be a great opportunity for us to go to our customers and solicit them.
YDSTIE: So the hardware store might use its customer mailing list to alert the community that it wants to expand to the next town. The hardware store would put relevant financial information on a website - either a registered portal or one run by an investment firm.
NEISS: And these websites are where the investors will go to get the information on the offering and then decide whether or not they want to put some money in. They can invest right there with the click of a button.
YDSTIE: Neiss says one reason crowdfunding is needed is that since the financial crisis, small businesses and startups have had trouble getting bank loans. He says crowdfunding also provides an opportunity for small investors to support local businesses or get in on the ground floor of startups. Under current law, only qualified investors with high incomes or net worth are allowed to do crowdfunded investing. The system approved today would allow people of modest means to invest as much as 10 percent of their income or net worth, whichever is lower. Barbara Roper of the Consumer Federation of America thinks this is a bad idea.
BARBARA ROPER: Experience tells us that the vast majority of startup - early-stage startup companies fail. You know, there's a very real risk that crowdfunding investors will lose some or all of their money.
YDSTIE: But Roper said she was pleased to see the SEC amended the proposed rule to put tighter limits on what people of modest means can invest. Woody Neiss, who now runs Crowdfund Capital Advisors, agrees that investors need to understand the risks and not expect to make money for seven to 10 years.
NEISS: Absolutely, there's no get-rich-quick scheme here. And if they're going to go into this, they need to understand what the risks are and how long it's going to be before they get their money back if they get their money back.
YDSTIE: Neiss says that businesses, who will be limited to raising $1 million annually in the system, also need to understand it will still take hard work to raise money. John Ydstie, NPR News, Washington.
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