Charities and artists successfully raise money for their causes via crowdfunding, a method of soliciting hundreds or thousands of small donations over the Internet.
Congress seems to think so. The bipartisan Jumpstart Our Business Startups — or JOBS — Act loosens restrictions so business can more easily raise capital and, it's hoped, create jobs. As part of the legislation signed into law this month, entrepreneurs will be able to sell securities through crowdfunding.
"People are excited about the small guy getting access to some capital and starting their own companies," says Sanjay Shirodkar, a lawyer with DLA Piper in Baltimore and former special counsel with the Securities and Exchange Commission.
But from the investor side of things, it's difficult not to think of this as a train wreck waiting to happen. The law allows people to invest thousands of dollars annually in startups without all the usual protections.
No question, fraud will occur. If con artists can send you emails that look as if they come from your bank, they will be able to set up counterfeit sites that appear to belong to authentic groups raising capital. Crowdfunding could turn into crowdfleecing.
And even in legitimate transactions, many investors are likely to be disappointed.
"Everybody seems to look at this as a fantastic opportunity to get in on the ground floor of the next Facebook," says Michael Kitces, director of research for Pinnacle Advisory Group in Columbia. "And the reality is that's not how 99.9 percent of startups turn out."
The mechanics of investor crowdfunding are still being worked out. The SEC has about nine months to write regulations.
What's known so far: Entrepreneurs will be able to raise up to $1 million annually by selling securities in their private ventures.
The law restricts how much individuals can invest — and potentially lose — each year.
Those with annual income or net worth under $100,000 can invest whichever amount is higher: $2,000 or 5 percent of income or net worth. Wealthier individuals can invest up to 10 percent of income or net worth, but no more than $100,000.
The securities must be sold through intermediaries — brokers or a new creation called "funding portals" — that will register with the SEC.
These middlemen are supposed to insure that investors don't go over their investment limits. They also must make sure that investors review the educational materials and understand they could lose their entire investment.
Investors will get basic details about the startup, such as the address, names of directors and officers, a description of the business, the price of the securities and how the proceeds will be used.
But how much financial information they receive beyond that depends on how much money is being raised. For example, when raising $100,000 or less, the company must supply its most recent tax return and a financial statement that the top executive promises is true. If raising more than $500,000, the company must provide audited financial statements.
Investors will have to hold onto their securities for at least a year. It's unclear how they will be able to sell their stake after that — or if anyone will want to buy it.
"That's the great unknown. What might develop down the road is a market for privately traded securities," Shirodkar says. If so, he adds, investors don't have to buy just publicly traded stock.