You don’t need to be rich to invest in a startup

Next week will begin a new chapter for the startup industry. Starting Monday, new crowdfunding rules will permit anyone, not just the rich clan, to risk $2,000 a year or more investing in small companies in exchange for a stake in the business. Companies can raise up to $1 million a year this way.

Until now, only accredited investors, meaning those with an annual income of at least $200,000 or a net worth of at least $1 million, have been permitted to take equity stakes in most private companies.

According to the new rules, implemented as part of Title III of the JOBS Act, startups raising money through online crowdfunding portals will be able to sell shares to people regardless of their wealth or income so long as the founders have submitted annual financial reports to the SEC.

“For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in,” President Obama said when he signed the bill into law that set these changes in motion.

That was four years ago. It took a long time to iron out the details, in part because the Securities and Exchange Commission was concerned that ordinary people could lose their life savings because of fraud or naïveté.

The big question is how much the change will transform crowdfunding, which has typically rewarded backers with T-shirts, events tickets and early iterations of gadgets.

While some startups are keen to sell shares to small investors, others are hanging back because they find the rules too onerous and the fundraising limit too low. Meanwhile, Kickstarter, the biggest and best-known crowdfunding site, has no plans to join the party.

The new rules are expected to find favorable side in non-tech entrepreneurs who have trouble attracting venture capital. Richard Swart, a founding board member of the Crowdfunding Professional Association, says the new fundraising rules could especially appeal to companies outside venture-capital rich California and New York. He says entrepreneurs in theater, food production and energy have expressed the most interest so far, along with minority-led businesses.

"We're hoping crowdfunding can start to equalize the distribution of funding," says Swart, who also serves as chief strategy officer at NextGenCrowdfunding LLC,  a year-old startup that provides information about funding portals, individual companies and crowdfunding regulations.

Skeptics, however have their own concerns. Jim Fulton, an attorney at Cooley LLP who specializes in corporate and securities law for emerging companies, says many companies, especially in tech, consider the $1 million limit too low and the costs to register and submit annual results too high. He says fewer than a dozen clients have asked about the option. Another potential turnoff: a requirement that companies communicate with investors as individuals rather than as a group.

Though Kickstarter has no intention of adding equity investing to its platform, rival crowdfunding portal Indiegogo does.

"It was the original goal of the founders when we launched in 2008 and it still is," says Indiegogo Chief Executive David Mandelbrot, adding the company is working out details with attorneys now and expects to launch something later this year. "Limiting venture financing to accredited investors and treating people differently according to their wealth feels very undemocratic. It's sad it's taken this long to change that, but at least these are steps in the right direction."