The Wisdom of Crowds? Crowdsourcing Could Help Fund Future Startups

Crowdsourcing may become the new way for small investors to finance startups and community-based businesses, if small business advocates can persuade Congress to revamp the nation's securities laws.

It's called crowd fund investing and it's already being practiced in the U.K., Holland, India and China. However, it's not currently allowed in this country because it breaks the Security and Exchange Commission's (SEC) rules on accreditation and solicitation.

Here's how it works: Groups of people come together and pool their contributions (usually between $50 and $500 each) to invest in startups and provide knowledge and experience to help an entrepreneur succeed. The funding rounds take place on the Internet, which provides an added level of transparency between investors and entrepreneurs that may allay SEC concerns regarding potential antifraud and investor protection.

"These rules were written at a time when only 4 percent of Americans invested in markets," Sherwood Neiss, a successful entrepreneur and Small Business & Entrepreneurship Council (SBE Council) member, said in a statement. "Today we have technology that has leveled the playing field and increased investor sophistication, making these rules outdated."

A framework for bringing this investment option to these shores was presented to the House Oversight and Government Reform committee by Neiss and Karen Kerrigan, president of the SBE Council.  The committee held a hearing May 10 on "The Future of Capitalism."

"Under this framework, entrepreneurs will raise capital in rounds on Internet platforms where they will have to submit to rigorous background checks," Neiss said. "The crowd will openly discuss information about the entrepreneur, their idea and capital requirements.  As an all-or-nothing platform, entrepreneurs won't be funded if the crowd doesn't feel they or their idea is worthy enough. And if it's funded, both the entrepreneur and the crowd become part of an online community where the crowd comes together to share knowledge, experience and marketing power to help the entrepreneur succeed."

At a time when entrepreneurs and small businesses have limited sources for accessing capital , the nation needs to reform archaic rules that are hurting U.S. competitiveness and entrepreneurship, Kerrigan said.

"We need to revisit these rules to allow Americans to invest in their communities through SEC-monitored frameworks," she said.

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Reach BusinessNewsDaily senior writer Ned Smith at nsmith@techmedianetwork.com. Follow him on Twitter @nedbsmith.