Crowdfunding is about to go big time.
For years, filmmakers, artists and charities have used the power of the Internet to generate money for projects. But in the coming year, with the blessing of Congress, startups will be allowed to raise money this way by selling stock to small-time investors.
The Securities and Exchange Commission Wednesday took a step toward implementing the law by proposing how much people could invest and how much companies must divulge. The SEC voted 5-0 to send the proposal out for public comment. Final rules could be approved next year.
For investors, the new crowdfunding rules could provide a chance to make a small profit and possibly get in early on the next Twitter or Facebook.
But such investing is also extremely risky, given that a majority of startups fail. And critics warn that investment crowdfunding is ripe for fraud.
Under the proposal, people with annual income and net worth of less than $100,000 could invest a maximum of 5 percent of their yearly income. Those with higher incomes could invest up to 10 percent. Companies could raise a maximum of $1 million a year from individual investors.
Companies also would be required to provide information to prospective investors about their business plan and financial condition, as well as a list of their officers, directors and those who own at least 20 percent of the company.
SEC Commissioner Luis Aguilar said investment crowdfunding could be used to prey on "vulnerable segments of society." The system could enable "affinity fraud," he said, with promoters appealing to members of ethnic or religious groups to which they portray themselves as belonging.