Congress weighing rules on 'crowdfunding'

A motley crew of backers is pushing Congress to loosen restrictions on "crowdfunding," the new capital-raising method that uses the Internet to solicit start-up investment, despite warnings about the potential for fraud.

Crowdfunding, popularized by online platforms such as Kickstarter and Kiva, currently relies on a donation-style model where fans of an artistic project, venture or nonprofit campaign pledge money in exchange for early product or philanthropic fulfillment.

It seems in Washington, almost everyone is a fan, from conservatives to liberals; a recent House bill to ease crowdfunding restrictions passed 407-to-17. The Senate is now considering a similar measure.

Broad-based support for crowdfunding is a natural fit because it's in everyone's interest to improve the flow of money to small companies during a prolonged weak economy, said James Angel, an associate professor at Georgetown University's McDonough School of Business.

"The real question is: How do you protect investors from the inevitable fraudsters?" Angel said. "That's where the fine-tuning comes in."

With everyday citizens able to invest in new companies at the earliest stage of development, the fundamentals of start-up funding are changing rapidly.

SEC regulations dating back 80 years prohibit private companies from soliciting the sale of securities from individuals other than high-net-worth accredited investors. Meanwhile, the cost of clearing registration hurdles for small-share offerings puts them out of reach of many ventures in need of growth capital.

But with pending changes, the capital-raising method could start to draw closer attention from traditional investors.

"Folks have talked about the issues of having unsophisticated investors getting involved here, the possibilities of fraud, and I think the SEC is going to have to seriously look at this," said Mark Heesen, president of the National Venture Capital Association.