But under the law enacted last year, businesses would be able to offer investors a piece of the company for the first time. Fundraising over the Internet could be a pathway to getting in early on the next big trend. Experts warn that nearly 55 percent of startups fail within five years.
Still, the latest iteration of crowdfunding could help those startups that failed to attract attention from venture capitalists. Supporters say this kind of investment crowdfunding could create jobs and boost economic growth in overlooked areas of the country, such as the Midwest.
New businesses there don’t have access to pools of capital provided by Wall Street or Silicon Valley, says Robert Hoskins, who does public relations and marketing for crowdfunding ventures.
“It’s going to save America’s butt,” he said.
But investor advocates and other critics express concern that this new arena of investing could be a breeding ground for fraud.
While many companies are started by entrepreneurs with good intentions, “there could be some sharks out there as well,” said William Beatty, the director of securities in Washington state. “I hope a lot of people don’t get hurt,” he said in a telephone interview.
SEC Commissioner Luis Aguilar said unscrupulous operators could use investment crowdfunding 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.