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SEC May Make Small Business Investment Easier

Small businesses interested in raising more capital, take note: the Securities and Exchange Commission is reviewing current investment rules for small private firms.

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Small business owners interested in raising more capital, take note: the Securities and Exchange Commission is looking into current fundraising rules for small private firms.

In her testimony before the House Oversight and Government Reform Committee yesterday, SEC Chair Mary Schapiro indicated that the current rules for investment in private companies are restrictive to the point they prevent smaller companies from generating the capital they may need, which ultimately slows economic growth.

In the past, rules such as businesses with more than 499 shareholders or $10 million in assets having to register with the SEC and disclose their financials have kept investment numbers in small businesses relatively low, since this effectively makes such companies public. Which pretty much defeats the whole point of being a private business.

To examine the issue, Schapiro testified that the SEC would be forming a small-business committee specifically tasked to review these and other rules for private small businesses.

"Companies seeking access to capital should not be overburdened by unnecessary or superfluous regulations," Schapiro told the committee. "At the same time, while we have an important responsibility to facilitate growing companies' access to America's investment capital, we must balance that responsibility with our obligation to protect investors and our markets."

Schapiro's statements are pretty much a straight-up response to the rise of what are known as crowdfunding sites, like ProFounder, which enable participants to invest in projects and companies. Currently, such sites avoid the whole SEC investor-limit requirement using a revenue sharing model instead of equity-based investing.

Opponents of the limits currently in place say that crowdfunding sites are constrained by existing rules, and the 499-investor limit should be raised or removed altogether. But the limits are there for a reason, since investors, SEC policy has long maintained, have a right to see the books of the company in which they're investing. Don't expect an outright removal of the investor or asset limits.

But a change is certainly needed: the Internet and the availability of crowdfunding and microfinancing is a huge potential channel for cash investments into any small business that cannot be ignored any longer. Rules that allow more flexibility with such investments, yet still protect vulnerable investors, would be a great boon to small business owners. Particularly now, as they make their slow comeback from the recent recession.


Brian Proffitt is a veteran technology journalist/analyst with experience in a variety of technologies, including cloud, virtualization, and consumer devices. He is also an adjunct instructor with the Mendoza College of Business at the University of Notre Dame. Check out Brian's website, Proffitt Margins, for more information.

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