More Cash for Start-ups?

New legislation could expand crowdfunding options through websites such as Kickstarter and IndieGoGo.

Susan Walsh/AP;

Seal of Approval President Obama's American Jobs Act includes one entrepreneur's proposal to boost crowdfunding.

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Crowdfunding sites such as Kickstarter and IndieGoGo have helped artists, musicians, and entrepreneurs collectively raise millions in small donations from online users. Soon, if Sherwood Neiss gets his way, start-ups may be able to tap into the power of crowdfunding as well.

Neiss co-founded FlavorX, a Columbia, Maryland–based company that makes flavorings for children's medicine. (FlavorX was the subject of Inc.'s June 2003 cover story, "The Heart of a Company.") Last year, Neiss started working on a new business, Easy Answers, a polling app for smartphones. After struggling to raise capital, Neiss began looking into crowdfunding. But he found the donation-based system limiting. Couldn't entrepreneurs raise more money, Neiss reasoned, if they were allowed to offer investors a potential return?

But under current regulations, companies are largely barred from publicly advertising private stock offerings. And businesses may be required to register with the Securities and Exchange Commission if they raise money from more than 35 people (excluding accredited investors, such as angels). Plus, if private companies have more than 500 shareholders, they may have to disclose financial information to the SEC, as most public companies do.

In February, Neiss began lobbying legislators for what he calls a start-up exemption. He asked that companies with less than $5 million in annual revenue be allowed to raise up to $1 million from investors via crowdfunding—without reporting to the SEC.

Recently, the idea has gained bipartisan support. In September, President Obama included Neiss's crowdfunding proposal in the American Jobs Act. About a week later, Republican Congressman Patrick McHenry of North Carolina introduced the Entrepreneur Access to Capital Act, which is expected to come to a vote by the end of 2011. If passed, the bill could allow start-ups to raise up to $2 million from an unlimited number of investors in chunks of up to $10,000 each.