As investors seek next big thing, crowdfunding may be the answer

WASHINGTON - Crowdfunding is about to go big-time.

Once just a hip way of raising money to make a movie or help out a good cause, crowdfunding is expanding to a whole new arena. But in the coming year, start-ups may be allowed to sell stock in their companies over the Internet to a national pool of small-time investors.

For those investors, it's a chance to make a profit and possibly get in early on the next Twitter or Facebook. But it's also extremely risky, given that a majority of start-ups fail. And critics warn that investment crowdfunding is ripe for fraud.

The Securities and Exchange Commission on Wednesday took a step toward implementing a law passed last year that would allow companies to issue stock through crowdfunding. The SEC voted 5-0 to send regulations for the practice out for public comment. Final rules could be approved next year.

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.

Crowdfunding is hardly new. Sites like Kickstarter and Indiegogo have for years helped fund projects through donations raised online. Through those sites and others, supporters can pledge $10 - or tens of thousands of dollars - to help start a project, be it a business, a charity, or the arts. In return, supporters can receive a gift, such as a T-shirt or a song named after them. Or they can simply feel satisfied knowing they helped a good cause.

But under the law enacted last year, business would be able to offer investors a piece of the company for the first time. Investment crowdfunding could be a pathway to getting in early on the next big trend. Experts warn that the reality is nearly 55 percent of start-ups fail within five years.