IF THE COMMON person wants to become a patron of the arts, the Internet has an answer. At Kickstarter, anyone can browse through the dreams of creative types — a documentary film, works of paint on plexiglass, a “trash truck ballet’’ — and help fund the ones that strike a chord.
But what if the common person wants to be venture capitalist, investing a little bit here and there in businesses with tiny staffs but outsized potential? The Internet now has an answer for this too. It’s a brilliant concept that could create jobs and improve communities. It’s also illegal — at least for the moment.
Imagine a website, like Kickstarter, where a business could describe its plans — anything from a cherished local bookstore that wants to open a cafe to a high-tech start-up that would mean the end of remembering passwords. Then imagine that, unlike Kickstarter, what you gave was not a donation, but a way of purchasing a small piece of the venture.
All manner of businesses, starved by gun-shy banks, would have access to a novel source of capital, and the public would be able to support commerce it believes in. Communities would benefit as neighbors would suddenly have a new way to support local bakeries, fishmongers, and the multitude of other enterprises they want to keep in town. And everyone would benefit as more jobs are created, juicing up our balky economy.
The problem is that the nation’s securities law prohibits raising money this way. The regulations strictly limit who can invest in private companies, and were put in place in the 1930s to crack down on widespread hucksterism.
Imagine a website that would give neighbors a new way to support local bakeries, fishmongers, and the multitude of other enterprises they want to keep in town.
Congress is now considering changes to the law, allowing small businesses to raise relatively limited amounts of money without submitting to the extensive machinery of the Securities and Exchange Commission. The House recently passed the legislation and Senator Scott Brown, who appeared at a forum in Boston last week to pitch the idea, has offered a smart bill of his own.
The great looming fear, just as it was decades ago, is the threat of fraud. Human nature hasn’t changed much in the intervening years, but the world has. There are now easy ways to limit the risks, and unleash the power of micro-investing.
Probably the most powerful argument for it is eBay. A marketplace where complete strangers buy and sell goods, sight unseen, would seem a perfect recipe for massive deceit. Yet eBay has grown into a vast, effective enterprise, with many happy customers and billions of dollars in goods sold every year. One simple reason is the power of reputation. Buyers can see what others have said about a seller before they purchase. When people can easily share information - a forte of the online world - it is a lot more difficult for bad actors to get traction.
Crucially, Brown’s bill would require that people invest through an “intermediary,’’ an organization that would have to register with the government and would broker the deals, the way eBay brokers auctions. The Boston-based WeFunder hopes to be one of these intermediaries. It is hosting a petition drive in support of the legislation: More than 2,500 people have signed, pledging to invest $6.5 million if the law is changed.
In the United Kingdom, the laws are different and the idea is already working. A venture called CrowdCube started just a year ago and has already raised nearly $4 million, according to Amy Cortese, author of “Locavesting.’’ CrowdCube does extensive screening of a business before allowing it to appear. It requires a detailed business plan, and the public can ask the business tough questions - all in a public forum, for all to see. It’s crowd-vetting. People may yet lose money, of course, but no fraud has been reported.
Another simple protection is to limit the amount that people can invest, limiting losses. Brown has suggested $1,000.
Massachusetts, with its hordes of innovators, would particularly benefit from modernizing the nation’s investment rules. Money would flow here. Businesses would launch and expand. Some would do very well indeed, with a crowd of small investors cheering them on. As Brown said, “There are sectors where we could just blow the doors off.’’