Securities and Exchange Commission rules that took effect Monday will make it easier for companies like Cambridge’s Wefunder Inc. to provide an online platform for start-ups to raise money.
The SEC revised regulations for the first time to allow private companies to publicly solicit for investment dollars in exchange for equity, a major shift in the way fledgling businesses have traditionally been allowed to seek early-stage funding. It means start-ups can now use crowdfunding websites such as Wefunder to raise money.
The change is part of a broader overhaul of securities law as a result of the 2012 Jumpstart Our Business Startups Act, or JOBS, a federal law intended to give entrepreneurs the ability to cast a wider net when seeking money, and give people other than professional investors or bankers the chance to invest in start-ups.
“There’s going to be more capital coming in for start-ups, which is good,” said Mike Norman, an MIT graduate and cofounder of Wefunder. “But what gets me most excited is that start-ups are going to be able to access people who could help them in new ways.”
After the SEC changes were put in place Monday, Wefunder’s site immediately began promoting 25 companies seeking investments, including Terrafugia, a Woburn company working on developing a flying car, and RoomHunt, a San Francisco apartment rental start-up.
Crowdfunding sites like Kickstarter and Indiegogo have become increasingly popular in recent years for letting artists, musicians, entrepreneurs, and others raise money from fans and enthusiasts over the Internet. Typically, someone seeking money offers prospective backers a product, or reward, in exchange for donations. But they do not give backers an equity stake in their venture.
Changes in SEC rules governing the way companies can advertise for investments has drawn criticism and raised concerns among some professional investors, financial specialists, and watchdog groups. In July, Massachusetts Secretary of State William Galvin formed the Internet Crowdfunding and Offerings Watch Department, or I-CROWD, to be on alert for any abuses that could result from the revised federal regulations.
At the time, Galvin was critical of ending the ban on advertising for the sale of securities, saying he worried people might be fooled into making bad investments.
But it’s not just investors who could be duped into making ill-advised financial moves, said John Coates, a Harvard Law School professor. Entrepreneurs could sell ownership stakes in their companies to strangers “who will have rights and expectations that will predictably generate disputes and conflicts.”
There are limits to the new rules. Backers still have to be accredited investors, which means they must have an annual income of $200,000 or a net worth of more than $1 million. And while the JOBS Act has called for additional changes in securities law that would open up start-up investment to anyone regardless of income, the SEC has not issued rules to govern those proposed changes.
Wefunder, which requires a minimum investment of $1,000, also checks out companies that solicit funds through its site, and the founders of those businesses must undergo background checks. Start-ups must also already have the financial backing of a professional investor.
Still, Norman said people using sites like his to invest in start-ups should not commit money without doing their own due diligence.
“These are extremely risky investments,” he said. “Disclosures have to clear and upfront.”
Wefunder itself has attracted a fair amount of interest from investors. Founded in 2012 by two MIT graduates and one from Babson College, the company has already received about $1.1 million in backing.
It also recently participated in the prestigious Y Combinator start-up accelerator program in Mountain View, Calif. The company said it plans to maintain offices in California and Cambridge.
Michael B. Farrell can be reached at firstname.lastname@example.org.