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Newly Legal: Buying Stock in Start-Ups Via Crowdsourcing

Amateur investors may soon be able to use crowdsourcing to buy equity in start-ups. But should they? At least one expert–the author of a report on Kickstarter–recommends caution. Under a newly implemented provision of 2012′s “Jumpstart Our Business Start-ups Act” (JOBS Act), it became legal this week for small start-ups to solicit investments publicly, via the Internet. They can sell shares without first having to register them with the Securities and Exchange Commission. An entrepreneur in need of cash can raise up to $1 million a year, provided he or she sells shares only to “accredited” investors—meaning ones who can show they have a net worth of more than $1 million or income of over $200,000 a year. Such sites as RockThePost already sell equity to accredited investors, who lawmakers and regulators regard as being more sophisticated than less-affluent ones (and thus better able to assess the risks inherent in new means of funding). Ethan Mollick, a professor of management at the Wharton School of Business, has studied social media funding platforms extensively. His paper, “The Dynamics of Crowdfunding: An Exploratory Study,” looks at the outcomes of some 48,500 Kickstarter projects, which collectively raised $237 million donated dollars. He tells […]

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