Lance Iversen / The Chronicle

Ian Schuster (rear) and Mike Johannsen work on a craft beer for their startup, Schubros Brewery, in their San Ramon test kitchen. Crowd funding would help it expand faster, Schuster says.


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Ian Schuster and his business partners have raised almost a quarter of a million dollars to launch their craft beer brewery company, but if they had more money, they could grow the business much faster.

Bryan Brumfield has poured most of his life savings into the artisanal wine business he plans to start after he retires as an Oakland firefighter in March and needs additional capital to bring in outside expertise.

Daniel Hsu has networked up a storm on social media for his e-commerce clothing site and now needs $10,000 in startup capital.

All three entrepreneurs would love to tap the power of social media to find additional investors online who would each put up small amounts of money in exchange for equity stakes in their companies, a concept called “crowd funding.”

But they can’t do so under current law. Companies can sell shares to what the SEC calls “accredited investors” – seasoned, high-net-worth people who understand the risks. But financial stakes for small-time investors are limited to 35 people (fewer in some states), just enough to enable some friends-and-family funding, but not enough to harness the Internet’s reach to attract a larger number of equity investors.

Popular websites like Kickstarter and IndieGoGo show the power of crowd funding by letting people request funds online from strangers to back specific projects – a theatre performance, for instance. But the people who pledge money can only receive perks like T-shirts, not equity shares, in exchange.

Lending sites

Then there are lending websites like Prosper.com that facilitate person-to-person loans. People ask to borrow money for anything from plastic surgery to starting a company and offer a fixed interest rate in return. But again, equity stakes are not allowed.

Now, legislation pending in Congress that enjoys strong bipartisan support and Obama administration backing may make crowd funding possible for entrepreneurs.

Crowd funding “has the potential to be a powerful new venture capital model for the Facebook and Twitter age and its potential to create jobs is enormous,” said Sen. Scott Brown, R-Mass., in congressional testimony last month. “But crowd funding is currently illegal because of obsolete regulations, some dating back to the 1930s. Imagine that – the next Steve Jobs is being held back by rules written during the age of the typewriter.”

Brown is sponsoring the Democratization of Capital Bill, which would let small companies sell up to $1 million in equity online in chunks of $1,000 or less. It is under review by the Senate Committee on Banking, Housing and Urban Affairs.

A similar bill, the Entrepreneur Access to Capital Act, passed the House in November by a wide margin. It would allow up to $2 million in crowd funded investments in $10,000 increments.

But some industry experts worry that crowd funding would entice online hucksters to set up shop.

“A lot of people believe everything they see on the Internet, so we are concerned about fraud,” said Jack Herstein, president of the North American Securities Administrators Association. “Scam artists follow the hottest trends. They could make up fraudulent websites (pretending to be legitimate businesses seeking crowd funding). The mom-and-pop retail investors won’t know who’s on the other side of those websites. Once you push the button and send your credit card number, your money is gone.”

Still, he said, he is not opposed to crowd funding – he just wants to make sure there are built-in safeguards to protect investors. “Everybody should be behind anything that helps the economy,” he said.

That’s exactly the argument made by proponents of crowd funding. The role of small business in job creation is well documented. At a time when banks are reluctant to make loans, allowing small enterprises to solicit funds online so they can start up and grow makes sense, supporters say.