When Pabst Blue Ribbon, the Milwaukee-based beer company beloved by hipsters, was up for sale a couple of years ago, two advertising execs had an idea: Why not reach out to other PBR fans via Facebook and Twitter to raise the roughly $300 million that would be needed to buy the company? The men received pledges from 5 million people totaling $200 million - or about $40 a person - before the Securities and Exchange Commission shut them down. The problem: they did not register the securities with the SEC. Companies are required to register with the SEC and provide financial and other disclosure to investors to help them make informed decisions - basic investor protections established after the Great Depression to deter scam artists. But registration is costly, and, as the PBR example shows, many people aren't aware of the basic laws regarding capital raising.
At the same time, crowdfunding is emerging as a powerful way for companies to raise money by aggregating small sums from many investors—especially when banks are reluctant to lend and the stock market is closed to many smaller firms. Although fundamentally flawed, the PBR campaign shows the potential of crowdfunding—when done right. (So does the wild popularity of Kickstarter and Kiva, but those sites do not promise any profit or ownership). The SEC has a duty to protect, but our Depression-era laws are woefully outdated in the Facebook age, and all too often hinder the flow of capital to worthy businesses that would use the money to develop new products, hire workers and expand. Social media and technology are making it possible for companies to reach out to their loyal customers and supporters in new and transparent ways. The SEC should be studying how to harness that power for productive use. A proposal before the SEC would exempt crowdfunded investments of $100 or so per individual from registration. More on that here.