Could Facebook Raise Capital For Entrepreneurs?

Social networks, including Facebook, may become platforms for small businesses to raise capital, if the U.S. House of Representatives has its way.

The House Financial Services committee last week passed legislation that would remove a Securities and Exchange Commission rule that makes it harder for companies to raise money by seeking small contributions.

Removing the rule would allow for so-called “crowd funding” of new business entities through social networking sites.

The bill, H.R. 2930, also called the Entrepreneur Access to Capital Act, would specifically enable new businesses to use crowd funding to accept and pool donations of up to $1 million without having to register with the SEC.

In exchange for the investment, funders would receive an equity stake in the business. Under the current restrictions, contributors can get token gifts but they don’t expect to make a profit for their investment.

The proposed bill is sponsored by Republicans, the party that controls the majority in the House, who believe that removing restrictions for entrepreneurs will boost investment in start-ups and spur job growth and creation.

The bill will go to the House floor for a vote later this week, and it is expected to pass with support from both sides of the aisle, before moving to the U.S. Senate. There’s concern, however, that state regulators will try to halt enactment of the legislation if it passes.

The engagement and connectivity that Facebook and social networking allows also comes with disadvantages, such as spam and malware. Critics of the proposed bill fear it could breed fraud and put less savvy start-ups at risk.

A story in The Wall Street Journal cites several critics who say the proposed changes would hurt small businesses because they don’t have the resources to deal with outside investors.

I’m skeptical about whether Facebook would become a viable source of funding for entrepreneurs if the bill is passed.

Perhaps some of the social networks designed specifically for crowd funding, such as RocketHub and Peerbackers, could offer businesses more protection and allow entrepreneurs to build targeted networks of potential investors.

If nothing else, the strategy of raising capital is perhaps one tool in a broader toolkit that new business entities could pursue to draw investors.

Do you think Facebook is a viable platform for raising capital?

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