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TheStreet Open House

Businesses, Brushed Off by Banks, Look to Customers for Funding

The Jumpstart Our Business Startups Act (JOBS Act), signed by President Barack Obama in April, included a provision to allow for smaller companies to raise up to $1 million in equity per year through crowdfunding. The rules essentially exempt the companies from certain securities laws that require them to go through Securities and Exchange Commission filing requirements in order to raise the equity.

Congress put the SEC in charge of hammering out equity crowdfunding regulations, primarily related to how crowdfunding portals would be regulated (should they be broker-dealers, for instance) as well as ensuring investor protections against fraud. The rules are supposed to be in place by Dec. 31 (with implementation in 2013), but with last week's resignation of SEC Chairman Mary Schapiro, that could mean the rules will be delayed, according to an article in The Washington Post.

Still, small businesses are eager to jump on the bandwagon.

Crowdfunding is "really going to lead to a renaissance in all types of business activities," says William Michael Cunningham, author of The Jobs Act: Crowdfunding for Small Businesses and Startups and a social policy investing analyst. Besides funding, "the key part of crowdfunding is that it also serves as a mechanism to validate your product."

"The real exciting part is when you start to see daycare centers and other facilities serving communities that have been locked out or can't get financing" have successful crowdfunding campaigns, Cunningham says.

Phil Simon, a technology author and entrepreneur, says that, while funding is important, the platforms also allow ideas to be vetted to the public before investing in a potentially failed idea.

" Amazon (AMZN) is great, but I don't know who buys my books ," Simon says. "When people pledge, you can communicate with them. That's incredibly useful."

Simon thought the lag time between book submission and publication for his first two books were too long, especially for the ever-changing technology world. He decided to create his own publishing company, but needed funds to get started.

He raised $4,000 through a Kickstarter campaign and was so satisfied with the experience, he underwent a second campaign to publish his fourth book.

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