The crowd effect.

• Author: Morton, Heather
• Position: TRENDS - Federal rules on equity crowdfunding - Brief article

The internet's ease at reaching a "crowd" of people instantaneously is attracting a growing number of businesses, charities, organizations and individuals interested in raising money for a variety of reasons, quickly.

Entrepreneurs are especially interested in equity crowdfunding. That's where companies (usually start-ups) solicit donations by offering promissory notes to the would-be investors for future shares of the company's stock.

Given that nearly 50 percent of start-up companies fail within the first five years, however, it's a high-risk investment. The potential for scams and people losing large amounts of money is big.

The Securities and Exchange Commission just released--after four years of working to support entrepreneurs while protecting investors--its carefully drafted rules on interstate crowdfunding, which were required by the 2012 federal JOBS Act.

State and federal laws have governed the issuance of securities and have required companies selling stocks to register them, which can cost a lot of...