When 'Friending' Becomes a Source of Start-Up Funds

Social networking is pretty good for keeping abreast of far-flung friends. Could it work for entrepreneurs looking for investors?

Critics say the idea is dangerous for investors, and even dicey for the entrepreneurs. Yet, it is gaining traction with small-business owners from the Bay Area to New York, who say they eagerly await an opportunity to sell stakes in their businesses through social networking—a process known as crowd funding.

The House Financial Services committee last week backed legislation that would make it possible for small businesses to use crowd funding to raise money from investors in exchange for equity stakes.

Under the proposal, investors would be able to buy stakes of up to $10,000 a year, or 10% of their annual income, whichever is less. Companies would be able to sell up to $2 million in equity—but must provide audited financial statements if the total exceeds $1 million.

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