Can a web-raise legally replace Angels and VCs?

Want to raise $50k for your start-up? There’s a site for that.

I had thought there were laws about raising money from the general public, but social media fora may have begun the trend of undermining the role of regulators. According to the Wall Street Journal last month, there are at least four sites that serve as a vehicle for entrepreneurs to raise start-up capital: ProFounder.com, Peerbackers.com, Kickstarter.com and IndieGoGo.com.

It is hard to tell if this is a new form of capitalism at work, entrepreneurial charity or just the American version of microlending:

In September, Mr. Chang used ProFounder to create a private fund-raising Web page, showcasing the business plan of Uncle Clay’s House of Pure Aloha LLC. He invited 75 family members, friends and customers to view the plan and asked them to contribute money. Nineteen people invested a total of $54,000 in exchange for a 2% cut of the store’s revenue over four years, starting in late 2011.

“Raising capital through the community, through a more democratic process—it was just a perfect match for our business,” says Mr. Chang, now a business partner at the shop.

Mr. Chang is now trying to raise another $60,000, using a public profile on ProFounder, allowing strangers to invest as little as $100. Like the private investors, they get a 2% revenue share for four years—but only until they are repaid. Any additional returns they receive are donated to charities.

The last part is clearly the hook for some, even if you hard core capitalists find it amusing. You invest your dough in exchange for a royalty, and once it comes back, the profits go to charity. Seems like a risky way to donate money to me, but the buzz that goes with that mindset has attracted some very high profile supporters, including the founders of LinkedIn and SecondMarket. Both seem like natural fits for any firm trying to connect people via the web.

Some of the sites have real VC backing, and I expect this phase of the business model won’t be the last. It will be fascinating to see how the market regulators face up to this new reality, if social media become an effective tool to raise capital for your business.

MRM