Brace yourself—crowdfunding is coming. For small investors it will be either a great “level-the-playing-field” opportunity to get in on the ground floor of promising startups or a federally sanctioned invitation to fraud on a scale not seen since the boiler-room days. Or both.

Equity crowdfunding will allow entrepreneurs to sell unregistered shares directly to all sorts of investors via the Internet. It’s part of the bipartisan Jumpstart Our Business Startups (JOBS) Act that President Obama signed in April. The Securities & Exchange Commission is supposed to finalize the rules that will implement the act early next year.

Without going through an expensive and onerous SEC registration, companies will be able to sell up to $1 million of stock per year to an unlimited number of investors. Individuals who earn less than $100,000 a year can invest up to $2,000 per company per year; wealthier folks can invest 10% of their income up to $100,000.

If a company is trying to raise $100,000 or less, the executive officer must certify the veracity of financial statements and provide prior-year income tax returns. Those raising between $100,000 and $500,000 must take the ­additional step of having an independent certified public ­accountant review financials. Offerings of more than a half-million dollars will require audited financial statements.

Even before the passage of the JOBS Act, crowdfunding was growing fast. In 2011 an estimated 452 crowdfunding platforms worldwide (but mostly in Europe and North America) raised nearly $1.5 billion, according to a May report from Crowdsourcing.org. That study estimates volume will hit $2.8 billion in 2012.

But growth could be exponential once the SEC issues the new rules. That’s because U.S. crowdfunding sites like Angel List have been (under pre-JOBS law) able to sell stock only to “accredited” investors—those with a net worth of more than $1 million or an annual income of $200,000 or more ($300,000 for a couple).

For all the buzz about Kickstarter—it has raised more than $230 million for 23,000 “projects” since 2009—it does not sell equity. (It isn’t interested in equity projects, its founder said recently.) Instead, the public makes donations and gets some sort of premium reward. So Kickstarter projects tend to be small, artsy or fun. Example: Mystery Brewing Co. in Chapel Hill, N.C. raised $44,259 in 2010 from 243 backers. In exchange for donations of $5 to $5,000, backers got logoed bottle openers, T-shirts, framed posters, home-brew recipes and tulip-shaped beer glasses.

The JOBS Act opens true equity crowdfunding up to the masses. “The target audience is likely to be unsophisticated,” says Stephen Goodman, an attorney with Pryor Cashman LLP in New York. “We already know the SEC has been extremely skeptical of this [crowdfunding] process.”

Posted From ; http://www.forbes.com/sites/johnwasik/2012/06/06/what-you-need-to-know-to-profit-from-crowdfunding/