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The University of Tennessee, Knoxville

Crowdfunding: Where Social Networking Meets Venture Capital

Joan M. Heminway, Distinguished ProfessorCollege of Law

The meteoric rise of Facebook, Twitter, LinkedIn, and other social networking web sites presents many opportunities and challenges for law, society, and the economy. With small businesses—historically engines of economic growth—finding it difficult to raise start-up funds and capital for new projects, social networking seems like a logical way to find new "friends" from whom to raise the necessary investment dollars. This form of raising monies has become known as “crowdfunding,” and has been popularized by websites like Kiva and ProFounder. Yet, securities regulations in the US effectively prevent ventures from using the Internet to raise funds that generate returns to investors because of required compliance with a resource-intensive federal and state registration process. The main fear of regulators is that investors will be defrauded on the faceless Internet. Can we legalize desired forms of crowdfunding without creating an opportunity for fraud and other misuse?​

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