By KENT HOOVER
khoover@bizjournals.com

Bipartisan support is building for allowing small businesses to use Internet platforms to raise capital from large numbers of individual investors through "crowdfunding."

This concept already is being used to raise contributions for films, books and other ideas that don't offer a return on investment, other than a T-shirt or some other perk. More than 500,000 projects have been funded through crowdfunding websites such as Indiegogo and Kickstarter, according to Sherwood Neiss, an entrepreneur in Miami Beach, Fla., who co-founded FLAVORx, a company that makes medicine taste better.

Securities and Exchange Commission rules, however, make it difficult for businesses to raise money through crowdfunding. Neiss and other small-business advocates want the SEC to provide a crowdfunding exemption to its registration requirements.

They've won support from President Barack Obama, who endorsed crowdfunding in his jobs plan as a way to help entrepreneurs. Rep. Patrick McHenry, R-N.C., introduced legislation this month that would direct the SEC to provide a crowdfunding exemption for small businesses that are trying to raise up to $5 million. Individual investments would be limited to $10,000 or 10 percent of an investor's income.

McHenry said his bill would "allow everyday investors to connect with entrepreneurs. In today's fast-paced world of information and innovation, all Americans, rather than just banks and venture capitalists, should be able to invest in the next Google or Apple."

"I think we have about a 90 percent chance of making this happen," Neiss said.

Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council, also is optimistic.

Kerrigan said she was "pleasantly surprised" that Obama included crowdfunding in his jobs plan and hopes the president will continue pushing it.

"I think small-business owners need new sources of capital," she said, noting that credit is still tight.

"Legalizing crowdfunding would be a great breakthrough for the entrepreneurial sector," she said.

At a Sept. 15 hearing on McHenry's bill, an SEC official acknowledged crowdfunding's potential.

"This source of capital and the ease with which an individual can communicate with and access investors electronically presents an opportunity for smaller companies in need of funds," said Meredith Cross, director of the SEC's division of corporate finance.

But, she added, "an exemption from registration and the investor protections provided thereby also would present an enticing opportunity for the unscrupulous to engage in fraudulent activities that could undermine investor confidence."

"Crowdfunding investors may have limited investment experience, limited information upon which to make investment decisions and almost no ability to negotiate for protections," Cross said.

Neiss said the  concern could be addressed by requiring background checks on businesses that try to raise money through crowdfunding platforms. Investors should have to verify that they understand there is no guarantee of return on their investments and, in fact, they could lose their entire investment, he said.

The "crowd" aspect of crowdfunding also offers strong protections against fraud, he  said.

"Opening the funding process to the general public adds transparent and trust signaling," he said. "It's much harder for fraud to occur when the whole world is watching on an open and transparent platform, especially with credibility and performance ratings that are visible to the community."