Capital Formation and the Internet: An Alternative Source of Equity Financing for Small Businesses

Authors

• Brandon W. Freeman

Abstract

Traditional methods of equity financing are unrealistically expensive for most small companies with capital needs. Under federal and state disclosure laws, start-up ventures must pay for printing a prospectus, advertising, and mailing, along with legal fees and other expenses, which are often beyond their means. But the Internet is expanding to enable small companies in their early growth stages to raise money from outside equity investors. By accommodating new technologies, the Securities and Exchange Commission (SEC) and state regulators have aided the Internet's expansion into equity financing.

In October 1995, through a Securities Act Release, the SEC endorsed and encouraged the use of electronic media to market and sell securities. The SEC has continued its support by quickly and favorably addressing Internet-related issues in later Securities Act Releases and no-action letters. Many states have likewise adopted measures that encourage Internet securities offerings. Within this expanding regulatory framework, however, many issues remain unresolved.

The first section of this article provides an overview of the federal securities law. The second discusses developments in federal and state securities laws regarding capital formation and the Internet. Next, the article identifies Internet offerings that the SEC should examine to further facilitate capital formation and to provide certainty to market participants.

Recommended Citation

Brandon W. Freeman, Capital Formation and the Internet: An Alternative Source of Equity Financing for Small Businesses, 3 Computer L. Rev. & Tech. J. 37 (1999)