(Bloomberg News) An Internet tool for entrepreneurs to gather small donations got a big boost April 5 when President Barack Obama signed legislation allowing companies to sell equity through crowdfunding websites.

While the law is designed to help young companies grow and create jobs, it may lead to a rise in scams and losses for investors, according to state securities regulators and attorneys. The Jumpstart Our Business Startups Act also eases funding rules for closely held firms and newly public companies.

"States are concerned that the fraud and scammers will come out of the closets now and start using the social- networking sites to rip off investors," said Jack Herstein, president of the North American Securities Administrators Association. State regulators reported almost 3,500 enforcement actions and ordered more than $14 billion in investor restitution in 2010, according to a NASAA survey.

Crowdfunding websites, which have sprung up in the past several years, list offerings from businesses trying to raise small dollar investments from hundreds or thousands of people through the Internet or social-media platforms. Until now they had been able only to take donations from the public, sometimes providing perks such as their product in return.

The bill permits startups to pool capital through crowdfunding by selling as much as $1 million in securities a year. Investors may be able to profit by selling the shares after a required yearlong holding period or if the company eventually goes public. The websites usually charge the businesses a fee or take a percentage of the money raised for listing offerings.

Many of the details around how crowdfunding will work are unclear because the U.S. Securities and Exchange Commission has about nine months to write rules. Businesses would have to reach at least a target offering amount before giving people equity, according to the legislation.

The law also limits how much a person can contribute through crowdfunding. Investors with annual income or net worth of less than $100,000 will be allowed to invest the greater of $2,000 or 5 percent of their income or net worth a year. People with more than $100,000 can invest as much as 10 percent of their income or net worth, up to $100,000.

"That helps tremendously in reducing the damage a huckster can do," said David Marlett, executive director of the National Crowdfunding Association, which formed in March.

'Win-Win'

Individuals contributed about $123 million through crowdfunding globally last year, a 284 percent increase from 2010, according to Daily Crowdsource, a San Diego-based firm that produces industry research and news.

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