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Internet technology offers the potential to reduce the search and information costs associated with capital formation. Commentators have suggested that the Web will enable small business to achieve better access to the capital markets. To facilitate this access, they have suggested regulatory reforms to make internet offerings cheaper and easier. At the same time, small business offerings have been identified as among the most risky, offering a caution to those who counsel regulatory reform. This article examines the existing regulatory climate. State and federal regulators have adopted a number of recent reforms to facilitate the use of the internet and to reduce the regulatory burden on small business offerings. The article explores proposals for further reform and evaluates the existing evidence on the extent to which previous regulatory changes have affected the use of the internet for small business capital formation. The article concludes that, despite these reforms, small businesses have had limited success to date in using the internet as a substitute for traditional financing methods. The article goes on to consider the effect of substituting public capital markets for traditional small business financing sources, such as banks, angel investors and venture capital, if technological and regulatory change makes this substitution possible. In particular, the article identifies nonfinancial benefits that banks and private equity provide to small businesses through active managing and monitoring. Shifting the source of small business capital may sacrifice of these benefits, at the cost of future business performance.

Publication Title

Journal of Small & Emerging Business Law

Publication Citation

2 J. Small & Emerging Bus. L. 57 (1998)