In case you haven't noticed, the IPO market is rigged against you. The low-float debut pop tactic that's in vogue this year masks a more troubling trend of IPO underperformance, especially when debuting companies are hyped to the moon.

If you've envied the hedge funds and venture capitalists that place the first bets on tomorrow's juggernauts, you'll be interested to know that Congress, for once, appears to be on your side. The House passed a bill in November allowing start-ups to use small-scale crowd funding to raise seed capital, and a similarly styled Senate bill is working its way through committee. Read on to find out what it all means for you.

Crowd funding 101
Both bills would modify the long-standing Securities Act to permit start-ups to generate seed capital by going to the crowd, so to speak. A company that needs capital will nearly always file for IPO or raise money from accredited investors, which are firms or individuals whose net worth can hurdle some reasonably high bars.

The reason crowd funding hasn't yet had an impact lies in the murky waters of private equity sales, which restrict buyers by net worth, require firms brokering deals to register as broker-dealers with the SEC, and prohibit companies from passing the funding basket around in public. That logic, born out of the rampant speculation that led to the Great Depression, is simple. People who don't have anything to fall back on shouldn't bet the farm on a long shot, the very definition of a start-up business. Statistics may vary, but tend to agree that most start-ups are out of business within four years.

Changing attitudes
Here's a more complete list of what the two crowd funding bills would allow:


House Bill

Senate Bill

Passed? Nov. 3, 2011. No; introduced Nov. 2.
Funding limits? $1 million per year; $2 million per year if the company offers audited financial statements. $1 million per year.
Crowd limits? Investors must pass a financial literacy test and are annually restricted to investing the lesser of $10,000 or 10% of their annual income in any one company. Investors must pass a financial literacy test and can only invest $1,000 in any one company in a given year.
Issuer requirements? Issuers (whether company or crowd funding site) must warn investors of the speculative nature of start-up investing; conduct a financial literacy test on potential crowd funders; obtain and provide to the public various pieces of relevant information on the company; refuse to offer financial advice, and verify the income of potential investors, as necessary. Provisions are roughly identical to the House bill, with the exception that only crowd funding intermediaries may work with small investors directly -- companies are not given direct power to sell equity this way.
Supersedes the states? Yes. In most cases; exemptions are given to the states in cases such as those where more than half of crowd funding investors for a given round live in the same state.
Securities restriction? Investors may not sell their stake for one year, unless it's back to the company, or to a typical accredited investor. Blanket one-year holding requirement.
Want to learn more? Read the full bill here. Read the full bill here.

Sources: Library of Congress and House Rules committee.

The House version is said to be favored by the White House, so the final combined bill will probably look much the same as the one already through the gauntlet.

What's in it for the little guy?
The final bill's impact on ordinary investors may be muted. Having a larger base of funding might seem like a nice benefit until factoring in the extra accounting and compliance effort the SEC demands for each new investor. Crowd sourced investors aren't counted against the SEC's private investor limit, but they also bring in a pittance compared to what's possible. Groupon (Nasdaq: GRPN), for example, raised $130 million in a single funding round last year. Admeld, set to be subsumed into Google (Nasdaq: GOOG), has raised $30 million since 2008. Even Angie's List (Nasdaq: ANGI), a flabbergastingly unprofitable site, managed to convince people with more money than sense to fork over $50 million in a private offering this March.

Crowdsourcing some final thoughts
The best start-ups get acquired or go public, but very few with promise have much difficulty finding money. If "financial literacy" is poorly defined and easily short-circuited, crowd funding might become a gray-market shell game in which investors are at the mercy of unscrupulous fraudster-preneurs. It's admirable to help the little guy get his foot in the door, but not if the only doors available lead to warehouses full of garbage.

Take our poll below and tell us if you'd like to invest in a start-up.

If you're looking for a growth play with more certain prospects, take a look at the Motley Fool's selection for the hottest IPO of 2011. In this report, you'll find out about Latin America's most exciting franchise opportunity, which could become the next McDonald's for investors. Get your free copy today before the rest of the market catches on.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.