Successful, million-dollar Kickstarter projects such as DoubleFine Adventure and Elevator Dock have proven that there is a demand for crowdfunding. Small businesses are using intermediaries like Kickstarter to help them pre-sell yet-to-be-developed products, and thousands of “backers” are lining up to accept their offers.
But what if one of these Kickstarter backers wants more than just a game, a tee-shirt, or an Elevator Dock? What if they want a piece of the company or a piece of the project? Wouldn’t it be possible for someone like Tim Schafer to sell stock in his company through a service like Kickstarter?
Not in the United States.
Although crowdfunding for equity is allowed in some European countries, investor protection laws that resulted after the Crash of ‘29 preclude the practice here. But change is in the air. Legislation is working its way through Congress to allow small businesses to sell securities under lighter SEC restrictions.
Congressman Patrick McHenry (R) of North Carolina, introduced H.R. 2930, The Entrepreneur Access to Capital Act. After some debate, H.R. 2930 passed the House by a vote of 407 to 17, where it now sits in the the Senate’s Committee on Banking, Housing, and Urban Affairs.
The bill seeks exemptions in the Securities Acts of 1933 and 1934 to allow companies to raise funds by selling securities under certain restrictions:
- Company can raise $2 million per year by providing investors with audited financial statements. It can raise $1 million per year without providing those documents.
- Risk to investors is limited by restricting levels of participation to the lessor of $10 thousand or 10% of an investor’s annual income.
- Those who sell securities (whether they be the company or intermediaries) will still be subject to certain Securities and Exchange Commission filing requirements, but neither will need to be registered “…as a broker under section 15(a)(1) of the Securities and Exchange Act of 1934 solely by reason of participation in such transaction.”
While H.R.2930 waits in the Senate, it has also been packaged with four other bills to form H.R.3606–a.k.a the Jumpstart Our Business Startups (JOBS) Act, (don’t you just love these names?) which was approved by the House, by a 390 to 23 vote. Those four other bills include:
- H.R. 2940 The Access To Capital For Job Creators Act
- H.R. 1070 The Small Company Capital Formation Act
- H.R. 2167 The Private Company Flexibility And Growth Act (Still in House)
- H.R. 4088, The Capital Expansion Act (The House version of S.1941)
And while all of the bills mentioned so far have “H.R.” in front of them, the Senate has its version too. Senator Scott Brown (R) of Massachusetts, introduced S. 1791, The Democratizing Access to Capital Act.
The largest hurdle these bills must overcome requires convincing lawmakers that investors are protected. With images of Enron and Bernie Madoff fresh in their minds, legislators will be taking a close look at the reporting exemptions from stringent reporting practices such as Sarbanes-Oxley that these bills offer small businesses.
The big questions will come down to risk. How much risk will investors be subject to? On Wednesday, March 21, 2012 the Senate’s Committee on Banking, Housing, and Urban Affairs will conduct an open hearing entitled “Examining Investor Risks in Crowdfunding” to discuss this very topic.
One of the questions that I had after reading these bills was: “And then what?” For example, H.R. 2930 restricts the selling of crowdfunded securities “…during the 1-year period beginning on the date of purchase, unless such securities are sold to–1) the issuer of such securities; or 2) an accredited investor.”
It makes for an interesting future. Let’s assume that a Crowdfunding Law is passed in 2012 and that some crowdfunded securities are sold to investors. At some time in 2013, will these securities be available to sell on the open market? If so, who will handle those sales? Will there be a new marketplace to buy such securities, like a Crowdfunding Stock Exchange?
Networked technologies have given us new ways to work together. Services like Kickstarter have given video game developers new options beyond finicky publishers. Crowdfunding for equity laws will give small businesses capital options beyond neighborhood bankers and traditional investors. If Congress can balance small business’s need for capital with an acceptable level of risk for investors, we may be entering a new era of entrepreneurialism.
What do you think?
Photo Credit: Library of Congress