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Senate Passes Crowdfunding Bill, Following House’s Lead

Crowdfund Act

The US Senate passed a bill yesterday that would allow startups to crowdfund their investments – and have access to cash when traditional investors are hard to come by.

This victory for the CROWDFUND Act follows passage of the similar JOBS Act in the House; now, the two are waiting to be reconciled and signed by President Obama (who has supported such bills) before going into effect. As we explained previously, these crowdfunding bills exempt businesses raising “small-dollar investor” money from regulations that are prohibitively costly and time consuming.

But not everyone is cheering this move, which critics say exposes unsavvy investors to risks of fraud or deception. That’s why the CROWDFUND Act was framed as a compromise: crowdfunding must be done through SEC-registered platforms, and the bill would:

“require crowdfunding portals to provide investor protection, including investor education materials on the risks associated with small issuers and illiquidity.”

With those caveats in mind, startups and other businesses can raise up to $1 million per year. But individual investments are limited: the most you can donate is $100,000 (if you make $1 million or more). For the rest of us making under $100,000, we can contribute up to $2,000 or 5% of our income (whichever is higher).

But a few questions remain unanswered, mainly: what will it take to register with the SEC as a crowdfunding portal? Depending on how rigorous the process is, it may be a while before crowdfunding becomes a reality. But if it’s not a hassle, we could see a lot of new crowdfunding startups competing to handle our micro-investments.

The CROWDFUND Act (full text here) was introduced by Senators Scott Brown (R-MA), Jeff Merkley (D-OR), and Michael Bennet (D-CO). In the pro-business rhetoric of Brown:

“With this bipartisan compromise we are now closer to freeing Massachusetts’ small businesses to use the powerful tool of crowdfunding,” he said. “It’s time to level the playing field for investors so that anyone can provide the seed money that will allow the Bay State’s innovative startups and entrepreneurs to grow their businesses and create jobs.”

(The same for startups in the other 49 states, too.)

Is this a positive step? The general public may not be able to distinguish a cool app from a profitable business, but does it matter? Let us know what you think.

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About the Author

Kira M. Newman is a Tech Cocktail writer interested in the harsh reality of entrepreneurship, work-life balance, and psychology. She is the founder of The Year of Happy and has been traveling around the world interviewing entrepreneurs in Asia, Europe, and North America since 2011. Follow her @kiramnewman or contact kira@tech.co.

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7 Responses to “Senate Passes Crowdfunding Bill, Following House’s Lead”

  1. Jeff Segal

    I'm flabbergasted — our dysfunctional leadership got this just about right. For everyday investors who want to see their money actually working — as opposed to being a drop in the bucket for multibillion dollar corporations or money-management firms — crowdfunding is a brilliant alternative.

    Reply
  2. Peter Herring

    I've been involved over the past week in conversations with folks from around the world on the issue – crowdfunding as an equity raise is legal in UK, Australia, other countries, and is working. I suspect that a lot of the hesitancy concerning the bill, and the insufficient caps, has as much to do with keeping the big boy investors in the game as it does with the official handwringing over the "unsophisticted investor". (Do we expect some fraud? Sure, but anything along the lines of Mr. Madoff's $64B bilking of "sophisticated" investors? Hardly.) After all, I can go out today and raise up to $5MM on a 505D raise, including 35 unaccredited investors. The safeguards are already in place, all that ever needed to happen was apply the Reg D standards to crowdfunding and we're off to the races. Nonetheless, I applaud this stage as the first stage in the "legalization" of the democratization of capital, with more to come.

    Reply
  3. Andrea Fuentes

    Thank you Peter Herring! I cringe when I hear people talking like a small start up taking small investments is somehow going to "bilk" investors, with the way the American taxpayers and homeowners got hammered with the bank bailout, the Goldman-Sachs influenced mortgage bubble, and of course good old Bernie Madoff. Yet I can't even post on Angelist that my start up is in the process of a small seed round of financing? It's ILLEGAL?

    Reply
  4. @jasonacobb

    I think it will be interesting how the existing crowdfunding sites / companies embrace this or leave it behind. Will potential investors / clients require this from a company like kickstarter or will it just be viewed as unnecessary overhead to slow projects down? I think it's a great idea but I don't perceive it to be a clear requirement driven by clients or investors.

    Reply

Trackbacks/Pingbacks

  1.  President Obama Signs JOBS Act, Allowing Crowdfunding
  2.  New JOBS Act legalizes Crowdfunding as a source of finance for entrepreneurs in the US « INNOVATION FOR SOCIAL CHANGE

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