The Senate is now considering a bill that would cut the red tape preventing startups from crowdsourcing their funding.
The Entrepreneur Access to Capital Act (HR 2930), introduced by Congressman Patrick McHenry (R-NC), passed 407-17 in the House of Representatives in November and was supported by President Obama.
The crowdfunding bill exempts companies raising $2 million or less from SEC regulations that require them to register deals with the SEC and perform those deals through licensed brokers. With this exemption, startups could raise money on crowdfunding sites in exchange for equity, rather than just soliciting donations.
In turn, the bill would limit individual investments to $10,000 or 10 percent of annual income (whichever is less), and require financial audits for companies raising over $1 million. The SEC has the authority to make these exemptions under the current Securities Act.
Opposition to the bill comes from those worried about small-time investors being lured into poor investments – with the logic that great ideas would easily find large backers. Some also believe that this type of regulation should be left to the states. Two similar bills have been introduced by Senators Merkley and Brown.
Ryan Williams, Grow VC: What are some of the current securities regulations or other regulations that are preventing these small businesses from accessing capital markets?
Congressman Patrick McHenry: What’s unique in the United States is that we have 50 individual states with unique securities laws and registration requirements…What if you have 50 people [investors], one from each state? Well, that would require you to file individual forms in all 50 states, and they’re all unique and different in some way. You’d have to hire law firms that are licensed in those 50 different jurisdictions, and so the barrier to low-dollar equity raising across the country is very expensive…
Let’s say you were…a college student who’s on Facebook in the first year, and they wanted to fund their servers. You could own a little piece of a product you really like, and Facebook could have raised up to $2 million under my bill, and they could have done it [as] $1 from 2 million people across the country. That is a way to open this up and let the crowds determine the products we’re going to support and the companies we’re going to support.
Grow VC: In your discussion with entrepreneurs, have you noticed a particular stage at which they are having a difficult time accessing capital?
McHenry: If you look at my father’s experience in creating his business, he financed his first equipment purchase on a credit card. If you look at what entrepreneurs do in the United States, they’ll get a second mortgage on their home; unfortunately, right now with our housing market, that isn’t open to folks. We’ve changed credit card regulations and so coming by credit via credit cards is more difficult right now…And so those two avenues that we’ve seen are being restricted…And the third avenue would be going to banks and getting the lending. That’s always a challenge in the best of economic times.
Grow VC: Is this just simply a case of technology, namely the Internet, outpacing legislation?
McHenry: Technology and innovation always outstrip regulation…
We also have regulations in the United States that prohibit firms from communication about an offer. So, for instance, if you put a message on Facebook about “invest in my company,” you could be violating federal securities law. Now, that’s absurd…We have on the books today regulations that are 80 years old. We have to update them…The idea of crowdfunding is not new; it’s happening around the world, and we want to just make sure that we keep pace with international competition when it comes to our securities markets, and I think this is a powerful and wonderful way to do it.
Grow VC: Can you explain the role that startups play within the US economy and why they’re so crucial, particularly at this point in time?
McHenry: The power of the entrepreneur in the American economy is real and substantial. And the power of small businesses to power our economic growth in the United States is just absolutely amazing and vital…
The innovative spirit of our economy over the last century has brought us to the forefront in the world. We want to make sure that that spirit can keep going and, as somebody who believes in free markets and believes in creative destruction, I do think it’s important that we lessen the regulatory burden so people can be more creative and innovative and we can have a lot more economic growth.
Grow VC: So what’s next for these various crowdfunding bills?
McHenry: Trying to predict what the Senate will or won’t do is beyond any individual, even a senator. But I am very hopeful that we’ll have action in the Senate; we can get this on the president’s desk this year. We just have to make sure the Senate acts.