March 23, 2012
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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