Crowdfunding & Startup Capital: A Look at Legislative Initiatives to Ease Restrictions

“There has been a lot of talk recently about a phenomenon called crowdfunding, a new type of fundraising that relies on social media and the Internet to raise small amounts of capital from large numbers of individuals. Despite the talk, crowdfunding remains impermissible under the securities laws absent a costly registration with the SEC and with state securities administrators… Crowdfunding would seem to be a viable approach to small company capital formation, if only it were legal.” (The Entrepreneur Access to Capital Act and What It Could Mean for Startups by Sheppard Mullin Richter & Hampton LLP)

In November 2011, the House of Representatives passed the Entrepreneur Access to Capital Act, which would ease restrictions on startups and emerging growth companies that seek to raise capital through crowdfunding. The Senate version of the bill appears to be stalled for the time being, primarily over concerns that less regulation does not adequately protect investors from fraud, but proponents of crowdfunding believe that some version of the bill will pass.

For your reference, here’s a roundup of legal commentary and analysis of the Act and other legislative efforts to allow entrepreneurs and startup companies to engage in crowdfunding activities:

House Approves Bills Providing Crowdfunding and Solicitation Exemptions (Katten Muchin Rosenman LLP)

“… the ‘crowdfunding’ bill would amend the Securities Act of 1933 to add new Sections which would exempt from the registration requirements transactions where the aggregate amount of securities sold by an issuer in a 12 month period does not exceed (a) $1,000,000 or (b) $2,000,000 if the issuer provides potential investors with audited financial statements.” Read more»

Watch out House! Here comes the Senate with it’s own Crowdfunding Bill! (Priore Law Group)

“Bipartisan support combined with a lot of national support seems to indicate that it’s just a matter of time before crowdfunding becomes the next big thing for startups to seek investment. Not to be outdone by the House, Senator Scott Brown of Massachusetts introduced S.1791 ‘[a] bill to amend the securities laws to provide for registration exemptions for certain crowdfunded securities, and for other purposes.’” Read more»

The Entrepreneur Access to Capital Act and What It Could Mean for Startups (Sheppard Mullin Richter & Hampton LLP)

“Despite the enthusiasm for the concept of crowdfunding, H.R. 2930 raises significant policy concerns as well as practical issues of implementation. On a policy level, the use of crowdfunding by small issuers would seem to lead inevitably to results that the securities laws are designed to avoid. The public solicitation of large numbers of relatively inexperienced investors to invest in small untested companies with a minimum of disclosure and almost no supervision will result in unhappiness among at least some investors who lose their money and feel, rightly or wrongly, that they have be defrauded.” Read more»

Crowdfunding: Devil in the Details (Priore Law Group)

“On its face, Senate Bill S.1791 opens the door to crowdfunding websites. The Bill defines key features of crowdfunding such as the limits on the amount a company can raise ($1 million) and the limits on how much an individual can invest ($1,000) in any particular endeavor… S.1791, however, includes a separate clause, Section 7, that limits the ability of organizations to raise money directly from their local community because it requires a third-party intermediary.” Read more»

Regulation A: Crowdfunding’s ugly older brother (Priore Law Group)

“Increasing the opportunities for startups to raise financing is all the rage in Congress. So, with the changes proposed by H.R. 2930, H.R. 2940, and S.1791, it might be easy to miss another important piece of legislation with bipartisan support: The Small Company Capital Formation Act or H.R. 1070. While legislation to allow crowdfunding and public solicitation might capture all the headlines, it’s H.R. 1070 that might just have the biggest impact on financing successful startups.” Read more»

Related Commentary and Analysis

Relaxing The Ban On General Solicitation (Davis Wright Tremaine LLP)

“The ban on general solicitation for startups slows down companies that are trying to raise capital and makes raising capital more difficult. This is unfortunate since according to studies done by the Kauffman Foundation, new companies create the bulk of the new jobs in this country… Congress is attempting to address the issue. The House passed a bill repealing the ban on general solicitation. But the Senate has yet to act.” Read more»

Crowdfunding and Social Media: Is It a Symbiotic Relationship? (Priore Law Group)

“As social media has grown, so has crowdfunding. Although the two might not appear to be directly intertwined, the correlation is no surprise. In fact, social media is a critical component of crowdfunding on the Internet. And, perhaps most importantly, social media and crowdfunding are only becoming more intertwined as crowdfunding becomes more popular, sophisticated, and institutionalized.” Read more»

Commissioner Orders Crowdfunding Facilitator To Stop (Allen Matkins Leck Gamble Mallory & Natsis LLP)

“It is important to note that neither of these bills has been enacted and it remains to be seen what Congress will do, if anything, to facilitate crowdfunding. Unless and until action is taken at the state or federal level to facilitate crowdfunding, it will remain a risky proposition, as illustrated by this Consent Order to Desist and Refrain that was recently issued here in California [against] ProFounder Financial, Inc. [which] established a website to help issuers raise money through crowdfunding.” Read more»


Related: Who Wants to be a Millionaire? Crowdsourcing & MF Global (MarketsReformWiki)

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