Senate Passes Crowd-Funding Legislation
Vol.
905
March 27, 2012
Offering small businesses a new way to find capital, the
U.S. Senate has passed legislation that allows entrepreneurs to solicit equity
investments from the general public – a practice known as crowd-funding. The
measure is part of the broader Jumpstart our Business Startups (JOBS) Act,
which is expected to quickly gain approval in the U.S. House, before being sent
to President Obama to sign. “Crowd-funding will allow
small businesses to bypass Wall Street and go straight to Main
Street for financing, freeing every American to
invest in a local business or the next great idea,” said Senator Scott Brown
(R-MA).
The Senate bill, which amends previously-passed U.S. House
legislation, effectively removes certain regulatory obstacles put in place by
the Securities and Exchange Commission (SEC). Currently, the SEC requires
private companies to register with the agency before seeking the backing of
investors. Providing what amounts to a registration exemption, the
crowd-funding bill increases the reporting threshold to 2,000 investors, up
from 500. Smaller businesses will now be able to raise
up to $1 million from investors through SEC Web portals, while only providing
the agency with basic information, rather than extensive financial records.
Meanwhile, investors can join a “crowd” of other financial
backers of a company, spreading risk and buying early stock in a company they
believe has potential for profit and growth. Individuals with an annual income
of less than $100,000 can invest up to $2,000 or 5% of their annual income –
whichever is greater – in any one deal in a given year. People with an annual
income of $100,000 or more will be capped at a 10% investment, up to a maximum
of $100,000 for a single investment.
Critics of the legislation argue the deregulation will have
little positive impact on businesses and will instead likely fuel a wave of
scams. Yet, crowd-funding supporters feel the legislation is too strong to be
undermined by scammers. “You can have crowd-funding take place with minimal
amounts of fraud and illegality,” said Representative Patrick McHenry (R-NC). |