Congress Passes Crowd-Funding Legislation
Part Of Jumpstart Our Business Startups (JOBS) Act
Offering small businesses a new way to find capital, the U.S. Senate & House of Representatives have 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. "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 amended previously-passed U.S. House legislation, effectively removes certain regulatory obstacles put in place by the Securities and Exchange Commission (SEC). Previously, the SEC required private companies to register with the agency before seeking the backing of investors. Also, the SEC used to only allow a private company to have 499 total shareholders, limiting crowd-funding possibilities.
The new crowd-funding law 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.
"Too many Americans are still hurting financially or struggling to find work," said Senate Majority Leader Harry Reid (D-NV). "It is crucial for Congress to continue efforts to create jobs and rebuild our economy."
With this new measure now law, 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. "Economists predict that crowd-funding legislation will increase new-business startups by at least 10%," said U.S. Rep. Patrick McHenry (R-NC), who sponsored the bill that passed in the House. "There's not much that folks agree on in Washington these days, but getting our economy back on the right track is something that everyone supports." – DV