The past three weeks we have witnessed a tidal wave of change in the U.S. regulatory landscape for crowdfunding. Crowdfunding, as a vehicle for job creation and innovative business growth, has caught the attention of the White House, which specifically highlighted how entrepreneurs are using crowdfunding to access capital — and how President Obama’s new “American Jobs Act” could extend that access to more high-growth companies.
In a post on fueling innovation and entrepreneurship on the White House blog on September 9, U.S. Chief Technology Officer Aneesh Chopra and deputy director for policy Tom Kalil described the crowdfunding proposal from the White House:
America’s most innovative companies need equity capital to grow and hire faster. As part of the President’s Startup America initiative, the Administration will work to unlock this capital through smart regulatory changes that are consistent with investor protection. This means reducing the disproportionately high costs that smaller companies face when going public, as well as raising the cap on “mini” public offerings (Regulation A) from $5 million to $50 million. It also means responsibly allowing startups to raise money through “crowdfunding” – gathering many small-dollar investments that add up to as much as $1 million.” Right now, entrepreneurs like these bakers and these gadget-makers are already using crowdfunding platforms to raise hundreds of thousands of dollars in pure donations – imagine the possibilities if these small-dollar donors became investors with a stake in the venture.
Kalil explained more about the proposal in a call with reporters after the president’s speech. “We’re looking for ways to “reduce the regulatory burden on the ability of high growth entrepreneurs to raise capital and go public,” he said. “We’ll work with the SEC to develop a crowdfunding exemption for companies looking to raise $1 million dollars or less.”
Kalil responded to another question from a magazine editor, and said that they have observed the tremendous success of existing platforms, where small firms could raise money as grants. Clearly, Grow VC and firms like it are already highly visible on the White House radar.
The interest in crowdfunding regulatory changes isn’t limited to the White House. Following President Obama’s administration’s proposal, Republican Representative Patrick McHenry proposed legislation in Congress to relax SEC disclosure rules on public offerings by companies seeking crowdfunding.
Under his bill, an unlimited number of investors could contribute up to $5 million to crowdfunded companies, but could not individually contribute more than $10,000 or 10 percent of their annual incomes.
The bill would also exclude crowdfunding investors from the 499-shareholder cap for private companies and remove the ban on general solicitation that exists in many current exemptions.
“In an economic environment in which lending to job creators and entrepreneurs remains dismal, we must find new and modern means for capital formation to ignite our sputtering economy,” said McHenry at a House Oversight subcommittee hearing last week. This hearing was thanks in large part to Sherwood Neiss, and StartupExemption.com, who have been working tirelessly over many months to realize this regulatory overhaul.
Meredith Cross, the director of corporation finance at the SEC, also spoke at the hearing, and indicated that while the SEC has not reached any conclusions about how, or if, to update its capital-raising rules for private companies, she indicated an exemption could provide “real benefits” to the economy and small business markets in particular.
“If it’s viewed as a tainted market where people go to fraudulently steal money that won’t help anyone,” she said. “I worry about websites popping up all over the place and disappearing and then the money is gone.” Further, Cross echoed the administration’s policy direction, in indicating that the SEC is also reviewing the ban on general solicitation and the cap of 499 shareholders for private companies. Clearly, the biggest concern is the potential for fraud, but again, StartupExemption.com has crafted a detailed and well thought-out framework for preventing fraud and abuse.
All that said, the administration proposal doesn’t yet address preemption of state law. Preemption is a U.S. legal doctrine that forecloses the possibility of conflicting and onerous state laws. Absent preemption, a federal crowdfunding exemption will be far less effectual, because entrepreneurs will still have to comply with state regulations in every state where they accept investments. The StartupExemption.com framework, and Rep. McHenry’s bill do address preemption, in a similar way to SEC Rule 506. While this imposes some additional requirements for state registration, it would alleviate most of the costs involved in multi-state compliance. There does not seem to be any reason why the Obama administration will not get on board with McHenry’s well-crafted proposal.
Additionally, the administration proposal doesn’t yet discuss whether crowdfunding sites will be exempted from treatment as brokers or investment advisers. Again, this is dealt with by McHenry’s bill, but may need some additional details to ensure that Grow VC and similar platforms can keep working to grow the economy, empower startups, and create meaningful and long last job growth.
We are confident that meaningful regulatory change will be finalized soon, but there are still roadblocks that can slow it down. We encourage comment and participation, both at GrowVC.com, as well as StartupExemption.com, the Sustainable Economies Law Center, and Crowfundinglaw.com. Thanks again, and please share your ideas to build on this extraordinary revolution!
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This entry was posted on Tuesday, September 27th, 2011 at 8:32 am and is filed under Entrepreneur Inspiration. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.