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Crowdfunding Bill for Small Business Ventures Moving in House and Senate

The Obama administration has supported crowdfunding bills, and now the House of Representatives has delivered the Entrepreneur Access to Capital Act (H.R. 2930). Scott Brown (R-MA) has introduced his own version, the Democratizing Access to Capital Act (S. 1791) in the Senate, but it is still in committee.

And just days ago in Boston, I attended a lunch with a group of business lawyers to discuss crowdfunding and how it might affect business as we know it. You can read the bill in its entirety above, but I give a very basic breakdown here.

The bill adds a new exemption for rounds under $2 million, and the maximum investment per individual is either $10,000 or 10% of that individual’s annual income, whichever is lower.

Although the new rule reduces the legal expenses by simplifying compliance, compliance doesn’t disappear entirely. But if a Company uses a third-party site (e.g., Indiegogo) to handle the issuance, that site can handle many of these requirements for the Company, which is a big relief.

These requirements come in three flavors:

Investor Protections

The issuer (whether that’s the Company or the crowdfunding site managing the transaction) has to warn investors that the investment is speculative, and that they can’t sell the securities anytime soon. Issuers also have to quiz investors on basic matters of risk to ensure they really get it. Finally, the issuer has to have some electronic means of communication for the investors on its site.

Sharing Information with the Securities Exchange Commission

The issuer has to send the SEC information like its name, address, website, and a list of employees. They also have to notify the SEC when they begin an offering and complete one. Finally, they must allow the SEC to have the same level of access to their website as any investor would have.

Fraud Prevention Mechanisms

Keeping in mind that all of the anti-fraud rules that exist in the securities laws still apply, there are a few additional but small burdens to prevent fraud. One is that issuers have to outsource all their cash handling to a third party custodian. This third party won’t be allowed to release any money until at least 60% is raised. This should disappoint scammers who were aiming for a long-tail approach to defrauding investors.

Another restriction is to avoid giving investment advice. I’m not sure what effect this would have on site layout—if you feature different startups on the homepage, are you implicitly endorsing investment in those startups?

Does that constitute advice? I don’t know. The SEC will clarify, I’m sure. Stay tuned.

Contact the author here, and follow @Revolve_This and @gerritbetz on Twitter.