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House of Representatives Passes Crowdfunding Bill

Great news everyone! The House of Representatives has overwhelmingly passed the JOBS Act, which contains the crowdfunding legislation that I’ve described in detail before at the Exemplar Blog.

The president has already signaled his support and so has the senate, so I’d wager this bill will be signed by Summer, and will take effect shortly thereafter.

Why is this such a big deal?

The new crowdfunding rules are like a backwards, upside down version of the existing ones. Let me explain why.

After the roaring 20s destroyed our markets, the US settled on transparency as a preventative measure. We formed the SEC and declared that if a company sold stock publicly, the company selling it had to make detailed information publicly available.

This is expensive and tedious. If you’re a curious type, you can find out all those things our forefathers intended you to be able to research by using the search engine Edgar. But, for a sampling of the reams of paper lost to this cause, just look at this recent 10-K filing made by the Pepsi Bottling Group.

Yikes.

Thank God: You Don’t Always Have To Register With the SEC

The Securities law cuts companies some slack by waiving the expensive registration requirements in certain circumstances. Basically, these circumstances are that you aren’t raising too much money (See e.g., Rule 504) and—here comes the killer piece—you’re only selling to savvy, rich people (Rule 501).

Most early stage transactions and angel funds are set up with this framework in mind. It’s the status quo.

At least it was the status quo.

A Whole New Crowded World

If this bill becomes law, companies won’t have to hide their equity investment opportunities away from the common man. They’ll advertise them publicly on sites like IndieGoGo or Kickstarter, and the investors will earn stock for their money—not a token gift.

But crowds cause their own problems. Startups might go from having under ten shareholders to having hundreds and hundreds. All of their holdings will have to be tracked, and depending on the capital structure of the company, they may have the right to vote on the management of the corporation. They might even have a right to sue the corporation by virtue of being a shareholder.

Only time will tell.

You can contact the author here, and follow @revolvethis, @ExemplarCo, and @gerritbetz on Twitter.