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Previous, I summarized the Entrepreneur
Access to Capital Act (H.R. 2930), a bill which provides for a crowdfunding
exemption to the registration requirements of federal and state securities
laws. The bill was recently passed by the U.S. House of Representatives,
and now awaits U.S. Senate action. In this post, I'll provide some of my
thoughts on what is to come.
Will it pass?
Predicting the future is usually a futile effort, but I
do believe that this bill (or something like it) has a good chance of becoming
law. If you had asked me this same question a year ago, or even six
months ago, I would have told you that it has no chance. The political
climate over the last few years has favored the tightening of securities laws,
not their deregulation, due in no small part to the perceived excesses of the
securities industry in the events leading up to the financial crash in 2008.
What I hadn't counted on was the cumulative effect of three years of high
unemployment on the political process. Politicians are desperate for a
solution to reduce unemployment and consequently legislation that promises to
reinvigorate the entrepreneurial sector has found rare bipartisan support.
Of course, the Republican gains in the Congress in 2010 helped
significantly as well, given that the need for business deregulation is an
article of faith within the Republican party. As a result of these
factors, the House passed the bill overwhelmingly in a rare bipartisan vote.
The White House has also signaled that it supports the effort. The
only remaining piece to the puzzle is Senate passage.
The U.S. Senate could choose to take up H.R. 2930 itself,
or proceed with its own version, the Democratizing Access to Capital Act of
2011 (S. 1791), which is sponsored by Sen. Scott Brown (R - MA). S. 1791
is remarkably similar to the House bill. Given the bipartisan support for
the concept, I think it is highly likely that a crowdfunding bill will pass the
Senate, though it will likely differ in small or major ways from the House
legislation. These differences will need to be reconciled in conference
committee, and then the reconciled bill will need to be passed again by each
house. However, neither political party has drawn a line in the sand
about any of the particular differences and most of them are rather technical.
Therefore, there currently aren't any major impediments to a final bill
being passed before the end of 2012. My prediction, therefore, is that we
will see a crowdfunding exemption passed into law by the end of next year.
How will its implementation affect its
Assuming the bill passes, it must also be implemented by
SEC regulations. It is crucial to understand that the SEC has significant
power to determine how useful a crowdfunding exemption could be. If the
SEC's regulations make it difficult to use, then no one will use it and the
effort will be for naught. If the SEC issues regulations that are
friendlier to issuers, then the exemption could be highly useful. For
instance, here are some open issues that will need to be addressed and could drastically
affect the ability of companies to use the exemption effectively:
As you can see, even if the crowdfunding exemption bill
passes as is, there will still be any number of issues unresolved until the SEC
fills in the gaps in the legislation through interpretive regulations.
These regulations could greatly facilitate the usefulness of this new
exemption, or could eviscerate its usefulness, causing it to be used as often
as Rules 504 and 505 of Regulation D.
 This issue of whether state registration requirements
apply to intermediaries is very complex and merits its own post. This
issue has been around for some time, because there is an analogous situation
pertaining to Rule 506 offerings. Some states require the officers who
conduct a Reg. D offering to register as "issuer agents," but such requirements
may be preempted by federal law.
 Rules 504 and 505 are other exemptions contained
within Regulation D. They tend not to be used very often because, unlike Rule
506, there is no federal preemption of state registration requirements,
subjecting offerings conducted under this rule to numerous state regulations.
Read more articles by Alexander Davie at Strictly Business, a
business law blog for entrepreneurs, emerging companies, and the investment
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