Like other capital formation bills we've discussed, the House of Representatives has overwhelmingly approved (by a vote of 407-17) the "Entrepreneur Access to Capital Act," H.R. 2930. Subject to certain limitations, H.R. 2930 would allow businesses to raise money selling unregistered securities using "crowdfunding."
Crowdfunding generally involves raising funds from large numbers of people typically in small amounts, often using social networks. Crowdfunding has been used successfully for charitable purposes, where participants donate funds, but the public nature of most crowdfunding solicitations limits the ability of businesses to raise investment funds using crowdfunding.
The main provisions of the crowdfunding exemption set forth in H.R. 2930 include:
In addition, investors who purchase securities under the crowdfunding exemption would not count toward the 500-shareholder threshold for SEC registration in Section 12(g) of the Securities Exchange Act of 1934, as amended. We have previously discussed the attention this rule has received from the SEC, as well as in recent proposed bills.
SEC Rulemaking Would be Needed
The bill would require SEC rulemaking to carry out these provisions within 180 days. This seems wise, since it is easy to imagine numerous topics that are critical to understanding how to safely use this exemption. Here are just a few notable questions off of the top of my head:
The concept of removing legal restrictions to permit businesses to accept small investments via crowdfunding seems simple. However, as H.R. 2930's surprising detail demonstrates, it can be difficult to set policy that balances the goals of capital formation and investor protection, particularly in the context of public solicitations of investors. Indeed, H.R. 2930 has materially changed since its original form. It remains to be seen whether the Senate will move quickly on this issue, with or without material changes. But the overwhelming bipartisan support in the House of Representatives implies this idea may move quickly. Interestingly, President Obama has also endorsed the concept of crowdfunding in his proposed American Jobs Act.
We will keep you posted on this interesting topic.
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