There is a growing movement to create a new crowdfunding
regime for raising capital. The models seem to draw inspiration from Kickstarter, a platform to fund creative
projects. I say that because each time I see a draft bill it talks about an
internet-based intermediary as part of the exemption.
President Obama endorsed the idea of a crowdfunding
exemption. That has lead to three bills in Congress, plus a proposal being
generated by NASAA as a state-run alternative.
President Obama cheered for crowdfunding
as part of the American Jobs Act unveiling. The statement talks about the
millions raised through Kickstarter in the form of donations. That's not
exactly right. The offering is sometimes a pure donation, but more often is
linked to a product in development.
Entrepreneur Access to Capital Act (H.R. 2930) permits "crowdfunding" to
finance new businesses by allowing companies to accept and pool donations up to
$5 million without registering with the SEC. It would limit individual
investments to the lesser of $10,000 or 10% of an investor's annual income. An
amendment requiring a notice filing with the SEC was rejected as was an
amendment that would have barred felons from being involved.
is putting together a model exemption for use at the state level. The
various state level regulators are trying to craft this model.
Democratizing Access to Captial Act (S.1791) was introduced by Senator
Scott Brown. This bill is being supported by the Wefunders, who is in the
business of being a platform for capital crowdfunding. Unlike Kickstarter, it's
only open to accredited investors.
Online While Deterring Fraud and Unethical Non-Disclosure Act of 2011 (S. 1970)
was introduced by Senator Merkley. This bill has the right acronym.
What they all have in common is some cap on the total
funds that can be raised and a cap on how much someone can invest.
I'm all for making it easier for entrepreneurs to have
easier access to capital. The registration and legal limits on capital-raising
deter lots of projects. However, they also vet projects. To some extent,
excluding the unworthy. It also tends to deter lots of worthy projects.
I like the project crowdfunding at Kickstarter. There is
no expectation of riches, other than whatever trinket or completed example of
the project they promise to you in exchange for your funding. I have no
concerns about the dilution of shares, executive compensation, ratchets, and
Capital crowdfunding should be an interesting experiment.
I predict it will create lots of new jobs and fund lots of interesting
I also expect that it will be suspect to fraud. I expect
that there will be many disappointed small investors who expected to reap
fortunes, instead being stuck with worthless shares in failed companies or
companies that existed only to funnel cash to fraudsters. The extent of
that fraud will depend on how well Congress crafts a crowdfunding bill. I
expect they will come up short.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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