Well, this just in from a dispatch on Capitol Hill: The Senate has passed legislation that will essentially legalize crowdfunding in startups by practically anyone, even your mom. U.S. Senators Scott Brown (R-Mass.), Jeff Merkley (D-Oreg.), and Michael Bennet (D-Colo.) collectively introduced the “CROWDFUND Act” (S. 2190) earlier this month, which adds measures to the House of Rep’s now well-known JOBS Act to ensure that companies would be able to use SEC-approved crowdfunding platforms to raise money from “small-dollar investors.”
While the CROWDFUND Act passed 73-26, and received bipartisan support, as one might expect when the potential for any old investor to enter the well-guarded circle of angel investing (especially in Silicon Valley) comes around, both the JOBS Act and the CROWDFUND Act have been controversial in the business community. Many worry that lowering the barriers to investing in startups could increase the amount of fraud inherent to the process.
With these dangers in mind, certain measures have been written into the bill to protect both startups and their non-accredit investors. Under the amended legislation, entrepreneurs will be able to raise up to $1 million per year through SEC-registered crowdfunding portals. The bill also limits the amount of money people can invest based on their income.
For example, investors with an income of less than $100K will be capped at 5 percent, or $2K investments, and those with incomes over $100K will be capped at 10 percent, or $10K. On top of that, the bill also requires crowdfunding sites to provide protection, including investor education materials that inform people to “the risks associated with small issuers and illiquidity.”
Both bills have yet to be reconciled and signed, but support is reaching a new high, and the passage through the Senate is auspicious to say the least, especially as this marks the first time that crowdfunding legislation has ever been passed in the Senate.
Last week, Ryan Caldbeck, the founder of equity-based crowdfunding startup CircleUp, penned a guest post for TechCrunch talking about how the JOBS Act could “change startup investing forever.” Caldbeck touches on the important point that, today, angel investing is generally reserved for about 1 percent of the population, and, in fact, less than 1 percent of small businesses receive outside equity investment.
The entrepreneur makes the argument that crowdfunding could “open up new funding possibilities for neglected areas of the economy,” as crowdfunding investors will bring their own individual insights to growing consumer brands that are finding early traction. He gives the example of a baby food company that can now have 50 parents who know and trust the brand, and lend financial support to the company to help it achieve the next level of growth. With influencers and vocal representatives of small brands now able to invest their own money, they will likely be motivated to do even more in favor of the startup to help it grow.
Additionally, Caldbeck argues that the CROWDFUND Act’s passage could bring a new level of transparency to the funding process, potentially doing away with the current process of private investor meetings, and bringing it into a wider community space where companies can share their information more broadly.
AngelList, for one, has been loud in its support of the JOBS Act, and today Co-founder Naval Ravikant said he thought the passage was a great thing for startups and investors and that he was very happy with the outcome.
Of course, on the other side, SEC Chairman Mary L. Schapiro has added her voice to the criticism of the JOBS Act, saying that it removes too many investor protections, and opens up the more vulnerable to “fraudulent schemes disguised as investment opportunities.” The New York Times also published a snarky opinion piece that goes a long way to drive that point home.
Meanwhile, entrepreneurs across the board seem to be in favor, and crowdfunding sites are naturally in support, as the WSJ points out, a site called Crowdfunder already has $13.59 million committed to 925 founders and companies from 986 crowd-investors.
What do you guys think? The right thing to do? Right thing for the wrong reasons? Wrong all the way around?
Update: While the crowdfunding provision is indeed exciting, as a commenter and the NYTimes points out, it’s also important to weigh both the positive and negative consequences of this under-mentioned piece of the JOBS Act:
Under the JOBS bill, companies with up to $1 billion in annual revenue would be free to ignore — for their first five years as a public company — regulations that were put into place after the end of the dot-com bubble and the collapse of Enron. Among them are requirements to hire an independent outside auditor to attest to a company’s internal financial controls, and restrictions on how financial analysts interact with investment bankers in promoting a company’s stock.
Because of amendments to the original bill, it will return to the House of Reps for approval. House Leaders said that they expect to get to the bill next week. President Obama has reportedly said that he will sign the bill when it gets to his desk.