Congress Acting to Help Entrepreneurs Raise Capital

The House passed a couple of bills on November 3, 2011 that will make it easier for entrepreneurs to get startup money, including a much-anticipated crowdfunding bill.

A proposal to make it easier for entrepreneurs to get crowdsourced funding, or “crowdfunding,” made its way to Capitol Hill today, where it found bipartisan support—and a few words of caution.

House opens door to small-business investors – Entrepreneurs looking for capital may benefit from a rare case of bipartisanship that broke out on Capitol Hill in November. The House passed two bills aimed at helping startups and early-stage businesses raise capital.

On November 3, with a 407-17 vote, the House passed the Entrepreneur Access to Capital Act, which makes it easier for businesses to raise capital through “crowdfunding.” This technique uses the Internet to solicit small equity investments from large numbers of people. The legislation allows businesses to use crowdfunding to sell unregistered securities as long as the total amount raised is $2 million or less. The bill also limits individual investments in crowdfunded securities to $10,000 or 10 percent of the investor’s annual income.

On November 3, the House voted 421-1 to reform the Securities and Exchange Commission’s Regulation A. This rule currently allows small companies to offer up to $5 million in stock to the public without registering it with the SEC. The Small Company Capital Formation Act raises that threshold to $50 million, which would allow more companies to raise capital without going through the lengthy and costly SEC registration process.

While it’s foolhardy to predict what the Senate will do with any legislation, the odds for these bills look good, given their overwhelming support in the House. Plus, President Barack Obama has endorsed both bills, saying they would reduce “the red tape that prevents many rapidly growing startup companies from raising much-needed capital.”

Crowdfunding already is being used by musicians, artists, and restaurants to raise money from their fans and patrons, but these investors only get perks such as CDs or desserts. The Entrepreneur Access to Capital Act expands crowdfunding to equity investments.

In order to protect investors from fraudulent offerings, state regulators will be notified of each crowdfunding offering so they can police it. Plus, people who have been convicted of securities fraud or other financial crimes will be prohibited from raising money through this technique. In addition, the offerings will include warnings about the speculative nature of investing in startups.

These protections won over most Democrats. Members of both parties agreed that Congress needs to do what it can to help new businesses access capital.

The Entrepreneur Access to Capital Act “combines the best of microfinance with the power of crowdsourcing,” said bill sponsor Republican Representative Patrick McHenry of North Carolina. This enables ordinary Americans, not just wealthy accredited investors, to own “a stake in their favorite businesses”—maybe “even the next Facebook,” McHenry said.

Woodie Neiss, an entrepreneur from Miami Beach, Florida, who testified in favor of the crowdfunding bill in September, said it’s “amazing to see members of both parties get behind this important issue. The understanding that small businesses face a critical shortfall in their capital needs runs deep, and crowdfund investing is a commonsense solution. Entrepreneurs now have hope that Washington is coming together to address one of their top concerns.” Neiss cofounded FLAVORx, a company that makes medicines taste better.

High-tech trade associations, meanwhile, were pleased with passage of the bill that raised the Regulation A threshold. The current limit of $5 million, which was set in 1992, is so low that few companies find it’s worth the trouble to raise capital through these types of offerings. Only three companies made Regulation A offerings in 2010.

“Raising the exemption to $50 million would give struggling companies another avenue to raise capital through direct public offerings without a lengthy paperwork process,” said Jim Greenwood, president and CEO of the Biotechnology and Industry Organization.

The bill will help “cash-strapped small biotechnology companies short on resources,” he said.

Todd Thibodeaux, president and CEO of information technology trade association CompTIA, said the $50 million Regulation A threshold “will allow smaller firms the flexibility to innovate and implement new technologies, thereby rebuilding our economy, creating jobs, and maintaining U.S. competitiveness.”

Source: Kent Hoover