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House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act

With an overwhelming majority, 390 to 23, the House of Representatives passed another crowdfunding bill on March 9, 2012. The House had previously passed a similar bill in November 2011 called the “Entrepreneur Access to Capital Act” which we previously discussed in a blog, New “Invest Georgia Exemption” Helps Small Businesses Raise Capital. That Republican bill stalled in the Democratic-controlled Senate, as did another bill related to crowdfunding requirements which included lower investment amounts and the requirement to use a “crowdfunding intermediary.” The Senate currently has three crowdfunding bills before it, although none of the bills have yet to move out of committee. The Senate Banking Committee did hold another hearing on the topic of crowdfunding earlier this week.

The bill that passed most recently in the House was originally introduced by Representative Patrick McHenry (R-NC) and was rolled into a broader package called the Jumpstart Our Business Startups (JOBS), which included six bills bundled together. Rep. McHenry stated, “Crowdfunding is a key component of the JOBS Act. Economists predict the legislation will lead to a ten percent increase in new business startups, helping to create at least 170,000 jobs in the next five years. The bill is critical in getting our economy back on the right track.”

The newest bill would provide businesses with an exemption from Securities and Exchange Commission (SEC) registration if they are seeking to raise $1 million or less (or $2 million with audited financial statements). Investors would be limited to investments of no more than the lesser of $10,000 or 10% of their annual income. There would be no limit on the number of investors who could participate in a particular crowdfunding opportunity. Also, companies would have the chance to raise equity investment capital using the internet, which previously has not been allowed in exempt offerings.

Supporters of the JOBS bill see it as an opportunity for smaller businesses to raise capital more easily and efficiently. Those who are critical of it worry that it will increase opportunities for fraud and abuse in the marketplace.

According to a statement by Senate Majority Leader Harry Reid, the Senate may act on a package of job bills. He stated, “These measures will improve innovators’ access to capital, and they will streamline how companies sell stock through initial public offerings or IPOs. These pieces of legislation will also protect the rights of investors.”

President Obama is also on record in favor of crowdfunding legislation being passed. The original administration proposal called “for a national framework that allows entrepreneurs and small businesses to raise capital through crowdfunding.” Despite the President’s support, all 23 representatives opposed to the recently passed measure were Democrats.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.

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