Presently, the Securities and Exchange Commission (SEC) prevents companies from issuing shares for capital unless they register with the SEC. However, a House panel recently approved legislation sanctioning “crowdfunding.” The legislation would allow new businesses to raise up to $5 million, with individual contributions capped at $10,000 (or 10% of an investor’s annual income), without registering with the SEC. The Entrepreneurial Access to Capital Act, HR 2930 is sponsored by Rep. Patrick McHenry (R-NC), who explained that it will create jobs by connecting entrepreneurs to the everyday investor.
As detailed in a previous posting, crowdfunding is an innovative form of financing that enables people to pool money, typically comprised of small individual contributions, to invest in a particular company or venture. Crowdfunding often facilitates entrepreneurs in their earliest stages, when funding can be hard to secure from traditional sources like banks and/or venture capital firms. Companies like Kickstarter have already implemented crowdfunding, enabling enterprising inventors, artists, filmmakers, and the like to receive donations to launch their projects. Micro-lending services are thriving in philanthropic pursuits as well, organizations like DonorsChoose and Kiva.
The current raise of crowdfunding has prompted federal regulators to re-examine the existing rules governing capital raising. For instance, in a recent testimony SEC Director Meredith Cross noted that many view the prohibition on general solicitation as a “significant impediment to capital raising.” Moreover, some members of Congress have questioned the SEC as to whether certain laws governing entrepreneurs’ efforts to raise capital have become anachronistic given the rise of the internet and the proliferation of new ways to share and spread ideas.
The Entrepreneurial Access to Capital Act now moves from a subcommittee to the full House Financial Services Committee where it will be given further consideration.
For additional information please contact Brent Cunningham, Associate by email at email@example.com or by phone at (619) 298-2880.