Both houses of Congress were busy last autumn crafting new legislation that, if reconciled and passed, will radically change the way entrepreneurs and early-stage companies raise capital. The legislation provides for what is commonly called “crowdfunding” and would provide an easier way for young companies to raise their initial capital.
In early November, the House of Representatives passed The Entrepreneur Access to Capital Act (H.R. 2930) by a notably large and bi-partisan majority of 407-17. H.R. 2930 would amend the Securities Act of 1933 by providing private companies and others raising capital in a “crowdfunded” financing with a new securities registration exemption. The bill would allow companies to raise up to $1 million within a 12-month period (or up to $2 million, if investors are presented with audited financials) without registering the securities offered in the financing(s) with the Securities and Exchange Commission (SEC). The exemption would only be available, however, if individual investors are limited to investing the lesser of $10,000, or 10% of the investor’s annual income. Companies relying on the exemption (or third parties such as crowdfunding websites retained by the company to facilitate the offering) would be required to make certain disclosures to potential investors, including the goal amount of the offering and a warning about the speculative nature of the offering. Companies (and intermediaries) would also be required to deposit any invested funds with a third party to hold until the company has raised at least 60% of the goal amount. Investors purchasing securities in these crowdfunded offerings would be locked up for one year from reselling their securities (except back to the company or to accredited investors), and would be carved out from the total shareholder count that might otherwise trigger public reporting requirements under the Securities Exchange Act of 1934 (currently set at 500 shareholders). Offerings made pursuant to the proposed exemption would also be exempt from state blue sky registration requirements.
Following passage by the House of H.R. 2930, two additional crowdfunding bills were introduced in the Senate: the Democratizing Access to Capital Act (S. 1791), introduced by Senator Scott Brown (R-MA), and the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (S. 1970, also referred to as the CROWDFUND Act), introduced by Senator Jeff Merkley (D-OR) and co-sponsored by Senator Michael Bennet (D-CO) and Senator Mary Landrieu (D-LA). Both bills share similarities with H.R. 2930, but differ in certain important respects. For example:
- Both bills would require a third-party intermediary (registered with the SEC as a broker-dealer or “funding portal”) to facilitate the offering, greatly expanding the requirements placed on intermediaries to obtain information to both protect investors from fraud and ensure compliance with the investment restrictions. H.R. 2930 permits, but does not require, the use of such intermediaries.
- Each Senate bill has different fund raising caps and investor limits than the House bill. Senator Brown’s S. 1791 caps a company’s offering potential at $1 million per year, and limits investors to $1,000 per year of crowdfunding investments, whereas the CROWDFUND Act caps offerings at $500,000 (or up to $1 million, if audited financials are provided). Also, under the CROWDFUND Act, individual investors are limited to the greater of $500 per company per year (and $2,000 aggregate for all crowdfunded offerings per year) or, for investors earning over $50,000 and up to $100,000 per year, 1% of their income per company, and 4% per year in aggregate (investors earning over $100,000 per year have an upper limit of 2% of annual income per company and 8% in aggregate).
Congress recessed for the holidays without any significant progress on reconciliation of the three bills discussed here. However, considering the overwhelming bipartisan support of H.R. 2930, the introduction of crowdfunding bills by senators of both parties, and the explicit endorsement of crowdfunding legislation by the President, we may see crowdfunding legislation pass into law sometime this year. We will continue to provide updates as this exciting possibility progresses.