Update on crowdfunding legislation for July 2016

I’ve written often that the world of crowdfunding is evolving at a rapid pace. references to other recent news is built into my new crowdfunding bibliography published yesterday. This month that evolution continued as the U.S House of Representatives passed two bills designed to make it easier for businesses to raise money through crowdfunding.

I feel a need to add a comment that I prefer to cover crowdfunding topics that have significance to typical small business owners and investors. In contrast, this blog post is of interest only to those with an academic interest in the world of equity crowdfunding. There is relatively little chance that these developments will impact any of us reading this post within the foreseeable future.

Fix Crowdfunding Act (H.R.4855) – makes it easier for companies to raise money in stock offerings, Passed the House of Representatives but not been taken up by the Senate. The bill allows single-purpose funds to sell and offer for sale securities according to crowdfunding requirements, and considers them venture capital funds.

Supporting America’s Innovators Act (H.R. 4854) – defines a qualifying venture capital fund as being owned by not more than 500 persons and investing not more than $10 million  in securities of any one issuer. These entities are exempt from some provisions aimed at protecting investors.

Both bills easily passed by the House in rare bi-partisan support. It appears that crowdfunding has the support of both Democrats and Republicans. However, Govtrack gives a 21% chance of becoming law, indicating that the Senate may not be so receptive. The bills are not yet scheduled for Senate consideration.

Behind both bills is a legal concept called Special Purpose Vehicles that have been used by the financial industry to avoid the investor protections built into federal securities laws. Some respectable investment authorities argue that this is the best approach to equity crowdfunding. While the high-flying companies that offer these can sometimes produce attractive profits, there are also cases of investment disasters. From the perspective of most Americans, these bills are about expanding sophisticated investment options (if we don’t have enough compex options already) and have little to do with the concept of crowdfunding as a business opportunity in the way that most of us relate to the concept.

My own take is that these bills focus primarily on helping Silicon Valley high tech venture capital finance firms, with their high fees and questionable social benefit, and too little on broadening funding options for Main Street businesses across America. On the positive side, they made it possible for some firms like Pinterest to raise millions. On the other hand, Special Purpose Vehicles enabled the Enron scams to go undetected for so long. In a perfect world, crowdfunding legislation would focus on helping businesses outside the Silicon Valley high tech world. But I won’t hold my breath.


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