As you may have heard, Congress is now debating certain bills which would allow startups to raise funds in a new less restrictive manner, i.e. through “crowdfunding”.  The lead bill is the Jumpstart Our Business Startups (“JOBS”) Act passed by the House on March 8, 2012.  There is fierce opposition from various groups to the House version of the JOBS Act – including most states, the SEC, the New York Times, Bloomberg, accounting groups, AARP (?) and even the the old “Sherriff of Wall Street” himself, Eliot Spitzer.  In this post we’ll look at what crowdfunding is, what Congress is proposing and the effects it may have.

Crowdfunding itself is a fantastic idea which could lead to a new wave of startup financing which they are now restricted from taking.  In general, crowdfunding would allow individuals who are not accredited investors to invest smaller sums in an emerging business in return for equity.   The idea is generally, quantity over quality, that being a large number of smaller investors can get the same result as a small number of large investors.  Taking these small investments from anyone makes it infinitely easier to raise money, especially when the company would be able to advertise and hence solicit investors over the Internet and the World Wide Web.  It would allow investments from non-accredited investors, which is really everyone in the country that is not a millionaire (not taking their house into consideration).  Right now, startups can use sites such as Indiegogo or Kickstarter, but these sites really are seeking donations for the benefit of the company.  The company usually gives products or something else of value to the people who donate towards its cause, but not equity.  There are also sites like Angelsoft, AngelList, and others but they really only link startups with accredited investors for the traditional types of investment deals. Its not the sites that are behind, however, its the regulations.

Granted, the securities regulations in place now are there to attempt to to protect investors from fraudulent practices, although these regulations are largely seen as being too restrictive, not protective of the right things, and archaic – as they do not deal well with the ever-changing technological advances.  These regulations usually always lead startups to do private placements of their securities to ensure the offering is in compliance.  These are usually only to accredited investors and no public advertising is allowed.  If crowdfunding is allowed it would be a monumental change in the way the securities laws work and a groundbreaking event for startups around the country.

The JOBS Act is being critized as being reckless as it would alter the existing securities regime in too drastic a fashion, and could lead to fraud on a massive scale, especially as it would directly affect consumers.  The general idea behind the JOBS Act is noteworthy.  It would allow emerging companies to raise money over the World Wide Web in small increments, loosen some SEC registration requirements for mid-size companies and exempt mid-size companies from the dreaded Sarbanes-Oxley accounting rules for 5 years.  The most exciting part of the JOBS Act is that it would allow startups raising $1,000,000 or less to publicly advertise (think Twitter, etc.) and take investments from anyone up to $10,000 or 10% of their annual income (whichever is less) in equity.  Obviously this would be refined through SEC regulations after its finalized and given the go ahead by the Senate.

Here is Spitzer’s brash article called Kill the JOBS Act!.   The Wall Street Journal, true to form, seems to be in favor of the bill and takes the position that the accounting lobbyists are the ones seeking to kill it.  Which makes sense, as a lot of accounting firms make hefty profits guiding companies through the regulatory and reporting process, especially with the regulatory beast Sarbanes-Oxley.

The Senate has considered a similar bill called the Invigorate New Ventures and Entreprenuers to Succeed Today (“INVEST”) Act.  Earlier in the Senate it there were multiple bills introduced which could essentially glut or kill the JOBS Act, but none of them really took off.  As a side note most of these bills have awful names, which are just used to get the desired acronym, but that’s besides the point.

It now appears that the the Senate is working on an amendment to the JOBS Act (S.AMDT 1833) which would replace the crowdfunding portion of the JOBS Act, and put some more measures in the bill as protections against fraud and investor access to information.  Without such amendment the Senate will likely not pass it.  Read in the NY Times how the Senate is attempting to work this out.

It appears that there is bipartisan support for crowdfunding in general, so hopefully something will get passed in a fashion where crowdfunding as a concept can be available to all the startups in the country.  Granted, protections are needed, as we come off of the dot com bust, and the recent mortgage backed securities crisis.  But at certain times, big changes are needed, and crowdfunding would certainly be that change.  We’ll see what comes of this.