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Crowdfunding bill passes in US House and Senate

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The US House and Senate approved a measure that sweeps away restrictive rules for raising capital, enabling US businesses to acquire funding support from investors across the Internet.

Businesses may soon be able to underwrite their expansion plans with support from the network -- and thus getting around reliance on the whims of venture capitalists, banks and other deep-pocketed investors.

The US House and Senate have approved a measure that sweeps away restrictive rules for raising capital, enabling US businesses to acquire funding support from investors across the Internet. Now startups, small businesses, and even smaller units of large companies can engage in crowdfunding to secure financial support for new ideas from across social networks.

Once signed into law, the so-called The JOBS (Jumpstart Our Business Startups) Act clears the way to “crowdfunding” as a method to raise business capital. The bill originally passed in the US House in November by a 407-17 vote, and new version was more recently approved by the Senate, 73-26. The House approved the revised Senate measure, 380-41. It now awaits the President's signature.

[UPDATE 4/5/2012: President Obama has signed the JOBS Act into law.]

The bill enables companies can raise up to $1 million a year through crowdfunding (or $2 million if the company provides prospective investors with audited financial statements). $100,000 is the dividing line for qualifying investors: investors with incomes or net worth of less than $100,00 can invest up to $2,000 or 5% of annual income (whichever is greater) in a company; and those with incomes or net worth greater than $100,000 can invest 10% of either net worth or income, up to $100,000. Private companies would be able to have as many as 1,000 shareholders, up from the current cap of 500.

Social networking has not only opened up innovation from across the Internet via crowdsourcing — it also opened up new ways to acquire funding. The crowdfunding phenomena helps get projects off the ground by tapping support from fans and other interested parties. Internet-based crowdfunding is already employed to raise millions of dollars for charitable organizations, non-profits and political campaigns. Crowdfunding is also considered a new avenue for smaller creative projects, especially in the arts and music sphere, to access funds from contributors previously out of reach.

As Michael Greeley of Flybridge Capital Partners and a board member of the National Venture Capital Association, put it in a New York Times interview: "This is the logical extension of the marriage of crowd determination around either commerce or content or entertainment. We’ve watched every other industry become democratized by the Internet, so there’s no reason that finance can’t be, too.”

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Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure