Business Brains

Crowdfunding bill to open up social networks for raising capital

Posting in Government

Pending bill clears hurdles to crowdfunding. But why is an act of Congress needed to enable this new breed of business fundraising?

Will businesses soon be able to underwrite their expansion plans without depending on the whims of venture capitalists, banks and other deep-pocketed investors?

After 77 years of what many consider to be the most restrictive rules for raising capital in the world, businesses may be able to acquire funding support from investors across the Internet.

A bill clearing the way to "crowdfunding" as a method to raise business capital passed in the US House in November by a 407 to 17 vote, and is now working its way through the Senate. The White House has already indicated support for the bill, called the "Entrepreneur Access to Capital Act."

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.

Now startups, small businesses, and even smaller units of large companies can find financial support for new ideas from across social networks. "Small businesses account for 93% of all hiring. And small businesses have been starving from lack of capital," according to Representative Patrick McHenry, who authored the bill in the house.

So, why do we need an act of Congress to make crowdfunding happen? Can't such grassroots funding spring from the ranks without government involvement?

The problem is existing laws and regulations that inhibit such fundraising by private companies. Clearing away such laws will help crowdfunding move forward. For example, the proposed bill creates a crowdfunding exemption from SEC regulations for firms raising $5 million, with individual investments limited to $10,000 or 10 percent of an investor's annual income, and preempts Blue Sky Laws and eliminates the application of the ban on general solicitation for issuers relying on the crowdfunding exemption. In addition, it lifts the legal cap of 499 shareholders from crowdfunded enterprises.

The crowdfunding bill is now before the US Senate Committee on Banking, Housing, and Urban Affairs.

If passed and signed into law, businesses may be able to freely build their own investor bases across the Internet, thereby getting around the constrictions imposed by banks and venture capitalists.

Share this

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