Crowdfunding of Early-Stage Businesses Gaining Momentum

Corporate Attorney Carl BarnesBy: Carl Barnes

Crowdfunding – in which entrepreneurs and start-ups use the internet to raise capital in small amounts from large numbers of ordinary investors – may be on its way to becoming a realty. For the moment, crowdfunding is virtually impossible under the federal securities laws. But even SEC Chairman Mary Schapiro acknowledges that crowdfunding is “gaining … popular support.” In early November, H.R. 2930, “The Entrepreneur Access to Capital Act,” was approved by the House of Representative by a margin of 407 to 17. President Obama has announced his support for the bill. And, most recently, Senator Scott Brown (R-MA) introduced S. 1791, “The Democratizing Access to Capital Act,” into the U.S. Senate.

The two bills differ in some respects. The House bill, for example, would allow entrepreneurs to raise up to $1,000,000 in any 12-month period ($2,000,000 if the company provides audited financial statements) from investors who may invest up to the lesser of $10,000 or 10% of their annual income. The Senate bill, on the other hand, would limit companies to raising no more than $1,000,000 in any 12-month period from investors who may invest no more than $1,000 per year.

But the two bills also have much in common. Both would require companies to make specific disclosures to investors and to notify the SEC of the crowdfunding. Whether the bills will be reconciled and ultimately become law – and whether they will actually help entrepreneurs raise capital more efficiently – remain open questions. But the momentum is definitely there.

For more information on crowdfunding and private placements generally, please contact Carl Barnes.

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