HR 2930, the "Entrepreneur's Access to Capital Act," which lets small businesses sell non-public securities through social media solicitations has just passed with overwhelming bipartisan support from members of Congress and support from the White House.
The legislation, sometimes referred to informally as "The Crowdfunding Exemption Act," passed by an overwhelming 407-17 vote. It would allow for small raises of capital, up to $2 Mio. for issuers with audited statements ($1 Mio. without audited statements).
The House measure would also allow smaller companies to solicit investors through advertisements, effectively ending the SEC's prohibition on "general solicitation."
Investors would be allowed to invest up to $10,000 or 10% of their annual income, whichever is smaller. Critics, which include the North American Securities Administrators Association (NASAA), are concerned about the potential for fraud and are pushing through initiatives in the Senate bill which they feel would address potential scams.
Senate Banking Committee Chairman Tim Johnson (D-SD) is carefully considering the approach that the House has adopted, which would reform SEC registration. The sponsor of the House Bill, Patrick McHenry (R-NC), said that it would give smaller investors an opportunity to make investments in companies that they like, not just high-net worth and accredited investors. ?We take the best of micro-finance and crowd-sourcing and combine them in this bill," he said.
Senator Kirsten Gillibrand (D-NY) is one of the Senators considering introducing this capital formation bill in the Senate. ?Everywhere I spend time across the state, I talk to small business owners and entrepreneurs that need access to capital to grow and create jobs,? Ms. Gillibrand said.
NASAA President Jack Herstein wrote that ?If this legislation is enacted in its present form, it will prohibit states from enforcing laws designed to minimize the risks to investors" and has encouraged the Senate to implement measures that would protect investors from abuse and losses stemming from fraudulent activities.
Under HR 2930, the issuer of the securities must provide warnings to potential investors on the risky nature of the investments (as they are in emerging businesses, start-ups) and are very illiquid as there would be almost no secondary market for the investments. The issuer would also need to keep appropriate due diligence on each investor, file appropriate questionnaires, and maintain books and records as determined by the SEC and state regulators.
The issues are also obligated to state a target amount they are raising in the offering and withhold capital formation accumulated until the aggregate amount is not less than 60% of the offering. Also, issuers must outsource cash management responsibilities to a qualified third party custodian, such as a registered broker dealer or insured depository institution.
It will be interesting to see if this legislation encourages Congress to make additional changes to allow for medium size issuers to use similar techniques that could be helpful in raising funds for EB-5 visa offerings, which are typically larger than $10 Mio. For now, a combination of the "crowdfunding" option combined with EB-5 foreign investment and more traditional sources of project funding might help EB-5 Regional Centers give their offerings a greater chance of success.
It's just another tool in the bag.