When marketing executives Michael Migliozzi II and Brian Flatow decided they wanted to buy Pabst Blue Ribbon, a private beer company, they created BuyaBeerCompany.com to ask the public for financial help. The idea was quickly shot down by the SEC, prompting the recent discussion on where “crowdfunding” fits into the scheme of private businesses.
Crowdfunding, the practice of private companies soliciting the public for investments, has been made popular by websites such as Kickstarter, IndieGoGo,ProFounder and others. These are great for individuals and small groups looking for a leg up, but when it comes to private businesses using these as an investment tactic in exchange for shares in the company, the SEC wants everything to be nice and documented. Thus, the commission created a crowdfunding bill to officially allow private companies legal access to crowdfunding.
Currently, the SEC only allows a company to have 499 shareholders total in a private company. This makes crowdfunding difficult, as at its nature, crowdfunding is provided in small amounts by a lot more people than a regular venture or angel investment. The proposed bill, however, will allow any number of individuals to invest, but are capped by $10,000 or ten percent of their income, whichever comes first, and can only accept up to $5 million.
Check out the inforgraphic below for more details on the bill and the state of crowdfunding today:
Click Image To Enlarge
COMMENTARY: On November 4, the federal crowdfunding bill, Entrepreneur Access to Capital Act – H.R. 2930, was passed by a nearly unanimous House of Representatives (430-17) in one of the few non-partisan acts of the current Congress. Referred to as ‘the most important financial reform of the decade.” the legislation promises great change. If the bill becomes law, it will transform how businesses raise small dollars.
The concept of ‘crowdfunding’ was originally included within President Obama’s jobs bill. While the job’s bill was encountering fierce opposition by the Republican Party, the concept of stripping the U.S. Securities and Exchange Commission (SEC) of some of its regulatory oversight met with positive reactions. Republican Congressman Patrick McHenry introduced the Entrepreneur Access to Capital Act in the House.
As passed, the House version of the crowdfunding includes the following requirements and limitations on crowdfunding:
- "The [issuer] may only raise a maximum of $1 million, or $2 million if the [issuer] provides potential investors with audited financial statements.
- Each investor is limited to investing an amount equal to the lesser of (i) $10,000 or (ii) 10% of his or her annual income.
- The issuer or the intermediary, if applicable, must take a number of steps to limit the risk to investors, including (i) warning them of the speculative nature of the investment and the limitations on resale, (ii) requiring them to answer questions demonstrating their understanding of the risks, and (iii) providing notice to the SEC of the offering, including certain prescribed information.”
This is going to drive angel investors and venture capital firms, which are at the forefront of seed stage and very early venture capital rounds, up the walls. That limit of $10,000 is a deal killer for them.
Do I need to remind everybody just how cheesy many of today's startups are? Even the high visibility ones, the ones you read about in my blog all the time, have issues with their management, business models, barriers to entry, etc.
Thankfully, the House of Representatives placed a maximum cap on the crowdfunding raise of $2 million and saw the wisdom of requiring audited financial statements, and placed a cap of $10,000 per investor.
The Senate is now debating the crowdfunding bill, let's hope that they see similar wisdom and don't just let the fox into the chicken coop.
Angels have dominated the seed stage, and many of them pool together to invest $250,000 to several millions for a promising startup. How will they be able to assess the degree of risk without some financials, and I doubt many of them are going to want to have hundreds of small investors invest on a crowdfunding deal. Who is going to be on the board of directors to look after their interests? You know what they say, "two's company, three's a crowd."
The new legislation is going to divert a lot of startups away from angels, and make it easier to raise capital from large groups of smaller investors, which is good for the investors because the risk is widely spread, and it makes it a whole lot easier for the founders.
On the other hand, inexperienced entrepreneurs know very little about valuation, and will probably want to raise as much as possible, without very little accountability or understanding of the repurcussions that can occur later down the road.
This new Congressional bill still raises so many questions.
Courtesy of an article dated November 19, 2011 appearing in Entrepreneur Corner
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