Access to capital through crowdfunding

This week I’m off to DC to join David Levine, co-founder and director of the American Sustainable Business Council, in a media tour for the ASBC (I serve as vice-chair of the organization).  We will be doing a few other things including have discussions with the Americans for Financial Reform and hopefully some Congressional staff on the issue of crowdfunding.

I first mentioned crowdfunding as a potential tool for small businesses and entrepreneurs to have access to capital way back on November 17, 2010.  At that time only a few organizations, including the ASBC and the SC Small Business Chamber of Commerce (SCSBCC), were aggressively supporting changing SEC regulations to allow crowdfunding and we thought it was a long shot.  My have things changed.

First President Obama announced his support and instructed the SEC to seriously consider it.  Then the House overwhelmingly passed a version of crowdfunding.   Then bills were introduced in the Senate.  The House just recently passed more legislation including crowdfunding again and this week there may be action in the Senate.

But with all this relatively rapid action there is the distinct possibility that the original crowdfunding concept to really help small business will be lost as Congress and special interest groups expand the concept well beyond the initial idea.  The ASBC and SCSBCC will be working in DC this week to protect our small business interests.

The ASBC has posted on their website (also below) a good overview of how crowdfunding can help small business.  I’ll keep you informed of actions on the Hill.

Crowdfunding: Accessing Capital for Small Business

Given the challenges small businesses and entrepreneurs face in raising capital to help them grow and compete, the crowdfunding concept is a viable solution. Crowdfunding, especially in the context of community-based financing of local projects, has the potential when done correctly to be a very useful tool in opening up access to capital for business. Crowdfunding simply put is raising investment funding in small increments from a large number of people often through Internet marketing.

Current Securities and Exchange Commission (SEC) rules make this type of small dollar investments cost prohibitive due to registration and reporting requirements at both the state and federal level. Since 2010, ASBC has been one of the earliest supporters of crowdfunding as a vehicle for small business to gain access to capital. ASBC has worked on Capitol Hill to insure that the interests of locally-owned small businesses and entrepreneurs are properly served in the development of crowdfunding legislation.

Legislation is moving through Congress that would create a Crowdfunding exemption to the SEC regulations. The House passed the McHenry bill, the Entrepreneur Access to Capital Act (HR. 2930), with an overwhelming bipartisan majority. In the Senate, two bills are pending: Democratizing Access to Capital Act (S.1791) by Sen. Scott Brown (MA) and the CROWDFUND Act (S.1970) by Sen. Jeff Merkley (OR). We applaud the work of both senators.

It is vitally important for any crowdfunding legislation to allow small businesses to pursue maximum investments of $100 or slightly higher from individuals with an aggregate cap on total capital raised in the range of $100,000. Low individual investor limits combined with aggregate caps promote community-based economic support for local businesses while keeping potential investor losses and fraud risks relatively low; these limits allow relatively light SEC oversight.

We understand the argument for making intermediaries optional, since many small business owners and investors are not tech-savvy and may not be comfortable investing via an unfamiliar third-party platform. However, further work is needed to ensure sufficient investor protections without requiring an intermediary. We support strong and enforceable investor protections that won’t unnecessarily restrict the flow of capital within local communities and to local projects.

Because individual state laws on investments pose an obstacle to crowdfunding, the federal law should override state regulations.

For more information, or to get involved in the working group that manages this campaign, please contact us.