Capital Access Bills Would Help Small BusinessJanuary 24, 2012
Three bills that would make it much easier for small businesses to raise capital are stalled in the Senate. These bills passed the House with very strong bipartisan support and, in the case of the crowdfunding bill (H.R. 2930), with the support of President Obama. NSBA is urging all small businesses to contact their Senators and urge them to support the House bills without major amendment.
The Access to Capital for Job Creators Act (H R 2940) passed the House by a margin of 413-11 on Nov. 2, 2011. This bill would allow for general solicitation or general advertising to find investors, provided that all purchasers of the securities are accredited investors. Accredited investors are, generally, people who have a net worth of more than $1 million, annual incomes over $300,000 or institutions. It presently is illegal to advertise or post information on the internet seeking such investors unless you are a public company.
The Entrepreneur Access to Capital Act (H.R. 2930) passed the House by a margin of 413-11 on Nov. 2, 2011.This bill would create a so-called crowdfunding exception that would, if audited financial statements are provided to investors, allow a company to raise up to $2 million provided that the aggregate amount sold to any investor in a 12-month period does not exceed the lesser of $10,000 or 10 percent of such investor’s annual income. It is presently illegal to post information on the internet or otherwise publically seek investments unless you are a public company.
The Small Company Capital Formation Act of 2011 (H.R. 1070) passed the House by a margin of 421-1 also on Nov. 2, 2011. The bill would effectively amend Regulation A by increasing the aggregate offering amount of all securities sold within the prior 12-month period from $5 million to $50 million. The bill further provides that the securities may be offered and sold publicly and that the securities shall not be restricted securities within the meaning of the federal securities laws. Regulation A is a simplified form of registration meant for small and mid-sized businesses. In addition, the ongoing compliance costs for Regulation A companies are substantially lower.
None of these bills would dilute state or federal anti-fraud provisions.
Together these three bills have the potential to positively transform the ability of small businesses to raise capital to grow their businesses or get new ideas off the ground. It would enable small firms to raise capital without spending a fortune on attorneys or having to provide a big piece of the company to investment bankers.
Efforts are underway in the Senate to kill these bills or water them down to the point where they would make little difference in practice. There is particularly strong opposition from state securities regulators who oppose allowing small businesses to raise capital without first registering in all states and the District of Columbia.
Sen. Scott Brown (R-Mass.) has introduced the Democratizing Access to Capital Act of 2011 (S. 1791). This bill would provide a much more limited crowdfunding exception than the House bill. Investments would be limited to $1,000 per investor and $1 million overall. It also would more heavily regulate issuers and intermediaries such as web sites.
Sen. Jeff Merkley (D-Ore.) has introduced the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2011 (S. 1970). It would provide a even more limited crowdfunding exception than the Brown bill. In general, investors would be limited to investing $500, although those with incomes over $50,000 could invest more. In addition, lifetime limits of $2,000 of investments in crowdfunded companies would be imposed, although higher income investors could invest more. The holding period on resale would be set at two years (compared to one year for the other bills.) Intermediaries would have to be either a registered broker-dealer or a registered funding portal (a new type of regulated entity). Many additional requirements are added for issuers and intermediaries. This bill would not pre-empt state law. Thus current state laws apply, including each state’s blue sky securities laws. Therefore crowdfunding issuers would be required to comply with and make filings in 50 states and the District of Columbia (or simply not offer securities to investors in certain states.)