Senate passes small business investment bill.
President Barack Obama supports the measure, which stands to be one of the few bipartisan bills to pass Congress during this politically contentious election year.
Legislation to help startup companies raise capital by reducing some federal regulations won easy passage in the Senate last Thursday despite warnings from some Democrats that less government oversight would mean more abuse and scams.
Sen. Pat Toomey, R-Pa., a leading sponsor of the legislation, said it “might be the most pro-growth measure that this body will consider, perhaps this whole year.”
Democrats did manage to pass one amendment to increase investor protections, so the legislation will still require another House vote. The House passed the measure two weeks ago on a 390-23 vote. The Senate vote was 73-26, with all the “no” votes coming from Democrats.
House Majority Leader Eric Cantor, R-Va., said he would schedule a House vote next week “so we can get this bipartisan jobs bill to the president’s desk for his signature without delay.” That would be THIS week!
The legislation combines six smaller bills that change Securities and Exchange Commission rules so small businesses can attract investors and go public with less red tape and cost. It eases rules on advertising and permits startups to use the Internet and other social media to solicit a large number of small-scale investors.
The measure sailed through the House with almost no opposition but met resistance in the Senate after SEC Chairman Mary Schapiro and numerous consumer and investor groups expressed concerns that it dismantles some of the protections put in place after the Enron scandal and the excesses of the dot-com era. Senate Democrats demanded that investor protections be added to the bill.
On Tuesday, the future of the bill seemed in doubt when Senate Republicans rejected Democratic attempts to add protections to the bill and link it to reauthorization of the Export-Import Bank, an agency that helps U.S. companies finance their sales abroad. The Democratic leadership decided to move ahead after deciding on two amendments that addressed some, but not all, of the investor protection concerns.
That wasn’t enough for some Democrats. The Senate’s no. 2 Democrat, Dick Durbin of Illinois, said the bill would “allow companies to use billboards and cold calls to lure unsophisticated investors with the promise of making a quick buck investing in new companies.” Absolute NONSENSE.
“We are about to embark upon the most sweeping deregulatory effort and assault on investor protection in decades,” Sen. Carl Levin, D-Mich., said.
The centerpiece of the bill is a measure to reduce costs for companies seeking to go public by phasing in over five years SEC regulations that apply to “emerging growth companies.” That status would be in effect for companies with annual gross revenue of less than $1 billion.
The measure would remove SEC regulations preventing small businesses from using advertisements to solicit investors, raise from 500 to 2,000 the number of shareholders a company or community bank can have before it must register with the SEC, and allow smaller companies to sell up to $50 million in shares, compared with $5 million now, without filing some SEC paperwork.
It also encourages the practice of “crowdfunding,” in which the Internet is used to raise capital from a large number of smaller investors. The measure as it passed the House limits individual contributions to $10,000 or 10 percent of the investor’s annual income.
Obama expressed his support for the original House legislation, but the White House also said it supported Senate Democratic efforts to add adequate safeguards for potential investors in light of any reduced government oversight of investment transactions.
The Senate passed, by 64-35, an amendment on crowdfunding that requires websites to register with the SEC, requires promoters who are paid by a company to reveal that fact and requires a company trying to raise money to provide information about its financial condition, business plan and shareholder risks. It limits investments to 5 percent of annual income for those earning under $100,000 a year, or 10 percent for those earning more than $100,000.
Crowdfunding is now banned because it is not legal to widely advertise and offer securities to the public without SEC registration.
A second amendment, promoted by Sen. Jack Reed, D-R.I., would have tightened the definition of “shareholder” so that large companies don’t undercount the number of their shareholders in order to stay within the shareholder limit, set to rise from 5,000 to 2,000, for SEC registration. It fell on a voice vote.
White House press secretary Jay Carney praised the addition of the crowdfunding protections and said, “We will be vigilant in monitoring this and other elements to ensure the overall bill achieves its goal of helping entrepreneurs while maintaining protections for investors.”
HUGE victory for many small, grass-roots groups without whose efforts, this bill probably would never have been written or come to the floor of either chamber. So, we owe everything to these guys on their relentless pursuit of doing the right thing. What follows is an abridged story of how it happened:
When the Senate moved to vote on the House version of the JOBS bill last Thursday, it included a highly anticipated crowdfunding provision, the origins of which, appropriately, came from “the crowd.”
While there were many groups, companies and individuals involved in shaping the legislation, one of the most focused and sustained efforts pushing for the legalization of large-scale, ownership-based crowdfunding has come from an eclectic collection of internet-connected grassroots influencers: A blogger who first posted his idea on BoingBoing in 2009; the actor Whoopi Goldberg; a group of small business lawyers in Oakland, California; a trio of determined entrepreneurs; a small business group in Washington, D.C.; and the White House Office of Science and Technology Policy.
This group of influencers have helped push through a big rule change that many entrepreneurs hope could unlock that first stage of seed financing that evaporated with the onset of the recession.
The result of the legislation is that entrepreneurs will be able to test the viability of their ideas in a way that’s currently not possible by raising limited amounts of equity capital from large numbers of people who don’t have to be “accredited” by the Securities and Exchange Commission. And they could spread the word about their business ideas and solicit investors from their social networks online, which under current law is illegal without registering the business with all 50 state regulators.
That current state of affairs struck many in the small business and entrepreneurial community as absurd, at a time when projects on platforms like IndieGoGo and Kickstarter were garnering huge amounts of donations.
“If you try to offer equity to more than 35 members of your friends and family on Facebook, then you could go to jail,” said Woodie Neiss, an entrepreneur based in Miami who’s been working with two of his friends and building a movement for the past year to change the law. “That’s what we’re trying to say: This is silly. Let’s come up with a framework to enable this to work.”
Along with his friends, Neiss has been working with a San Francisco editor, a Washington, D.C. lobbying group for small businesses, and a loose coalition of entrepreneurs, lawyers and academics and the internet to build a grassroots lobbying campaign to influence public opinion and to change decades-old securities law to allow for experimentation with the idea of crowdfunding investments in startups.
Paul Spinrad, executive editor of Make in San Francisco, has worked with Neiss to lead the movement. A software developer and former section editor at WIRED, Spinrad had experimented with a crowdfunding prototype platform in 2003 called Premises, Premises. His later and (current) work at MAKE magazine inspired other business ideas, but he hasn’t had the time or money to invest in them. That led to a series of conversations with friends, and a December 2009 blog post on BoingBoing that solicited ideas from readers about how securities laws could be changed to allow equity-based crowdfunded investments. Spinrad’s initial idea was to persuade the SEC to carve out a regulatory exemption for any capital raising efforts under $10,000, and limited investor involvement of $100 per person.
It turned out that there were a lot of people who were interested in Spinrad’s idea. One group was the The Sustainable Economies Law Center (SELC) in Oakland, a group dedicated to promoting local community-oriented economic growth . Spinrad convinced its co-director Jenny Kassan to help him after reading one of her business columns in a local newspaper. Kassan herself was interested in the concept because she had a background in securities law and consults for small businesses on financing strategies.
At first, Spinrad and the SELC collaborated to petition the SEC to relax its rules on small business fundraising practices. Spinrad, Kassan and their colleagues raised $1,321 from 53 friends and associates in April 2010 to pay a token fee for the legal legwork on the crowdfunding site IndieGoGo. Spinrad documented the campaign’s progress at his personal blog “Change Crowdfunding Law,” and maintained a mailing list of about 200 people who had expressed interest in their campaign.
Over on the East Coast, Neiss and his two friends Jason Best and Zak Cassady-Dorion founded their own initiative called Startup Exemption, through which they hammered out the principles of a crowdfunding framework based on data garnered from the existing range of crowdfunding sites. They suggested a total fundraising limit of one million dollars for each small business, which the Small Business Administration defines as companies with average annual gross revenue of less than $5 million during each of the last three years, or since a business’ incorporation. Investors who aren’t wealthy enough to meet the SEC’s “accredited investor” standard would be limited to investing $10,000 or 10 percent of their adjusted gross income. Under the framework, state securities registration requirements would be pre-empted and entrepreneurs would have to register on a platform with their social security information, their real online identities on social networks, undergo a background check, and expose their business plan and idea to the public, which would thoroughly vet and discuss the idea online, as well as the business’ progress.
The two met in January last year after attending a small business forum convened by the SEC. While Spinrad writes and thinks out aloud on his blog about the nuances and implications of changing the law and tracks the progress of the campaign, Neiss and his friends have been lobbying public opinion and legislators on the issues. The duo have also been in touch with the White House Office of Science and Technology policy, which reached out to them last June: A senior policy advisor working the administration’s StartUp America initiative and doing outreach to the business community had been following Spinrad’s blog and asked the duo to come up with a two-page brief on their crowdfunding exemption idea.
Meanwhile, Neiss had also been working Capitol Hill, his network of friends and generating publicity for the idea. Last January, Karen Kerrigan, president of the Small Business and Entrepreneurship Council, helped Neiss land meetings at the SEC and with Rep. Patrick McHenry, (R-N.C.,) a member of both the House Financial Services and the House Oversight and Government Reform Committees. Several hearings were held throughout the course of the year on a bill that McHenry introduced that would legalize crowdfund investing. The House eventually voted to approve it for the first time last November, with full White House support. (President Obama touted his Startup America initiative in his State of the Union speech this year and reiterated his previous support to legalize crowdfunding.) Shortly after that, Neiss used IndieGoGo to raise money to organize a rally on Capitol Hill to publicize the issue and to urge the Senate to move the legislation, where it faced stuff opposition from state securities regulators and consumer groups.
Then, on December 9th, Whoopi Goldberg weighed in on her Facebook page on the issue, and asked her followers to sign Startup Exemption’s online petition to members of the senate to move the legislation.
“I was at a friend’s dinner in NYC,” Neiss explained in an e-mail. “I was talking about how hard it is to get capital for startups. One of the guys turned out to be President of Whoop Inc. He asked if there was anything they could do to spread the word. I met with them and they started to help spread the word.”
In the Senate, up until Tuesday, two versions of a crowdfund investing bill have been competing for legislators’ support: S. 1791, Sen. Scott Brown, (R-Mass.)’s Democratizing Access to Capital Act, and Sen. Jeff Merkley, (D-Oregon)’s Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (CROWDFUND). Both were introduced in December. Brown’s was supported by crowdfunding boosters, while Merkley’s was supported by state securities regulators.
The political climate is on the crowdfunding supporters’ side. Both the administration and Congress want to be seen doing something to boost the economy in an election year.
Tim Rowe, founder and CEO of the Cambridge Innovation Center, testified in front of the senate banking committee last week generally in support of the idea, with his own suggestions on how to improve on the current proposals. Wefunder.com, a crowd investing platform for startups, which is a startup itself at the innovation center, has launched an online petition in support of Brown’s legislation. More than 2,800 people have signed it since it was launched at the end of January.
Both Spinrad and Neiss are excited.
“We don’t understand why everyone isn’t talking about this,” said Spinrad in an interview. “This is an amazing, fundamental change, and it’s something everyone can relate to. Everyone knows Kickstarter, and everyone knows of a local restaurant that needs to get funded.” 🙂
He hasn’t sat back on his laurels even though the legislative momentum appears to have been on his camp’s side. So what did he do? Launch another crowdfunded effort to fund another campaign, of course.
In mid-February, he and the American Sustainable Business Council launched a new campaign on a new crowdfunded media-buying platform called Loudsauce to raise $13,530 for a full-page POLITICO ad about crowdfunding legislation.
It’s happening, kids!