We’re Getting Close!

The Senate appears ready to follow the House’s lead and pass legislation that would make it easier for small companies to obtain capital from investors.

Senate Majority Leader Harry Reid, a Democrat from Nevada, announced early last week that the Senate would move forward on bills “to spur small-business growth” by streamlining rules on capital-raising while still protecting investors.

The House overwhelmingly passed legislation in November that would allow businesses to use “crowdfunding”—soliciting small equity investments from large numbers of people via the Internet—as long as the total raised is $2 million or less. The bill limits individual investments in crowdfunded securities to $10,000 or 10 percent of the investor’s income.

In addition, the House raised the threshold for stock offerings under the Securities and Exchange Commission’s Regulation A from $5 million to $50 million. This would allow more companies to raise capital without registering the stock with the SEC.

The Senate Banking Committee has held two hearings on these proposals and are planning more in the next couple of weeks.

“This is something we should agree on,” Reid said. “These companies need the ability to get cash to innovate, grow, and build.

Karen Kerrigan, president and chief executive officer of the Small Business & Entrepreneurship Council, was optimistic about the passage.

“Access to capital continues to be a major struggle for small businesses and entrepreneurs. It is a no-brainer for the Senate to move forward with this package of capital formation bills,” she said. “Based on my positive interactions with Senate offices on both sides of the aisle, I believe we are on track for getting the package of capital formation bills through the chamber.”

President Barack Obama has endorsed these bills and also has proposed phasing in securities regulations for smaller companies in their first few years after going public.

Crowdfunding Set to Explode with Passage of Entrepreneur Access to Capital Act.

Nearly $100 million in seed money was pledged to start-ups and creative projects through the crowdfunding platform Kickstarter.com last year–just one of many websites now dedicated to matching projects with people who have some means and desire to support them. What Kickstarter donors got in return were things like “thank you” credits in films, DVDs, tee-shirts, flowers, cookies, and concert tickets. Federal and state securities laws prohibit these start-up operations from offering equity to their investors. The good feeling that comes from supporting innovation seems to be the main reward for many people who hand over cash to support the schemes of others online.

But what if there was potential for a financial return on these crowdsourced investments? If startups could offer stock to their small-stake supporters, some (including Amy Cortese in this New York Times Op-Ed) predict that the practice of crowdfunding would explode, opening up far more resources to entrepreneurs, spurring innovation, and creating jobs.

That’s exactly what the Entrepreneur Access to Capital Act (HR 2930) aims to achieve. The bill, has the support of President Obama and was passed by an overwhelming majority in the House in November but has been hung up in the Senate ever since.

Portfolio.com and Reuters reported on Tuesday that Senate majority leader Harry Reid announced plans to push the legislation forward. According to Reuters, the bill would:

“Create a regulatory framework to let private businesses use crowdfunding … to raise up to $2 million annually from investors pledging no more than $10,000, or 10 percent of their annual income.“

Though a report in the Wall Street Journal earlier this month suggested that the U.S. Securities and Exchange Commission might stand in the way of the bill, Reuters reported yesterday that:

“The SEC is considering updating its own rules to foster capital formation. Earlier this month, an SEC advisory panel urged the agency to relax outdated rules that trigger public financial reporting for companies, but it stopped short of backing crowdfunding, citing concerns about investor protection.”

In a TechCrunch interview at the Techonomy conference last November, AOL founder Steve Case pointed out the irony in current rules that limit investing to the accredited, noting that you don’t have to be accredited to go to Las Vegas and lose $10,000 at a table in an hour.

But “there are real concerns,” as Cortese noted in her Times Op-Ed:

“The S.E.C. must balance its dual mission of facilitating investment and protecting investors, and as we all know, snake-oil salesmen are alive and well on the Internet. Furthermore, Wall Street banks are likely to fight any efforts to encourage crowdfunding because it cuts them out of the equation. But the potential rewards outweigh the risks. With such sums, the hazard to any single investor is limited. And information is more freely available today than in the 1930s, when the regulations were written.”

Just how great is the potential of the policy to spur economic growth? A Capital Creation and Crowdfunding Conference in Los Angeles next month promises to explore “how the rising private markets will lead the nation toward an era of economic prosperity.”

And the industry publication The Daily Crowdsource is hoping to figure it out for us. They’re using the crowdfunding platform RocketHub to raise capital to conduct a crowdsourcing market research report.