With Senate Bill Passage Crowdfunding Legalization On the Horizon

On Thursday, the U.S. Senate approved legislation that will legalize crowdfunding and allow the general public to make equity investments in start-up companies and small businesses. By a 73-26 vote, the bipartisan CROWDFUND Act (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure) was passed as part of the JOBS Act or Jumpstart Our Business Startups Act (Is it just me or are they really good at coming up with these acronyms?).

The legislation will lift SEC restrictions on soliciting investors through advertising and allow companies to use crowdfunding platforms to raise up to $1 million per year from a larger pool of small, unaccredited investors. Small private businesses will also be able to sell up to $50 million in shares through a public offering before having to register with the SEC. With both parties clamoring to be perceived as supporting the growth of business, the bill sailed through the House two weeks ago and has the backing of the President. It will likely be one of the few bipartisan bills to easily pass congress this year.

Now that the legalization of crowdfunding is within reach, there is even more buzz about the promise of crowdfunding and the potential for this landmark bill to change business, investing, and even the larger economy in significant ways.

According to the New York Times, former AOL executive Steve Case who campaigned in favor of the bill said in an interview that despite the significant role that the Internet plays in most people's lives, “the ability to use that platform to leverage investment has been limited." For companies and for investors, "this democratizes the access to investments."

Over at TechCrunch, the founder of crowdfunding start-up CircleUp talks about how the legalization of crowdfunding could "open up new funding possibilities for neglected areas of the economy" and "change start-up investing forever." He also reminds us that with only 1% of the country acting as angel investors and less than 1% of all small businesses getting outside equity investment, start-up investing has been reserved for the 1% - that is, up until now.

As we've mentioned before, critics of the bill fear that loosening SEC regulations will increase the risk of fraud. A key part of the bill seeks to reduce the costs of going public by phasing in SEC regulations. Companies that have been public for less than 5 years with up to $1 billion in revenues would be exempt from regulations that were put in place to protect investors from incidents like the fall of Enron and the bursting of the dot com bubble. In an interview, Senator Carl Levin of Michigan said, "We are about to embark upon the most sweeping deregulatory effort and assault on investor protection in decades."

In an effort to address some of these concerns, Senate Democrats added several amendments to the legislation that would increase protections for investors. Under the Senate version of the bill, crowdfunding platforms will be required to register with the SEC and an income based cap will be created to limit the amount that unaccredited investors can contribute.

Companies participating in crowdfunding will still have to file information with the SEC including the names of officers, major investors, and financial information. Those raising under $100,000 will be required to provide tax returns and financial statements certified by a principle of the company. Companies seeking to raise up to $500,000 must file financial statements that have been reviewed by a certified public accountant. And those raising more than $500,000 will have to provide fully audited financial statements.

As a result of these amendments to the bill, it is being sent back to the House for reconciliation. House Majority Leader Eric Cantor of Virginia said that he will hold a final vote on the bill early next week so that the President can sign it into law as quickly as possible.

[Image credit: Greg Willis, Flickr]

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Kara Scharwath is a corporate social responsibility professional, marketing consultant and Sustainable Management MBA Candidate. She is currently working as a Graduate Associate in Corporate Citizenship at the Walt Disney Company while pursuing her degree at Presidio Graduate School. Follow her on Twitter @karameredith.