Crowdfunding: A Key Component of Jump-Starting Small Businesses and Our Economy
For some time, CompTIA has been calling on Congress and the Obama Administration to advance technology progress and job creation by providing small businesses and entrepreneurs greater access to growth capital. While CompTIA continues to support efforts to increase the availability of loans to growth-oriented small businesses, there are other steps that can be taken, such as easing the burden of raising equity capital by small businesses. This can be a win-win situation for investors, small businesses, unemployed citizens and our national economy.
Congress is now considering legislation that would enable small businesses to raise equity through a process referred to as “crowdfunding.” That is, a large group of investors (the “crowd”) come together to make small investments (“fund”) in a business. Currently, there are two main proposals dealing with crowdfunding: H.R. 2930, “Entrepreneur Access to Capital Act,” which passed the House by a wide margin on Nov. 3, 2011 and is now awaiting action in the Senate; and S. 1791, “Democratizing Access to Capital Act of 2011,” as introduced by Senator Scott Brown (R-Mass.) on Nov. 2, 2011. This Senate bill is currently under the jurisdiction of the Senate Banking Committee awaiting further action.
In general, the House-passed legislation allows for a higher individual level of investment but contains additional compliance burdens.T he Senate bill imposes fewer regulatory burdens on small businesses but lowers the individual level of investment. Both bills would allow up to $1 million to be raised in a 12-month period. The House bill would allow up to $2 million if audited financial statements are provided to the investors. CompTIA supports inclusion of the optional $2 million limitation provided by the House version. We believe that businesses should be allowed the higher limitation when audited financials are provided.
A key difference in the two pieces of legislation is the maximum allowable investment. The House bill would allow up to $10,000, limited to 10 percent of investor income; the Senate version sets a $1,000 per investor limit, which is simply too low -- especially in situations when the company provides additional documentation, such as audited financial statements.
The Senate bill provides investor protection by requiring the issuer to do the following:
disclose to investors all rights of investors, including complete information about the risks, obligations, benefits, history and costs of offering;
- and file required notices with the SEC.
The House version is much more detailed concerning the steps that an issuer must complete. While we understand the intent is to protect investors, the many requirements placed on issuers would likely mire down the process and increase the cost of the offering. This would be contrary to the goal of crowdfunding legislation, which is to streamline the offering process for small businesses in order to increase equity investment.
The basic question is how much should be required of the issuer in order to both protect the investor and maximize the issuer’s ability to raise equity investment. We believe that rather than detailing each specific step, the safeguards included in the Senate version provide a reasonable balance.
We are also supportive of the state pre-emption included in both bills. It is essential that Congress provide a level playing field for investors and issuers to come together across state lines. Businesses are continually burdened with compliance requirements from the multiplicity of federal, state and local jurisdictions. A single set of rules that would apply nationally is critical to the success of crowdfunding legislation.
There is also pending legislation that would reduce the filing and compliance burdens for certain small businesses that seek to raise equity capital. This legislation would increase the SEC Reg. A exemption level for small offerings from $5 million up to $50 million. Further, there have been discussions concerning a possible amendment of SEC Reg. D to allow issuers to use Internet solicitations in a public offering. CompTIA supports each of these proposals, which would both simplify and reduce the compliance costs to small businesses in raising much-needed equity capital.
America is clinging to its spot as the world leader in technology innovation. Unless we improve the ability of small businesses and entrepreneurs to access capital, our current economic climate will continue to stagnate. Congress can take modest, fiscally-responsible steps to provide a better climate to improve access to capital for our small businesses. Nowhere is this more important than the fiercely-competitive global IT industry. Clearly, increasing the ability of small businesses to raise equity capital is needed and will fuel job growth and our recovering economy.