(Ed. Note: This story was updated to note that the House Committee on Financial Services will be marking up this bill.)
Rep. Patrick McHenry, R-N.C., Deputy Republican Whip and member of the House Financial Services Committee, has introduced the Equity Crowdfunding Improvement Act of 2014 into the House of Representatives.
The bill, H.R. 4564, is aimed at ensuring investor protections while reducing bureaucracy. It would also increase the amount a company could raise through crowdfunding.
The JOBS Act of 2012 included two provisions for crowdfunding. Title II, which allows entrepreneurs to engage in general solicitation, came into effect last year, allowing companies to publicly share and advertise that they are looking for investments.
Title III, which would allow companies to raise capital from non-accredited investors, has been mired in a review of more than 500 proposed rules by the SEC since last October.
Under these controversial rules, a company could raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
Investors with both annual income and net worth less than $100,000 could invest the greater of $2,000 or 5% of their annual income or net worth over the 12-month period, while those with more than $100,000 of annual income and net worth could invest the greater of $5,000 or 10%.
Companies conducting a crowdfunding offering would be required to file certain information with the SEC that critics say is onerous.
This documentation would include information about a company’s officers, directors and owners, information about the offering and disclosures of its financial condition along with financial statements accompanied by audited tax returns.
Title III’s proposed investor protections—most of which are uncontroversial—provide that crowdfunding transactions take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal.
Intermediaries would have to do the following:
- Provide investors with educational materials
- Take measures to reduce the risk of fraud
- Make available information about the issuer and the offering
- Provide communication channels to permit discussions about offerings on the platform
- Facilitate the offer and sale of crowdfunded securities
Funding portals would be prohibited from offering investment advice or making recommendations, soliciting purchases, sales or offers to buy securities offered or displayed on its website. They could not impose restrictions on compensating people for solicitations, nor could they hold, possess or handle investor funds or securities.
McHenry’s Bill and Prospects
An analysis of McHenry’s bill on VentureBeat indicates that it would raise the amount a company could seek up to $3 million—or $5 million if the company provided an audited financial statement—and increase investment caps to the greater of $5,000 or 10% of an investor’s annual income or net worth.
The bill would also seek to reduce some of the bureaucracy in the SEC rules, such as annual audits and compliance reports.
It would retain significant investor protections, including transparency and reporting elements having to do with disclosures, investor education, escrow agents and intermediaries.
It would also preempt state-by-state registration requirements that would be required under a traditional filing—and would effectively kill crowdfunding.
Of considerable interest to entrepreneurs, the bill would add crowdfund investment companies, allowing funds to develop with the sole purpose of raising money from the crowd to make investments into startups and small businesses, but leave the diligence to the experts.
On June 10, the House Committee on Financial Services announced the markup of several bills, including H.R. 4564, and said they would be considered in open session.
What are the legislative prospects for McHenry’s bill or any amendments to Title III?
In a phone interview, Richard Swart, who heads up a crowdfunding center of UC Berkeley and has consulted with the White House on related issues, said that McHenry’s bill would “essentially repeal Title III. His staff believes it’s too expensive and too difficult, and people won’t use it, so why have regulations that no one will take advantage of.”
Swart envisages two scenarios for improved Title III legislation. If the leadership of both the House and Senate remain the same after midterm elections, “we’ll probably see some fixes because [Democratic Majority Leader] Sen. Reid and some liberal Democrats in the Senate are firmly opposed to changing it.”
If the Senate majority should revert to the Republicans, “I can guarantee you—to the extent anyone can guarantee politics—that you’ll see legislation,” Swart said.
“If the Senate flips, you’ll see a very rapid introduction of corrective legislation.” One “corrective” would be an increase in the amount a company could raise through crowdfunding from the SEC-proposed $1 million to $3 million to $5 million.