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Crowdfunding Bill Likely to Become Law Very Soon

by Peter Renton on March 2, 2012

Last year the U.S. House passed a crowdfunding bill (H.R. 2930 – Entrepreneur Access to Capital Act) but it has never made it to a vote in the Senate. That looks set to change.

Yesterday House Majority Leader Eric Cantor announced that he would bring up and pass a jobs bill in the house next week. According to this article in The Hill it will also garner support from the Democrats. The new jobs bill is actually six bills one of which is H.R. 2930. As Forbes reported earlier in the week Senate Majority leader Harry Reid now supports H.R. 2930. Many of the other bills are also popular with both sides so it looks like we may well have a new crowdfunding law possibly as soon as later this month.

To recap, H.R. 2930 has three main components that will effect how small businesses are able to raise capital:

  • A $10,000 limit per investor (or 10 percent of annual income, whichever is less).
  • A cap on the amount a company can raise of $1 million per offering (and up to $2 million if audited financial statements are provided).
  • No limit on the number of accredited or unaccredited investors.
But what is most interesting to followers of p2p lending is that this bill creates a legal precedent for a national securities law that overrides state law – something that both Prosper and Lending Club would dearly love to see in a p2p lending bill. If you allow individuals to invest small sums of money in businesses (a highly risky endeavor) it stands to reason that a similar investment in a creditworthy individual should also be allowed.
There is still a long way to go but I think this is good news for the p2p lending industry.
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{ 5 comments… read them below or add one }

Bilgefisher March 2, 2012 at 8:31 am

Peter,

Thanks for the heads up on this. This is potentially devastating for small business. If I read this correctly, this will make it much harder to seek private money for small businesses.

The best example I have is real estate. Suppose you want to buy and renovate a house. Many real estate investors use private money from unaccredited investors. The note is backed by the property. No different then a mortgage. The advantage; a real estate buyer can move very quickly to purchase a house, they can hold more than 10 mortgages, they can do so with very little money out of pocket. Now try using 10 investors on a 100k house. First it is much more difficult to find 10 people for the same note, 2nd should a default occur and they have to take back the property, you now have 10 hands in the pot and not 1. Finally, the investor is further limited on how they can invest there money.

This could be a serious roadblock for any business. Assume you want to borrow 100k from a friend to start a coffee shop or any other venture. If you don’t qualify from the bank, then what?

I hope I’m reading this wrong, but it seems like a way to push people towards banks for loans. It will further limit small business in this country.

Jason

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Michael March 2, 2012 at 9:46 am

@Jason

The bill does indeed say “individual investments in the securities are limited to an aggregate annual amount equal to the lesser of $10,000, and 10% of the investor’s annual income.”

Perhaps you could break up the mortgage into say 5 mortgages? Then an investor could fund 50K towards the house. Just thinking of a work around.

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Louis Lamoureux March 2, 2012 at 10:34 am

@ Bilgefisher First of all, the full text of the bill is quite a bit more complex than the synopsis Peter gave, so don’t freak out. The law applies to companies issuing securities. Which would not happen in the two scenarios you suggested. What it does do is open up funding options for small businesses that don’t have the resources to get listed on NYSE, NASDAQ.
Under your coffee shop scenario, traditionally, you could go to your buddy and request the money and you’d likely draw up contracts covering both parties. I don’t think that would be affected by this law because you are not issuing securities (especially for a loan).
But…
Let’s say you don’t have a buddy that has $100k to invest in your company, then this law says you could issue securities to raise the money, so you go to your parents, cousins, friends, strangers, and neighbors and sell them shares of the business to raise the money. This law makes it legal to do that and without having to spend millions to go public on the NYSE.

As Peter stated, what makes this interesting for crowdfunding is federal law trumping state law. LC and Prosper limit who can invest because they are constrained by state law.

Notice in the full text of the bill that the concern is over the risks to the investors, the transparency of the financials, etc. I’ve heard it said, that if LC or Prosper went public, they would be able to open up to every state in the Union. Why? because the listing requirements to be a public company would address those concerns about transparency and risk.

Additionally if you were planning to go public, you wouldn’t really be concerned about profitability, you’d be concerned about growing as large and as fast as you could first.

I wouldn’t be surprised to see an LC IPO later this year.

Lou

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Bilgefisher March 2, 2012 at 11:07 am

Lou,

Thanks for the clarification. I was bit riled so I researched the bill after I posted. I agree with your points.

Also you make a very interesting case for both prosper and LC going public.

Jason

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Peter Renton March 3, 2012 at 4:20 am

@Bilgefisher, Lou explains it quite well. This is all about the public issuance of securities which right now is simply not allowed unless you file an IPO. In the coffee shop scenario the way it can work is that you post a notice in the cafe and on Facebook and you have your best 50 customers/friends each kick in $2,000 for 1% of the stock in the company and then bingo. You have your $100K and everyone has stock in your company. It is designed to really stimulate investment in small business and I think it will do just that.

@Lou, Yes, I have spoken with LC about the IPO option and that will indeed preempt the state laws and they will be able to have investors in every state. But I wouldn’t hold your breath on this. I would be extremely surprised to see an IPO this year or even next year for that matter. LC is growing quite easily with just the states they have and accredited investors can invest from any state and they are getting more popular with those people all the time. I think an IPO is three to four years away and by then they may not even need the override of state law. There may well be a national p2p lending bill on the books by then.

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