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Possible Changes Coming to Allow More Crowdfunding

by Peter Renton on September 21, 2011

Last week with little fanfare or media coverage a House subcommittee met to discuss crowdfunding. The purpose of the meeting was to determine whether new legislation might be needed to allow small companies to raise money in a method more in line with 21st century practices.

While there was little media coverage of this meeting I did read this article in the Wall Street Journal (subscription required) and also coverage by Reuters on Yahoo News. The subcommittee of the House Committee on Oversight and Government Reform heard from top people at the SEC on this issue. Meredith Cross, the director of corporation finance at the SEC seemed open to possible changes.

Ms. Cross said the SEC, as part of its review of capital rules, was far along in a study to examine revisions to the 500-shareholder cap for private companies. The SEC is also working on a release to solicit public comment on issues relating to the strict ban on private companies publicizing their shares.

Congressman Patrick McHenry proposed legislation to relax SEC disclosure rules on public offerings by companies seeking crowdfunding. He proposed that an unlimited number (right now there must be less than 500) of investors be able contribute up to $5 million to crowdfunded companies. The Obama administration also seems to support the idea of changes.

I see this as a real positive step forward. With the interconnected nature of social media sites like Facebook, Twitter and LinkedIn many small business owners would be able to raise money from friends, family and business associates if there were fewer limitations. This kind of interconnectedness has only really become prevalent in the last 3-5 years but it is no doubt here to stay.

A National Exemption to State Securities Law

What relevance does this have to p2p lending exactly? Well it wasn’t covered by any of the news articles but there was this one little tidbit mentioned on Twitter that grabbed my attention. Part of the discussion was about whether there should be a national exemption from state securities law for these kinds of investments. This is what Lending Club and Prosper would so dearly like. Dealing with the state securities regulators one by one has meant that only residents of some states can participate in p2p lending.

If crowdfunding is able to secure this national exemption it follows that p2p lending might be included as part of this legislation. I hope Lending Club and Prosper are making their presence known in Washington to lobby for this kind of action.

Hat tip to KeirGumbs who posted Twitter updates while the meeting was being held.

[Update: This news article came out right after I published this post. Meredith Cross, quoted above, has recused herself from any discussions about crowdfunding - because she was an advisor to Lending Club prior to joining the SEC in 2009.]

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{ 15 comments… read them below or add one }

Dan B September 21, 2011 at 11:48 am

What “limitations” are you referring to that you believe need to be eliminated or relaxed because they are a hindrance to small business owners who are trying to raise money from friends, family or business associates ??

Peter Renton September 21, 2011 at 12:28 pm

@Dan, There are two main limitations for small business owners as I understand it:
1. There is a 499 person limit on the number of equity investors before a business has to report its finances to the SEC.
2. Small businesses cannot make a general solicitation for equity investment from the public without registering with the SEC first.

Here is a good article from Businessweek from earlier this year that explains the reasoning for change in more detail:

Dan B September 21, 2011 at 8:42 pm

.So your concerns are about small businesses attempting to raise capital outside of or beyond friends & family, right? 499 is a big number & no one has that much family. And unless you’re in showbiz or you’re a boxer who currently holds a world title in your weight class…………. you don’t have 499 friends either. :)

Peter Renton September 21, 2011 at 8:59 pm

@Dan, I certainly don’t have 500 friends but I ran a company in the 1990′s that had over 15,000 customers many of them extremely loyal. If I had wanted to raise equity financing I think I could have easily had 1,000 of these customers kick in $100 for $100,000 in funding. But that kind of deal is illegal today.

But the real problem is my point 2 above. No business can solicit equity investment from the public without registering with the SEC. This means all crowdfunding activities like you see on Kickstarter and Indiegogo have to be donation based.

Dan B September 21, 2011 at 11:01 pm

You;re absolutely right. I didn’t even consider it from those angles. Now that you pointed it out I can also think back maybe 10 years ago where I could have pulled off that type of a deal & the impediments that you’ve correctly pointed out.

Charlie H September 22, 2011 at 8:27 pm

Is it just me or did LC just tweak there interest rates today?

Peter Renton September 23, 2011 at 6:19 am

@Dan, I think change will come from the SEC on this one – whether or not it will impact p2p lending remains to be seen.

@Charlie, Rates look the same to me.

Dan B September 23, 2011 at 6:41 am

Charlie is right. For example, the 36 month A5 rate is up to 8.9%.

Peter Renton September 23, 2011 at 7:01 am

@Dan, I stand corrected. But it wasn’t yesterday, it looks like they changed the rates a couple of weeks ago. A1 went from 5.42% to 6.03%, A2 from 5.99% to 6.62%, A3 from 6.99% to 7.51% and so on. Looks like most rates went up 0.5 – 1% for most but not all loan grades. At the same time it looks like Prosper has decreased their rates. They are keeping us on our toes.

Good catch Charlie/Dan.

Charlie H September 23, 2011 at 10:37 am

Well I am glad I am not crazy at least.
One would think that this would generate at least an email to investors (lenders) and at least a pop up box after logging in the first time post change.

Peter Renton September 23, 2011 at 11:34 am

@Charlie, It seems that Lending Club rarely announce anything about an interest rate change, whereas Prosper often lets everybody know. I agree it would be nice to be informed of any changes.

Dan B September 23, 2011 at 9:33 pm

So Peter, how would you interpret this decrease in borrower rates at Prosper?

Peter Renton September 24, 2011 at 6:49 am

@Dan, I think the only reason for a reduction in borrower rates is to attract more borrowers to the platform. Prosper has been hovering between 300 and 400 loans on the platform for some time now whereas a couple of months ago that number was usually over 500. It will be interesting to if this change increases the number of available loans back to that level.

Dan B September 25, 2011 at 1:09 am

Doesn’t Prosper still offer $100 for every borrower referred to them? Is there a catch? I could probably turn over some rocks & round up several.

Peter Renton September 26, 2011 at 10:54 am

Yes, Prosper still offers a $100 referral fee for new borrowers:

There is no catch. But they must sign up for a loan through the Prosper referral page and you get the $100 after they have made their first payment.

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