Using the Internet and social media, crowdfunding allows entrepreneurs to raise limited amounts of capital from a wide array of micro-angel investors. In this common-sense way of expanding the universe of potential investors, transparency and a large population - the crowd - wind up evaluating each investment opportunity.
Making crowdfunding legal makes sense given the capital needs of small firms, and the tremendous opportunities opened for small investors via the Internet and social media. And rare bipartisan support exists for this important economic measure.
For example, on November 3, the U.S. House of Representatives passed the Entrepreneur Access to Capital Act (H.R. 2930), which again allows small businesses and small investors to get together via the Internet, by a vote of 407-17. Specifically, the legislation allows crowdfunding when the total amount of capital to be raised is $2 million or less, with individual investments limited to $10,000, or 10 percent of an investor's income, whichever is less.
President Barack Obama has embraced crowdfunding. On November 2, the administration released the following in a "Statement of Administration" policy: "In the President's September 8th Address to a Joint Session of Congress on jobs and the economy, he called for cutting away the red tape that prevents many rapidly growing startup companies from raising needed capital, including through a ‘crowdfunding' exemption from the requirement to register public securities offerings with the Securities and Exchange Commission. This proposal, which would enable greater flexibility in soliciting relatively small equity investments, grew out of the President's Startup America initiative and has been endorsed by the President's Council on Jobs and Competitiveness. H.R. 2930 is broadly consistent with the President's proposal. This bill will make it easier for entrepreneurs to raise capital and create jobs."
Steve Case serves on the President's Council of Jobs and Competitiveness, and also is chief executive of investment firm Revolution and heads up the public-private Startup America Partnership. Speaking at the Washington Economic Club on February 23 about the importance of entrepreneurship in the U.S., as the Washington Post reported, Case "underlined the importance of improving access to capital by allowing entrepreneurs to tap into modern financing alternatives like online crowd-funding platforms."
So, what's the hold up? The U.S. Senate has yet to take action.
Senate bills would have different funding levels and tighter regulations. As reported by CNBC.com on February 14, "Karen Kerrigan, CEO of the Small Business & Entrepreneurship Council says she thinks it has an 80 percent chance of passing the Senate when it does come up for a vote. ‘It has deep bipartisan appeal and President Obama's support,' she says. The only roadblock seems to be state regulators, who fear massive potential unregistered securities fraud. ‘They're spreading fear and slowing the process,' she says."
In particular, state regulators want to prevent the preemption of state law, and are seeking to severely restrict the maximum amount that can be invested by an individual.
The effort to over regulate in the Senate, in response largely to this lobbying from state regulators who in the end are seeking to protect their turf (as government regulators and bureaucrats do), places this common-sense, pro-entrepreneur crowdfunding measure at risk. With transparency and basic safeguards, as proposed by the House and the President, crowdfunding can be a tremendous opportunity for entrepreneurs to find the capital needed to start up and/or grow. It would be a clear plus for U.S. economic growth, competitiveness and job creation.
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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.