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U.S. House Passes Crowdfunding Bill

by Peter Renton on November 9, 2011

I never talk politics on the blog here but I must commend the Democrats and Republicans for coming together last week. On November 3rd the Entrepreneur Access to Capital Act (known as H.R. 2930) was passed in a near unanimous vote by the House of Representatives.

I first covered this bill a few weeks ago as arguments were being discussed in a House Subcommittee. It came up for a vote in the U.S. House last week and it passed by a margin of 407-17. It has also received the backing of President Obama so if the Senate passes this bill (which, dare I say, is likely) it will soon become law.

One aspect of the bill has changed since it was introduced by Rep. Patrick McHenry. He wanted a $5 million limit on capital raising – that has been reduced to $1 million or $2 million. Here are the core tenets of this bill:

  • 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.

Entrepreneurs Can Raise $1 Million From the Public

The biggest change with this legislation, as I see it, is that entrepreneurs will be able to solicit funds publicly. Right now, if a startup company wants to raise capital from the public they need to register with the SEC – a process that costs around $2 million in legal fees.

When this bill becomes law startups will be able to solicit seed money from their friends, relatives and customers in a public manner. So if a 20-something entrepreneur who has 1,000 friends on Facebook wants to start a company he can announce this to his friends and if a good portion of them kick in, say, an average of $100 he has himself some significant seed capital.

This May Have Big Implications for P2P Lending

While this will not help the regulatory challenges of p2p lending in the short run it could lead to similar legislation some time in the future. You see, this legislation allows entrepreneurs to issue securities to the public circumventing states securities law. This is exactly what Lending Club and Prosper would like. A national exemption for p2p lending so that it can be available to investors in every state.

This legislation came up in my discussions at Prosper headquarters last week and CEO Chris Larsen said he was very encouraged by the support for H.R. 2930. We are still probably a long way off from any meaningful change for p2p investors but this law will at least give some legal precedent for the public issuance of small securities on a national basis.

Hat tip to Lee Barken for bringing this news to my attention. His article was also picked by by Forbes yesterday.

{ 10 comments… read them below or add one }

LendStats.com November 9, 2011 at 12:10 pm

Hi Peter,

Thanks for bringing this to our attention. The $10k limit seems a bit troublesome. I checked the bill and the $10,000 limit is annual. Will this mean investors can only put in $10,000 per year?

Reply

LendStats.com November 9, 2011 at 2:37 pm

After re-reading the bill, I see this only applies to crowdfunded securities. So every loan through a p2p broker would be treated as a single crowdfunded security. This means the maximum amount anyone could lend on any single loan would be $10,000. Do I have that right?

Reply

Peter Renton November 9, 2011 at 2:42 pm

@Lendstats, That is how I interpret this new law. You can invest in as many companies as you like as long as you stick to the $10K limit per company.

And we are not talking about p2p loans yet – this is only for investing in startup companies. Some day I hope and expect this legislation will cover the issuance of p2p lending type securities.

I also expect to see several new business-only platforms sprout up in the next six months similar to MicroVentures.com that allows investors to take a small piece of equity in dozens or even hundreds of companies. That will be interesting.

Reply

Chris November 9, 2011 at 5:05 pm

These are exciting times. One could argue that if this bill becomes law, Prosper and/or Lending Club would naturally expand their services to offer a platform for businesses to sale shares/equity of their privately held firm. Even if (for some bizarre reason) they decided not to tap into this incredible market, numerous companies (such as MicroVentures) would – and this my friends, would be a game changer…. =)

Reply

Chris November 9, 2011 at 5:06 pm

I just realize my prior comment was poorly worded and my be confusing. I meant to type:

“One could argue that if this bill becomes law, Prosper and/or Lending Club could naturally expand their services to offer a platform for small businesses to sale shares/equity of their privately held firms.”

Reply

Peter Renton November 9, 2011 at 5:40 pm

@Chris, I don’t think that Lending Club or Prosper are going to jump on this bandwagon. Could they? Yes. But I think it would be a mistake at this stage of their existence. If they had a mature business and were plateauing then I think it would be a great idea. But right now they will probably just focus on one thing.

However, I think we will see many new platforms in the next 12 months focusing on business funding. Just taking a 2-3% commission on a startup funding would provide a sustainable business model I would think. These are indeed interesting times.

Reply

Sanjay Fuloria January 12, 2014 at 10:12 pm

Hi! Peter,

Why is there a limit of $35,000 as the loan amount one can apply for on a P2P lending platform? Is there a regulatory angle to it? Why this number and not, say, $100,000?

Reply

Peter Renton January 13, 2014 at 5:38 pm

Hi Sanjay, This is a limit that has been imposed by the platforms themselves and it is not a regulatory issue. This is a number the platforms feel comfortable with given that these are unsecured loans.

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Sanjay Fuloria January 15, 2014 at 12:26 am

Thanks, Peter for the response. I had another question on the differences between crowdfunding and P2P lending. As far as regulations are concerned, are they the same? Which one is better from the perspective of both the borrowers and lenders?

Reply

Peter Renton January 15, 2014 at 7:40 pm

Sanjay, I wrote an article about this very topic about 18 months ago: http://www.lendacademy.com/crowdfunding-crowdinvesting-and-p2p-lending/

Reply

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