Possible Changes Coming to Allow More Crowdfunding

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.]

Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech.

LendIt Fintech conducts three conferences a year for the leading fintech markets of the USA, Europe, and Latin America. LendIt also provides cutting-edge content all year long via audio, video, and written channels.

Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.

Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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Dan B
Dan B
Sep. 21, 2011 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 ??

Dan B
Dan B
Sep. 21, 2011 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. 🙂

Dan B
Dan B
Sep. 21, 2011 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
Charlie H
Sep. 22, 2011 8:27 pm

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

Dan B
Dan B
Sep. 23, 2011 6:41 am

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

Charlie H
Charlie H
Sep. 23, 2011 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.

Dan B
Dan B
Sep. 23, 2011 9:33 pm

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

Dan B
Dan B
Sep. 25, 2011 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.