It was the 19th century German leader Otto von Bismarck who said, “Laws are like sausages. It’s better not to see them being made.” Despite the warning I have been paying attention to the Crowdfunding bill that made its way through Congress these past few months.
It started as H.R. 2930. This was a relatively simple bill that had just three main provisions and could be detailed on a single page. This bill had broad bipartisan and White House support. But like most things in Washington, it was not that simple.
This week President Obama will sign H.R. 3606 Jumpstart Our Business Startups (JOBS) Act into law. This act is a combination of several bills and contains a multitude of provisions relating to business financing. Section III of the law is all about crowdfunding. For the first time the United States will have a law on the books that acknowledges this new kind of business financing. And let’s give credit to Congress for agreeing on something. This bill passed the Senate with a vote of 73 to 26 and passed the House last week with a 380 to 41 majority. Clearly this was a popular bill.
In effect the law gives a lot of leeway to the Securities and Exchange Commissions (SEC). The SEC has 270 days to enact “whatever regulatory changes are needed” to implement the crowdfunding provisions. So it is going to be next year before we see any substantive changes and we don’t know exactly what form these regulations will take.
Companies Will be Able to Raise up to $1 Million
What we do know are the details of this new law. Here are some of the changes that the SEC will be required to implement:
- It raises from 500 to 2,000 the number of shareholders a company or community bank can have before it must register with the SEC.
- It also raises, from the current $5 million to $50 million, the aggregate share offering amount a company can make before it must register the offering with the SEC.
- All crowdfunding platforms will have to register with the SEC.
- Anyone can invest in small businesses with certain limitations – the amount each individual can invest is capped on an income-based sliding scale, with limits ranging from $2,000 to $10,000 dollars per person per company annually.
- Companies can raise up to $1 million annually as long as it is done through an SEC-approved platform.
There is much more to the bill (you can read the complete PDF here) but those are some of the highlights. One of the safeguards put in by the Senate is the requirement for crowdfunding platforms to register with the SEC. This is one of my favorite parts of the legislation because it will make it more difficult for scam artists to come along and ruin it for everybody.
What is the Relevance to P2P Lending?
This bill really has nothing directly to do with p2p lending. Neither Lending Club or Prosper will be able to change the way they do business because of this new law. However, there are many indirect implications that bode well for the future.
This new law provides a federal legal precedent for everyday people (not just accredited investors) to make many small investments through a lending platform. It overrides state securities law so even small investors in states like Texas or Ohio can make investments. Now, assuming this law proves to be a positive for both investors and small businesses it isn’t much of a stretch to think it may be extended to include p2p lending one day. It stands to reason that investing in a small business is likely more risky than investing in a creditworthy individual, so if you allow one you should also allow the other.
Wide Coverage of This New Law
There has been a great deal of press about this new law since it was ratified last week. If you want to read more here are links to some recent articles about the JOBS Act on major news sites and blogs:
The New York Times
Washington Post
ReadWriteWeb
FastCompany
Forbes
I think 2013 is going to the year of crowdfunding. I expect there will be many investing platforms that will launch as soon as the ink is dry on the new SEC regulations. What do you think? Will you be investing in small businesses through these new platforms or do you think the risks are just going to be too high? As always I am interested to hear your comments.
I’m actually surprised that the law didn’t specifically address the lending to individuals and allow that, but that would be too much to ask for I guess. I’d much rather loan to individuals than businesses, as at least there is some rather limited additional safeguards to people running off with your money in the form of a credit hit. If a business goes under, there is little to stop the folks in charge from starting another company and raising new financing. Thanks fot the news!
Thanks Peter. It’ll be interesting to see the evolution of the venture industry as well as the market for trading private shares after they have been purchased.
Peter – A part of me wonders if the issue is really equity for the start of new businesses or really the issue is financing. I don’t think the financing issue has been solved; so it seems like the right leg has been injured but the doctor is putting a splint on the left leg. There doesn’t seem to be a wholistic approach to the issue of debt and equity. I think a simple change in bank regulations which allows for banks to “lend” preferred equity would be a simpler approach—then the private sector can create a secondary market for such paper. A proposal might be for banks under $5B in equity to be able to lend preferred equity (secured and unsecured) and allow for a minimal capital charge of say 5% for such loans…I think that would kick start a lot of capital flowing.
@CultofMoney, The bill and all the discussion around the bill was all about helping small businesses so I think p2p lending was not even a consideration. But as I said I think this provides a good precedent for the future. In a couple of year’s time when p2p lending volume is at $200 million a month it will give Lending Club and Prosper an excellent argument for an extension of the law to include p2p lending.
@Thomas, I think there is going to be a lot of changes here for VC and angel investing in the next 12 months. This is the biggest change for this industry in some time.
@Loren, There are many who believe this law is only a bandaid and will little to solve the lack of funding opportunities for small business. Many will not want to give up equity and this new law does little for those kinds of companies. But I think it is a step in a the right direction.
I am curious is this legislation paves the way for a future website/platform where a new business owner can post all relevant financial documents along with a statement that reads “I am willing to sale X number of private shares which equates to Y% equity of my firm for Z dollars.”
In effect this new platform would work as an exchange for private company shares – which would be a disruptive technology in and of itself.
@Chris, I don’t think this legislation is going to allow the trading of securities like SecondMarket. It is really for raising funds, so a company can raise money by issuing shares but the buyer of those shares will not be able to then sell on the open market. That may come, of course, but not with this legislation.