01.04.2012 0

Crowdfunding on the rise, and on the fast track

By Robert Romano — Decades-old federal regulations and state-by-state “blue sky laws” restricting small businesses from raising capital on the Internet may soon be coming to an end — and it could be just what the ailing economy needs to get moving again to create jobs.

The Entrepreneur Access to Capital Act, HR 2930, offered by North Carolina House Republican Rep. Patrick McHenry that would allow stock offerings up to $1 million adjusted for inflation to take place on the Internet across state lines without the costly start-up filing, accounting and auditing fees often associated with such offerings.  It would also allow for up to $2 million to be raised if the small business is willing to pay the fees.

The bill has already passed the House with strong bipartisan support with a 407 to 17 vote.  It has been placed on the Senate calendar, and if passed, is expected to meet with President Barack Obama’s signature.

Crowdfunding, a relatively new phenomenon, operates with a business raising small-dollar contributions from a large number of people, typically on the Internet.  Web companies like Kickstarter.com have helped raise more than $100 million since it launched in 2009 for non-profits, low-budget film productions, and other projects.

However, current securities laws prohibit businesses on Kickstarter from offering a share of the profits or the company to so-called “unsophisticated” investors, making investment a lot less attractive than it otherwise would be.

Currently, unregistered offerings are only allowed to accredited investors and a very limited number of “unsophisticated” investors, as defined by Securities and Exchange Commission (SEC) regulations. “Sophisticated” investors include financial institutions, employee benefit plans, a business, trust, or non-profit with more than $5 million in assets, an owner of the company offering the securities, or an individual with $1 million of net worth or an annual income of $200,000.

More or less, the law has traditionally taken the view that individuals that make less than $200,000 a year or are not millionaires are not smart enough to invest without getting ripped off.

But, even under current law, Bernie Madoff or MF Global-like scams happen all the time. Regulating who is allowed to invest in a start-up company has not and will never prevent fraud.  That is a canard.  After all, the new law would not legalize investment fraud; that would still be prosecuted and punishable with real jail time.

Nor does existing law prevent stock exchanges from offering thousands of stocks to small-dollar investors that yield no dividends and never even go up in value.

Instead, all the SEC’s existing capital control regime appears to have accomplished is restricting capital formation for start-ups here domestically to a clique of professional investors.  Meanwhile, start-up small businesses and less affluent investors who abide by the law are left in the dust when it comes to getting in on the same game.

It also has put a deadbolt lock on some $6 trillion of untapped capital — that’s the amount of money flowing through everyone’s checking and savings accounts, according to the St. Louis Federal Reserve.  That’s $6 trillion that could be invested in productive start-up ventures in local communities here in the U.S., creating jobs, but most Americans are prohibited from doing so.

Plus, with 14 million people still unemployed and the labor force participation rate dropping to 64 percent, the economy has not been creating the jobs needed to put this long recession behind us all.  Something’s got to give.

Raising unrestricted capital on the Internet may be the way of freeing up new money for the U.S. economy, helping small businesses and start-ups get rolling, and in the end, creating millions of jobs.  It’s the kind of big idea that makes one wonder why the antiquated securities laws were ever adopted in the first place.

Robert Romano is the Senior Editor of Americans for Limited Government.

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