Saturday, November 12, 2011

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Breaking Down H.R. 2930 (the Crowdfunding Bill)


A new House bill passed last week that will significantly change the funding landscape, and allow for companies to begin selling their securities on crowdfunding and social media sites. Previously, companies were limited to accepting donations through these sites. But, if this bill passes in the Senate, that may be no more.

But, who has time to slog through the entirety of a House bill? No one, so I've broken down the existing federal securities laws, and the changes that H.R. 2930 will make to them below.

If you're really brave and want to read the full text of the bill for yourself, read it here.

The existing laws on selling securities:
  • "General solicitation" is prohibited--There must be a substantive, pre-existing relationship between the potential investor and the company (or its agent). In other words, you can't put out the word and just sell them off to anyone who responds on Twitter.
  • There are additional disclosure and state law compliance regulations for non-accredited investors (these are expensive and time-consuming).
  • Intermediary websites must be registered with the SEC in order to accept commissions for the sale of securities through their site.
How H.R. 2930 changes these:
The above restrictions are removed under the new bill, and companies will be free to sell their securities on crowdfunding sites, and even on Twitter or Facebook. There are a few restrictions, however.
  • A company can only raise $1 million in this manner (or $2 million if they provide audited financial statements to the potential investors).
  • Each investor can only invest either $10,000 or 10% of their annual income (whichever number is lower).
  • The company (or the intermediary if you're selling on a site like KickStarter) must limit the risk to the potential investor in a couple of ways, including: notifying them of the speculative nature of the investment, requiring them to answer questions that demonstrate their understanding of the risks, and notifying the SEC of the offering (including certain required information).

As you can see, this is a pretty substantial change to the federal securities law. For now though, the bill still has to go to the Senate, and we may see some changes made to it, or a complete denial of the bill.

 If you want to read my thoughts on how this will affect entrepreneurs, read my post "What H.R. 2930 Means for Startups."