On Monday Massachusetts Senator Scott Brown (R) urged a Boston audience to pressure his Senate colleagues to bring his crowdfunding bill – or any crowdfunding bill for that matter—to a vote soon. The Senate Banking Committee will hold a hearing on the issue on Tuesday.
The general idea behind the proposed legislation is to make it legal for individual investors to put some money — up to $1,000 or $10,000 depending on the bill — into startups in return for equity. Crowdfunding is the “crowdsourcing” take on start-up funding.
“I don’t own this idea. There are other bills, bring them to the floor so we can tweak and work on them,” Brown told a roomful of entrepreneurs and reporters in South Boston. The House of Representatives has already passed a similar bill sponsored by Congressman Patrick McHenry (R-NC).
Brown’s proposed “Democratizating Access to Capital Act” would make it easier for startups to raise capital in small increments from investors. The current crowdsourcing models — like Kickstarter — let people invest in interesting startups, but they get gifts and products — not stock equity — for their money. Brown’s bill would cap each investment at $1,000 while McHenry’s bill has a $10,000 limit. Brown’s also would mandate that an intermediary handle deal flow and provide some oversight. McHenry, talking to the Boston group via Skype, said he worried that would stifle deals. President Barack Obama supports the idea of a crowdsourcing bill.
Backers of this legislation maintain that the inability for small companies to raise capital hurts innovation and job growth. “You can’t go to the bank with an idea and get financing but if you go to the bank with an idea plus $1 million, the bank will listen,” Brown said. Many of these startups are too small to attract even angel investors, let alone venture capital.
Speakers at the event, held at the Mass Challenge office in South Boston, were preaching to the choir, an assembly of entrepreneurs almost all of whom would love to be able to raise money from small investors.
Amy Cortese, a proponent of local investing, said the slate of security laws discriminates against the non-wealthy. “The thing about the 1930s securities laws is they created two tiers [of investors]. Those with a net worth of $1 million can invest in anything — the sky’s the limit — but ordinary Americans have to invest in public companies. There is some irony that we have to invest in the stock market for safety.”
A crowdsourcing bill would make it easier for friends and family to invest in startups, but it is not exclusive to them. Financial giants could take advantage of it as well.
Proponents said eBay (s ebay) has proven there is crowdsourced protection inherent in the Web world. “Reputation ranking helps you know who’s trustworthy and who isn’t. There is sunshine from these systems and the flow of data through social networks lets us transact with people we’ve never met and probably never will meet,” said Tim Rowe, the founder of the Cambridge Innovation Center, who spoke at Monday’s event and will testify tomorrow in Washington, D.C.
Obstacles remain. State financial regulators oppose the bill because it would cut filing fees they now collect. And it is unlikely that the U.S. Securities and Exchange Commission, which has trouble enforcing existing regulations, would be able to handle an influx of many smaller entities and deals. Brown acknowledged there are many wrinkles to iron out. “As with anything, the devil’s in the details,” he said.