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Senate Passes Crowd-Funding Legislation
Vol. 905 
March 27, 2012

Offering small businesses a new way to find capital, the U.S. Senate has passed legislation that allows entrepreneurs to solicit equity investments from the general public – a practice known as crowd-funding. The measure is part of the broader Jumpstart our Business Startups (JOBS) Act, which is expected to quickly gain approval in the U.S. House, before being sent to President Obama to sign. “Crowd-funding will allow small businesses to bypass Wall Street and go straight to Main Street for financing, freeing every American to invest in a local business or the next great idea,” said Senator Scott Brown (R-MA).

The Senate bill, which amends previously-passed U.S. House legislation, effectively removes certain regulatory obstacles put in place by the Securities and Exchange Commission (SEC). Currently, the SEC requires private companies to register with the agency before seeking the backing of investors. Providing what amounts to a registration exemption, the crowd-funding bill increases the reporting threshold to 2,000 investors, up from 500. Smaller businesses will now be able to raise up to $1 million from investors through SEC Web portals, while only providing the agency with basic information, rather than extensive financial records.

Meanwhile, investors can join a “crowd” of other financial backers of a company, spreading risk and buying early stock in a company they believe has potential for profit and growth. Individuals with an annual income of less than $100,000 can invest up to $2,000 or 5% of their annual income – whichever is greater – in any one deal in a given year. People with an annual income of $100,000 or more will be capped at a 10% investment, up to a maximum of $100,000 for a single investment.

Critics of the legislation argue the deregulation will have little positive impact on businesses and will instead likely fuel a wave of scams. Yet, crowd-funding supporters feel the legislation is too strong to be undermined by scammers. “You can have crowd-funding take place with minimal amounts of fraud and illegality,” said Representative Patrick McHenry (R-NC).

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