Crowdfunding Bill Stalls in the Senate

The JOBS (Jumpstart our Business Startups) Act, which passed the House last week, has stalled in the Senate over criticism by Democrats over some of its provisions, including those related to crowdfunding, the strategy being used today by many independent filmmakers.

Currently, it is illegal to use crowdfunding platforms like Kickstarter and Indiegogo to solicit actual investments. Monies pledged on these platforms are donations usually lacking any tax benefit or further income possiblity for the funder. (Or, increasingly, they are pre-buys for a specific goods or services.) The JOBS Act aims to change that, allowing businesses, including filmmakers, to solicit actual investment over the internet. A person — even someone not qualifying as an “accredited investor” — could invest up to $10,000, or 10% of his or her income (whichever is less), in a startup capitalized at $1 million or below and receive an equity position in the business.

Until this week, the bill, which is supported by President Obama, appeared headed for bipartisan consensus and quick passage. However, the pushback has now begun, with critics arguing that the JOBS Act dilutes investor protections needed in the aftermath of the financial crisis. The New York Times editorialized against the bill in its current form on Sunday:

House Republicans, Senate Democrats and President Obama have found something they can all support: a terrible package of bills that would undo essential investor protections, reduce market transparency and distort the efficient allocation of capital….

Another provision would permit “crowd funding” — raising money from small investors through the Internet — without requiring those companies to provide meaningful disclosure and without adequate oversight by the Securities and Exchange Commission. John Coffee Jr., a securities law expert, has dubbed that the “Boiler Room Legalization Act.”

In a good roundup on this issue by Adrienne Burke at the Forbes Techonomy blog, businessman and “crowdfunding activist” Nick Tommarello argues the more free-market position:

[Tommarello] says incentives are already there for intermediaries to regulate themselves. Tommarello believes crowd investing platforms will need to do due diligence on businesses they host in order to attract investors. Take Kickstarter for example, he says. “They take only a limited number of the projects that come to them. As an intermediary, you want the best companies to be on your website, and you want quality over quantity.”… And an online petition he started has gathered more than 2,700 signatories who have collectively pledged to invest over $6.6 million in crowd-funded new businesses if Congress passes a bill.

Today, reports Reuters, Senate Democrats took aim at the bill following criticism by SEC Commission Chairwoman Mary Shapiro, specifically targeting the crowdfunding aspects of the legislation. From Reuters:

Senate Democrats on Thursday also attacked a provision in the House bill that would permit a new capital-raising strategy known as “crowdfunding,” which lets investors take small stakes in private start-ups over the Internet.

While Democrats said they are not against the idea, they were concerned that Republicans had stripped away far too many regulations that would protect mom and pop investors from predators who seek to prey on people through the internet.

They are now seeking revisions, some of which were suggested by Schapiro, that include requiring intermediaries offering the stocks to register with the SEC and provide certain disclosures to investors.

While there was hope last week that this legislation would quickly pass Congress and be signed by the President, that schedule now appears unlikely. As Tommarello, quoted in the Forbes piece, said, “Best case scenario is that this would pass in May. Then the SEC would begin rulemaking. We’re at least a year away.”