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Senate Passes JOBS Act with Modified Crowdfunding Rules

The JOBS (Jumpstart Our Small Businesses) Act, a collection of six bills intended to make it easy for small businesses to raise capital by relaxing various Securities and Exchange Commission requirements, including those related to crowdfunding, passed the Senate yesterday. It is now headed back to the House for reconciliation and could become law next week.

While the House version of the bill passed swiftly with bipartisan backing, its passage through the Senate was rockier, with some Democrats and progressives warning that the bill would dilute necessary investor protections contained in the 2002, post-Enron Sarbanes Oxley Act. The bill exempts what it calls “emerging growth companies,” or those with under $1 billion in revenue (!), from some more recent regulations contained in the Dodd-Frank bill. SEC public disclosure rules applying to companies with over 500 shareholders and $10 million in assets are eased too; they now apply to companies with over 2,000 shareholders. The bill passed the Senate with an amendment sponsored by Democrat Jeff Merkley of Oregon and Republican Scott Brown of Massachussetts specifically addressing crowdfunding. From the New York Times:

The Merkley-Brown amendment would require companies to provide tax returns or financial statements to investors before the offering. In contrast, the House bill would allow companies to raise $1 million without providing any financial statements to potential investors.

The House bill would allow individual investors to invest up to $10,000 or 10 percent of their annual income per year, whichever was less. The Merkley-Brown amendment would limit those investments to the greater of $2,000 or 5 percent of either annual income or net worth, if either figure was less than $100,000.

Investors with annual income or net worth of more than $100,000 could invest up to $100,000 or 10 percent of annual income, the amendment states. The amendment also requires greater disclosure of financial results as the amount that the company intends to raise goes up.

(For more details on the Merkley-Brown amendment, see

Critics of the bill view it as a sop to the financial services industry, declaring that it will lead to the “boiler room” practices which caused investors to lose their retirement savings to Enron-like schemes. Indeed, Senate Majority Whip Dick Durbin broke with Democratic leadership on the bill, stating, “We will rue the day we ran this thing through the House and Senate without the appropriate oversight.” (For a brief summary of the JOBS Act’s effect on small business, see this summary from Reuters.)

Many independent filmmakers, however, who look towards crowdfunding to replace the industry financing that has drained from the sector in the last few years, see the bill as a boon. Crowdfunding sites like Kickstarter and Indiegogo have already demonstrated their ability to garner funding for independent films, with “asks” in the six figures now routine. (Filmmaker spotlights projects it endorses on our own curated Kickstarter page.) But, some supporters of the bill believe more people would contribute if they were promised an equity stake in the projects, something that’s currently prohibited.

Assuming the JOBS Bill becomes law, expect to see a boom in service industries addressing its accounting and reporting requirements. Accountants will have to gear up to process many more K1 filings, and the SEC requirements of the Merkley-Brown amendment will undoubtedly lead to legal middlemen guiding filmmakers through these processes. Already, one group, led by’s Carl Espositi, is attempting to establish itself as a certifier for crowdfunding platforms, charging these sites for a review and certification intended to reassure new investors. Adrienne Burke at the Forbes’ Techonomy blog writes about this “Crowdfunding Accreditation for Platform Standards program”:

Esposti and a self-assembled council of 11 industry experts, including Sherwood Ness, co-founder of Startup Exemption and The Crowdfunding Revolution author Kevin Lawton, invited more than 30 crowdfunding platforms to pony up $1,000 each to obtain accreditation. The council bases its approval on “qualification criteria” in four areas: operational transparency, security of information and payments, platform functionality, and operational procedures. Esposti says the $1,000 covers the accreditation process and the license to post a CAPS seal of approval on your website.

Eight organizations—Crowdcube (UK), Grow VC (Hong Kong), Crowdfunder (UK), GreenUnite (US), HelpersUnite (US), Symbid (Netherlands), Give A Little (NZ), and Fundrazr (US)–were awarded the CAPS badge, and another 20 are under review. Esposti said that “a couple that applied did not meet the standards.” He expects more than 200 crowdfunding platforms to apply for accreditation in 2012, and suggests that the CAPS program could serve as a model for the SEC’s crowdfunding regulatory framework.

David Bratvold, founder of the industry publication The Daily Crowdsource, says the CAPS program seems premature, and the wrong approach to preventing fraud. “It’s far too early to charge someone $1,000 to get certified,” he says. And, he notes, any swindlers would likely be the projects raising money, not the crowdfunding platforms that facilitate the process. He suggests that the kind of accreditation CAPS is promoting should be unnecessary. “The crowd regulates the crowd. If the crowd doesn’t want to be a part of it, they won’t. The data show that most people who donate through crowdfunding already know the project they’re donating to. I’m more in favor of an open opportunity.”

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