Equity Crowdfunding

House Passes 2 Bills Aimed at Making It Easier for Entrepreneurs to Get Access to Cash

House Passes 2 Bills Aimed at Making It Easier for Entrepreneurs to Get Access to Cash
Image credit: Shutterstock
Reader Resource

Get the working capital your business needs–learn more about Entrepreneur Lending, powered by CAN Capital »

Editor’s note: An earlier version of this story lead with the incorrect statement that the House of Representatives passed a bill that would allow entrepreneurs to raise up to $5 million with equity crowdfunding, five times the current $1 million cap. That reporting was based on outdated Congressional record keeping documents. An earlier version of the House bill included a provision that raised the cap to $5 million. The compromise version of the bill, which actually passed the House, did not include that provision. We regret this error.

In a rare sign of bipartisan support for just about anything on Capitol Hill, two bills both aiming to make it easier for entrepreneurs to raise money sailed through the House last night in landslide votes.

Both bills were spearheaded by Rep. Patrick McHenry (R) of North Carolina. "Despite the headlines from Silicon Valley, the truth is the vast majority of early-stage companies are not securing venture capital,” Rep. Patrick McHenry said on the House floor while introducing the bills. In a written statement announcing the successful vote in the House, McHenry said that "Angel investing and investment crowdfunding are both innovative new forms of capital formation which -- in the proper regulatory climate -- can become vital tools for entrepreneurs and small businesses."

Related: Starting May 16, Entrepreneurs Can Raise Money in a Whole New Way. Here's What You Need to Know.

The goal of the legislation is to make it easier for entrepreneurs to get access to capital.

In mid-May, rules for equity crowdfunding went into effect -- more than four years after they were passed into law by the Jumpstart Our Business Startup Act in 2012 -- making it possible for entrepreneurs to raise money from unaccredited investors through registered online crowdfunding portals. Before the rule change, entrepreneurs could only raise money through equity crowdfunding from sufficiently wealthy accredited investors.

At the time the legislation was written back in 2012, a funding vehicle called “special-purpose funds” or “single-purpose vehicles” were not being used. A special purpose fund is an investment vehicle in which one investor will spearhead a fund to go to an individual company. These vehicles are becoming increasingly popular in Silicon Valley and are being used by elite investors such as Chris Sacca. The House bill allows crowdfunding portals to host these special purpose funds or single purpose vehicles.  

Related: An Entrepreneur's Essential Guide to the New Wild West of Funding Opening on May 16

“Single-purpose vehicles allow small investors to invest alongside a sophisticated lead investor with a fiduciary duty to advocate for their interests. The lead investor may negotiate better terms, defend against unfair dilution by negotiating with venture capitalists during follow-on financing, mentor the company and represent small investors on the board,” says Nick Tommarello, the co-founder and CEO of crowdfunding platform WeFunder, in a letter to the Committee of Financial Services shared with Entrepreneur.

Not only do single-purpose vehicles give investors confidence, because they get to go in alongside sophisticated investors, they are better for the entrepreneur, too. “Due to the fear of collecting thousands of signatures needed to sign off on the types of strategic decisions common among pre-IPO companies, higher-quality issuers -- particularly those with other financing options -- are less likely to crowdfund without a single-purpose vehicle,” Tommarello says. “Over 80 percent of the companies that were interested in Regulation Crowdfunding dropped out when we informed them a single-purpose vehicle was not an option.”

The other piece of the Fix Crowdfunding Act (H.R.4855) that passed the House last night gives entrepreneurs a longer runway before having to deal with the regulatory burden of extensive, pre-IPO documents required to be filed with the SEC. Under the 12(g) exception, companies with existing revenue can raise up to $50 million before triggering disclosure requirements and companies without existing revenue can raise up to $75 million before triggering disclosure requirements.

Related: Your Guide to the High-Risk, High-Reward World of Investing in Startups When Fundamental Finance Law Changes Go Into Effect May 16

“These bills are the greatest political achievement for startup and growth-company entrepreneurs since passage of the JOBS Act in 2012. Specifically, this legislation truly democratizes the access to capital for entrepreneurs by eliminating the last few major limitations in holding entrepreneurs back from using these important new regulations,” said Ron Miller, CEO of equity crowdfunding platform Start Engine Crowdfunding, in an email to Entrepreneur. “We are so pleased to see that bipartisanship is alive and well when it comes to well thought out legislation that helps America’s entrepreneurs raise capital, build companies and create high paying jobs.”

The second bill that passed the House last night, also by an overwhelming bipartisan majority, is the Supporting America’s Innovators Act of 2016 (H.R. 4854). It would expand the pool of investors in any qualifying venture fund supporting startups from 100 to 250.

“Some say we should ‘wait and see’ before fixing equity crowdfunding. I am sympathetic to this argument when it comes to raising the investment cap from $1 million to $5 million. While I strongly support that increase, it can be delayed without endangering investors,” Tommarello says. However, I would like it on the record -- as an expert who has thought about these issues nearly every working hour over the last four years -- that I’m convinced that without the SPV and 12g fixes, retail investors will be heavily disadvantaged as compared to accredited investors and equity crowdfunding will ultimately be seen as a failure. Early evidence already bears this out.”

Related: Which Entrepreneurs Will Benefit Most From the New Era of Crowdfunding?

The House bills still have to be passed by the Senate and be signed into law by the president. McHenry’s office does not know when the Senate plans to take up the bills.

 

Edition: December 2016

Get the Magazine

Limited-Time Offer: 1 Year Print + Digital Edition and 2 Gifts only $9.99
Subscribe Now