Update: Crowdfunding passes the Senate

The JOBS act passed the Senate today with bipartisan support (73-26).  However, the Senate added two notable restrictions to the crowdfunding provision to protect investors from fraud,the Senate’s amendment allows entrepreneurs to raise only $1 million a year and it must be through an SEC-registered crowdfunding site.  Before going to President Obama, the bill will go back to the House to reconcile the differences with the Senate version.

Crowdfunding moves forward in the House

Legislation allowing entrepreneurs to access capital through crowdfunding took a step forward yesterday when the JOBS (Jumpstart Our Business Startups) Act was passed with bipartisan support in the House of Representatives (see here for NYTimes article).  A version of the JOBS act is expected from the Senate sometime next week.  As written, the “Entrepreneur Access to Capital Act” portion of the JOBS Bill would allow for the following:

  • Equity Capital Raise of up to $1,000,000.00 from either unaccredited or accredited investors if the company does NOT provide investors with audited financial statements.
  • Equity capital raise of up to $2,000,000.00 from either unaccredited or accredited investors if the company provides investors with audited financial statements.
  • Individual Contributions are limited to $10,000.00 or 10% of the investor’s annual income–whichever is less.

Currently, crowdfunding is only permissible on sites, such as Kickstarter, where companies or individuals are allowed to solicit donations, and in return they are allowed to provide freebies back to donors (see our earlier post).   Debt and equity in a company could not be offered as investments.  There are still legitimate concerns about scams and internet fraud and how to prevent them while at the same time not undermine the purpose of the legislation: enabling entrepreneurs to access money outside of friends and family.  I’m not sure what the solution is to the potential fraud problem, maybe a verification process for fundraising sites that includes a background checks for company owners?

New York Legalizes Benefit Corporations = Profits + Public Benefit

As of February 10, 2012, corporations in New York who designate themselves as a “Benefit Corporation” can legally pursue a “double-bottom line” of social justice and profits (click here for the announcement from State Senator Daniel Squadron).   Normally, a corporation’s directors and officers are held to have a fiduciary duty to the shareholders, meaning that pursuing interests outside of profit seeking can open directors and officers to shareholders lawsuits.  By allowing Benefit Corporations to exist, directors and officers have legal protection to engage in activities that promote a social good, such as using environmentally friendly materials, even though it may hurt their financial performance.

Although the Benefit Corporation structure is relatively untested in terms of legal issues, such as what happens if the B-corporation or one of its officers doesn’t meet its social obligations or fails to adequately deal with compliance and disclosure, this legislation officially pens the door for a new way of doing businesses, and that can only be a good thing.

Click here to access the non-profit group “B-Lab” which promotes the legalization of Benefit Corporations across the United States.  NOTE: that a “Certified Benefit Corporation” via B-Lab is NOT the same thing as being a legally formed Benefit Corporation.  While being a Certified by B-Lab can assist a company in meeting certain standards, the certification process by itself will not provide directors and officers with the legal protections of a Benefit Corporation formed under the laws of New York.

Legal Trends: Crowd-Funding

If your a small business owner or entrepreneur, you may have heard about a number of different crowdfunding sites, such as kickstarter.com or peerbackers.com, where a company solicits donations from the public, and typically the company gives freebies to the donors.

There are potential legal issues when raising money from strangers, in particular the Securities and Exchange Commission (S.E.C.) would like to make sure you’re not in fact issuing debt or equity, and only seeking to solicit donations.  There is currently a bill floating around in Congress to provide a crowdfunding exemption from S.E.C. registration requirements. Congressman Patrick Henry has sponsored H.R. 2930 “Entreprenuer Access to Capital Act”  which has been passed in the House and awaits a vote in the Senate.

This is a nice info-graph from venturebeat.com

INFOGRAPHIC: Drawing a Crowd: The Crowdfunding Phenomenon Heats Up