New bill would allow start-up capital to be raised on the internet
Today, Colorado U.S. Senator Michael Bennet and Senator Jeff Merkley (D-OR) introduced the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2011 (CROWD FUND Act), which would legalize and regulate the raising of start-up capital for small businesses on the internet. The promise of crowdfunding is that investments in small amounts made through transparent online forums can allow the “wisdom of the crowd” to provide funding for small, smart companies.
The principle is similar to that used by Kickstarter and Groupon, both of which use a threshold requirement. In crowdfunding investment, a start-up venture would publish information and allow investors to offer capital. If pledges for enough potential investors reach a threshold, the deal would move forward.
“Colorado is rich with entrepreneurial and innovative spirit, and our entrepreneurs need access to capital to help our economy get back on track and create jobs,” said Bennet. “We need to do better connecting potential investors to start-up small businesses and must update our outdated securities rules to allow Colorado entrepreneurs to take advantage of the vast investment capital available on the internet, while still maintaining the level of protection that investors expect and deserve.”
“The internet can democratize and transform financing for entrepreneurs, like it has so many other fields. But raising money on the internet should be safe and accessible, both for the small business and for the investor,” Merkley said. “Our securities rules simply haven’t been updated for the internet age. This bill would set fair rules of the road for this new channel for raising capital, allowing new websites to easily connect investors to small businesses and fund the ideas of the future – while minimizing the risk of fraud and loss for our most vulnerable investors.”
Normally, when a company seeks financing from the public it must register as a security with the Securities and Exchange Commission, providing detailed disclosures. Merkley and Bennet’s bill would provide an alternative to this process, allowing companies to raise up to $1,000,000 annually through crowdfunding on registered internet websites.
The bill would also implement basic marketplace protections for the ordinary investors seeking to take advantage of this new marketplace. Web sites seeking to list companies must register with the regulators and provide investors the basic information about the companies they list.
Crowdfunding companies themselves must provide basic disclosures to investors and regulators.