​Fix Crowdfunding Act Passes House, Likely to Pass Senate

Joel Anderson  |

Who says congress can’t get anything done?

Despite the ongoing gridlock that has seemingly left the legislative branch unable to accomplish even the most routine of tasks, there does seem to have been one area where Republicans and Democrats have consistently found common ground: opening up restrictions on capital markets. It was a trend that continued on Tuesday, when the House of Representatives passed HR bills 4854, the Supporting American Innovators Act, and HR 4855, the Fix Crowdfunding Act, each by wide margins.

In fact, the Fix Crowdfunding Act received a mere four “nay” votes to some 394 in favor, edging out the mere 380-vote margin for the Supporting American Innovators Act, which passed 389-9. Those two huge wins mean both bills will move on to the Senate where, given the clear demonstration of bipartisan support in the House, final passage would seem likely.

A Rare Bipartisan Consensus on Opening Capital Markets

The fact that changing old rules on securities law, many having been written in 1933, has been one of the rare bipartisan issues in Congress has been clear since the passage of the initial Jumpstart Our Business Startups (JOBS) Act in 2012, an election year no less.

It was Title III of that bill that made legal the use of equity crowdfunding for startups to raise capital from the general public. However, by the time the final rules were approved by the SEC, it became clear that, despite widespread excitement, Title III likely wouldn’t be the sort of revolutionary force some people had anticipated early on.

Title III raises are limited to just $1 million, and required a level of financial reporting that made it extremely expensive to take that path. What’s more, the rule changes to the so-called Reg A+ allowed for raising up to $50 million from unaccredited investors with less oversight than Title III, potentially rendering equity crowdfunding largely irrelevant before it had even gotten off the ground.

The Fix Crowdfunding Act was clearly geared towards addressing some of those concerns by opening up the rules surrounding Title III crowdfunding. Sponsored by Rep. Patrick McHenry (R-NC), the language of the bill as it was initially introduced, among other things, would have increased the cap for money raised in a single 12-month period from $1 million to $5 million, remove some of the requirements for registering with the SEC, lay out requirements for crowdfunding portals to report on potential bad actors while also protecting them from legal liability, and allow firms to solicit non-binding intentions of interest from investors before opening the actual crowdfunding round.

However, the final language that passed the house stripped out the majority of these changes, leaving only the creation of new language for the creation of Special Creation Vehicles (SPVs). These SPVs would essentially allow a company to organize the many new shareholders brought in by crowdfunding into a single entity managed by investment advisers. This should help firms using crowdfunding raises to keep their cap table relatively clean and uncomplicated and ease communication with shareholders by making them a single voice.

It's ultimately not going to address a lot of the bigger concerns about Title III, but it will create a legal vehicle that will make crowdfunding a much simpler process for the company involved.

Private Markets Expanded to Those Who can Benefit from them Most

The second bill, the Supporting American Innovators Act, addressed venture capital funds, opening them up to include more total investors by raising the cap for investors up to 500 people.

Taken together, the two bills represent what is clearly a general (if still limited) consensus among Democrats and Republicans: startups and emerging growth companies represent one of the most important pieces of the economy. Driving the majority of the job growth, small firms in the earliest stages of their growth are an essential piece of the job market and one that has seen sun shine on it from both sides of the aisle.

This has been especially true in recent years as wave after wave of new tech firms or startups with hot new apps continue to drive innovation across the globe. Silicon Valley may be in California, but it seems clear that politicians of every stripe have started to recognize the potential held in the model it’s laying out. If both of these bills pass the senate with similar levels of ease, it could mean that the expansion of private markets and their availability to the general public will continue unabated.

Editor's Note: The original version of this article had mistakenly indicated that the language of the bill as introduced was the same as the language of the bill as passed, which was inaccurate. It has been edited to reflect that.

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