Crowdfunding, Equity Capital Legislation Still in Play

The Senate Banking Committee held a hearing on December 1, to consider whether easing the procedures for raising equity capital would impact job growth.  CompTIA submitted testimony for this hearing urging Congress to increase the small issuer exemption and enact crowdfunding.

Concerning the small issuer exemption, legislation that passed the House overwhelmingly on November 2 would increase the offering threshold from $5 million up to $50 million.  H.R. 1070, the “Small Company Capital Formation Act of 2011” is now under consideration by the Senate Banking Committee and was favorably discussed during the Banking Committee hearing.  However, no action has been taken.

For crowdfunding, there are two main proposals: H.R. 2930, “Entrepreneur Access to Capital Act,” which passed the House by a wide margin on November 3, and S. 1791, “Democratizing Access to Capital Act of 2011,” as introduced by Senator Brown on November 2.

Both bills would allow up to $1 million to be raised in a 12-month period; the House bill would allow up to $2 million provided audited financial statements are given to investors.  In general, the House-passed legislation allows a higher individual investment but contains additional compliance requirements.  The Senate bill imposes fewer regulatory burdens on small businesses but lowers the individual level of investment.  CompTIA supports inclusion of the optional $2 million limitation provided in the House version.  We believe that businesses should be allowed the higher limitation when audited financials are provided.

A key difference in the two pieces of legislation is the maximum allowable investment.  The House bill would allow up to $10,000, limited to 10% of income; the Senate version sets a $1,000 limit, which is simply too low -- especially in situations where the company provides additional documentation, such as audited financial statements.  However, the most complicated issue in the crowdfunding legislation is how best to protect investors.  The basic question is how much should be required of the issuer in order to both protect the investor and maximize the issuer’s ability to raise equity investment.

Congress should move to ease the burden on small businesses to raise equity capital, and it should pass legislation that would permit crowdfunding and increase the small issuer exemption.  Clearly, increasing the ability of small businesses to raise equity capital is needed and will fuel job growth and our recovering economy.