Endorsed by the White House, the Republican-sponsored Entrepreneur Access to Capital Act passed the House by a landslide vote of 407-17 on Thursday. The bill will now go to the Senate for committee assignment. The “Crowdfunding Act” allows small companies to raise up to $2 million through general solicitation, allowing them to use social media to raise small amounts from numerous investors. Websites like KickStarter already allow “creative projects” to solicit web denizens for donations in exchange for “rewards” like a signed copies of the LP they helped fund. Crowdfunding is basically the same idea, only now individuals would get “rewards” like dividends or interest payments.
The House also passed H.R. 1070 this week by a 421-1 vote. The Small Company Capital Formation Act directs the SEC to amend Regulation A, an exemption from the ’33 Act’s costly registration requirements. Currently, small companies can use Reg A to raise up to $5 million in a public offering without registering with the SEC. This act would raise that limit to $50 million.
Under Reg A, the issuer only needs to provide the SEC an offering notification, consisting of the offering circular (a prospectus, essentially), notification and some exhibits. The issuer remains private, thus avoiding the Exchange Act’s reporting requirements. Right now, companies can also duck the Exchange Act by offering securities under Regulation D, which allows companies to raise more money than Reg A. However, unlike Reg A, Reg D forces the issuer to place restrictions on the securities offered, reducing liquidity (and thus, value). If the Senate OKs the Small Company Capital Formation Act, then Rule 505 under Reg D will become vestigial, kind of like the coccyx and the Third Amendment.
Given that both bills sailed through the House and that both are part of Obama’s Job’s Bill, Senate approval and a Presidential signature seem inevitable. (Then again, the Senate has demonstrated truly awe-inspiring dedication to partisan gridlock despite its dangers; it is the Saint Thomas More of legislative inaction.) Small companies looking to raise capital sometime in the coming year should keep a newly robust Reg A and crowdfunding in mind as potentially viable offering options.