In November of 2011, The U.S. House of Representatives passed a crowdfunding bill , with overwhelming support. By most accounts, the bill was friendly to crowdfunding and cut out much of the red tape that usually accompanies financial bills, thanks in large part to its author, Congressman Patrick McHenry. It creates “a crowdfunding exemption from SEC regulations for firms raising up to $2 million, with individual investments limited to $10,000 or 10 percent of an investor’s annual income.” And as a bonus, exempted crowdfunding investors from the 500 investor limit before public company reporting kicks in.
But then the special interests awoke. In the Senate, two related bills were introduced, one from Senator Scott Brown (“Democratizing Access to Capital Act of 2011”) and one from Senator Merkley (“Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2011”). Unfortunately, the Senate hearings and concurrent media postings were best characterized as the “Keep American Entrepreneurs Down by Continued FUD Act of 2011”, and the resulting bills watered down almost to the point of futility. Currently, passage of a crowdfunding bill is stuck in the Senate, with no apparent time frame for progress. You can see a quick visual snapshot of the various proposals here.
As you can see in the last link, the proposal from the North American Securities Administrators Association (NASAA) has the weakest proposal, with an embarrassingly out-of-touch maximum of $500K. Yet just recently, Kickstarter got its 3rd $1M project in the span of two weeks (Double Fine is over $2M alone!). Reality check, crowdfunding is already a market measured globally in billions of dollars, and how many cases of fraud have you heard about? You know why there is so little fraud? Because transparency is the best mechanism free markets have to offer for fraud prevention. Take for example the attempted crowdfunding project, the Tech-Sync Power System. After tech-savvy people in the project's chat forum scrutinized the technology, the project was canceled before the funding period completed. Who would have thought, we don't need government and intermediaries to “protect us”?
The crowdfunding market has spoken. And so has the American public. The dam is just ready to burst, trembling with pent up energy to utilize this community-oriented funding mechanism to get on with their entrepreneurial endeavors. Peer to peer lending has shown us it's possible to get better interest rates than offered by conventional lenders. Micro loans to people with absolutely no credit history has shown us that it's possible to have lower default rates than credit cards. Economic power is derived from community trust. Not from intermediaries, banks or a quadrillion dollars of global derivatives (20 times the size of the global economy, btw).
So now, it's time for politicians to “put up or shut up”. It's my opinion that a serious presidential contender will soon commit to a generous crowdfunding exemption. They don't have any choice. Because it's what people are demanding. And these people are the types who know how to effectively use social media. Obama has directly stated his support for the liberal House bill, so that gives him an initial advantage. But the onus is on him for real action. If however Ron Paul, who is scoring big with the youth vote, comes out strong for crowdfunding, it would be a game-changer for him. The end of this story has not yet been written...