It isn't often that Congress has a chance to get something really, really right. One current issue before legislators provides such an opportunity: crowdfunding.
What is crowdfunding? Part of the House-passed JOBS Act, crowdfunding would allow virtually any American to invest and hold stock in a privately-held startup. Current rules limit such investments to "accredited investors" with at least $1 million in wealth or $200,000 in annual income ($300,000 for a married couple). When it comes to outside investment in startup companies, the only people who directly see the benefits are quite literally, the one percent.
The House-passed crowdfunding bill would allow average Americans to invest in ideas they believe in -- in any amount up to $10,000, and not to exceed 10% of annual income. This has the potential to create a boom in small business investing from friends, relatives, and crucially, from the Internet -- where one will be able to literally invest in companies in the same way one figuratively "invests" with donations to nonprofits, grassroots political candidates, or arts projects -- $50 and $100 at a time.
Crowdfunding has enormous appeal. The House passed a standalone crowdfunding bill authored by Rep. Patrick McHenry (R-NC) last November on a 417-17 vote. President Obama supports it. The broader JOBS Act with crowdfunding sailed through the House 390-23 last week.
Yet some in the Senate are attempting to muddy the waters, and there are some indications that Senate Majority Leader Harry Reid will weigh in on the weakest possible crowdfunding bill, one which could create significant complications for business owners and investors alike.
This version -- the CROWDFUND Act [see update below], sponsored by Sen. Jeff Merkley (D-OR) -- would gut the promise of crowdfunding by introducing a thicket of new regulations and filing requirements on fledgling startups, and in marked contrast to the alternatives, open the door to more private lawsuits against small business owners.
Crowdfunding shouldn't be -- and actually isn't -- controversial, yet some politicians are trying to stand in the way. For too many in Washington, the Internet is still a foreign land -- one to be regulated and held at bay. Instead of the enormous potential for new small business growth, some politicians are demagoging the potential for fraud, though crowdfunding limits the size of investments so that no investors could lose their shirts in the same way they did with traditional investments in GM, Fannie Mae, and JP Morgan.
So, why is crowdfunding important -- beyond the novelty of raising capital in $50 increments on Twitter?
Marci Harris, founder and CEO of PopVox, an advocacy startup, tells the story of needing to turn down investment offers from friends in her hometown of Jackson, Tennessee, because the town's most affluent residents didn't meet the Securities and Exchange Commission's accredited investor guidelines. There is an enormous coastal bias in which startups get venture funding. Half the people in a Silicon Valley Starbucks make more than the $300,000 SEC threshold, Harris told me, but the doctors and lawyers of Jackson can enjoy the same comfortable living making $150,000 a year. While small angel investments are not out of reach for large numbers of people in Silicon Valley and New York, everywhere else, investment options for small entrepreneurs are much more limited. This is just one of the reasons why it's much harder to get a startup off the ground in Iowa or Arkansas than it is in Palo Alto.
Enter crowdfunding: by routing around traditional sources of seed-stage funding and raising money directly from friends or people who believe in your idea on the Internet, smart entrepreneurs in every community can have a shot. We see this already in the explosive growth of crowdfunding platforms like Kickstarter, which offers rewards rather than capital stakes to skirt the current ban on crowdfunding. Kickstarter is being used to fund films, arts projects, and innovative products like the cult-favorite Olloclip for the iPhone. And unlike the go-go world of Silicon Valley venture capital, many of the most popular projects on Kickstarter hail from unlikely locales like Albuquerque, New Mexico and Baton Rouge, Louisiana.
Politicians should understand the idea of crowdfunding, because that's how campaigns are funded. None understand this best than Scott Brown, author of the Senate's Democratizing Access to Capital Act -- the strongest crowdfunding bill in the upper chamber and far preferable to the Merkley bill. In 2010, my firm was involved in Brown's special election victory when over 150,000 Americans donated $12 million on the Internet in 18 days to upend the political establishment. Support from grassroots Americans has disrupted the political process, and the time has come to let grassroots investors shake things up in our economy as well.
UPDATE: After the publication of this article, Senators Brown, Merkley, and Michael Bennet (D-CO) introduced a revised CROWDFUND Act that appears to move significantly in the direction of the initial Brown bill. The new legislation allows for investments of up to $2,000 for those making under $100,000 and $10,000 for those making over $100,000. Specific language has not yet been released, but it now appears more likely that the Senate and House will reach a compromise.