With Occupy Wall Street movements across the country protesting the pay earned by investment bankers and brokers, the Senate Banking Committee heard arguments this week for and against a bill that would allow startup companies to connect directly with investors using the Internet. Sen. Scott Brown, R-Mass., has introduced Senate Bill 1791 to “amend the securities laws to provide for registration exemptions for certain crowdfunded securities and for other purposes.”
Brown says the bill would increase access to capital for startups, and allow more people to invest in private companies. “Its potential to create jobs is enormous,” Brown told the Senate Committee. Under his bill, companies would be allowed to solicit up to $1 million a year through so-called crowdfunding sites, with the maximum investment from any investor limited to $1,000. The House has already passed a crowdfunding bill that would allow an individual to invest up to $10,000 through crowdfunding and limit the amount a company could raise to $2 million.
Crowdfunding has long been popular and productive for nonprofits and application developers. Websites such as Appbackr.com allow investors to help fund applications and encourage them to promote the apps they fund on social media sites. The apps are sold through Appbackr.com, and the proceeds are shared by the developer, the investors and Appbackr.
The North American Securities Administrators Association opposes the bill, saying it will put small investors at risk. “The law should not provide lesser protections to the investors who can least afford to lose their money,” Jack Herstein, the association’s president, told the Senate Committee. Crowdfunding sites would not have to register with the Securities and Exchange Commission, meaning that opportunists could try to raise money for startups without performing the due diligence that investment banks are required to undertake.
Not all criticism of the crowdfunding legislation comes from the security industry’s big guns, however. Small-business backers note that startups with hundreds of small investors would have to open their books to all of them and allow them to weigh in on corporate decision making. This could scare off venture capitalists.
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