Regulators worried Jumpstart bill could jump-start crowd-funding

An election-year rush by Congress to address the biggest voter concern — the economy — may give new life to legislation that would allow fledgling companies to solicit investors online, a prospect that troubles state regulators. The House likely will vote soon on a package of bills dubbed the Jumpstart Our Business Startups Act that includes a measure written by Rep. Patrick McHenry, R-N.C., that would remove Securities and Exchange Commission restrictions on so-called crowd funding, allowing entrepreneurs to raise equity from small investors through the Internet and social media. Under the bill, a company could pool up to $1 million from investors without SEC registration. An individual's investment would be limited to $10,000 or 10% of his or her annual income. The bill wouldn't require the stock issuer to register with a state. The measure was approved by the House 407-17 last year. Crowd funding also has been endorsed by the Obama administration. Republican House leaders are putting pressure on the Senate to act on this measure and several other bills that they say will generate jobs. Senate Majority Leader Harry Reid, D-Nev., said yesterday that the Senate would act on a package of job bills. “These measures will improve innovators' access to capital, and they will streamline how companies sell stock through initial public offerings or IPOs,” he said. “These pieces of legislation will also protect the rights of investors.” The North American Securities Administrators Association hopes that Mr. McHenry's bill isn't in the mix. The group objects to the measure's state registration pre-emption, arguing that it would prevent states from detecting fraud until it's too late to stop small, unsophisticated investors from being victimized. “We do have concerns if the McHenry bill, as passed by the House, is part of this package,” said Bob Webster, NASAA director of communications. “There's a critical need to balance investor protection with capital formation,” he said. “We would hope that any legislation that is offered would take that balance to heart.” Two Senate crowd-funding bills would limit the amount of money that individuals can invest, and one of them would require that the portals through which securities are offered be registered as broker-dealers. Crowd-funding proponents said that state securities regulators are engaging in a “campaign of fear and fraud.” They assert that the existing form of crowd funding — in which businesses solicit gifts from donors — hasn't resulted in ripoffs. “Crowd-funding investment platforms will be open and transparent, and operate under a new regulatory framework,” the Small Business and Entrepreneurship Council and several other groups wrote in a letter to Senate leaders. “The platforms will protect investors by utilizing proven technologies and tap into ‘the sunshine' of social media.” The groups said that the number of self-employed Americans is falling, in part because they lack funding for their business ideas. “Healthy entrepreneurship requires access to capital, yet funding streams remain cautious, locked or tentative,” the letter stated. The Senate Banking Committee has scheduled a hearing on capital formation bills for Tuesday.