Crowdfunding: Democratizing Investment for Entrepreneurs

Yesterday, in an overwhelmingly bipartisan vote of 407-17, the House of Representatives passed a bill supported by President Obama that would allow small companies to raise capital through “crowdfunding.”

Crowdfunding is essentially raising little bits of money from a big group of people over the Internet.  The Internet has made it easier for political candidates and charitable organizations to turn lots of small contributions into large dollars, and in recent years some entrepreneurs have found success raising money this way to grow some very innovative companies.  But unless the money collected is a pure donation, the U.S. Securities and Exchange Commission (SEC) probably has to get involved.

That’s not a bad thing – we rely on the SEC and state regulators to protect investors against fraud and ensure a smoothly functioning marketplace.  But current rules, designed for a pre-Internet era, make crowdfunding difficult for entrepreneurs who want to connect with investors, not just donors. 

For example, there’s a new startup that turns shipping containers into tiny grocery stores that can sit on parking lots in “food deserts,” bringing healthy produce to underserved communities.  An online crowdfunding campaign successfully raised over $20,000 from nearly 200 donors, but none of these people can receive a stake in the venture – that would trigger an expensive SEC registration process designed for much larger companies.  If each of these people was willing to accept a zero percent chance of recouping their $100, how much more would they have been willing to invest if they had even a small chance of earning a return?

When President Obama presented the American Jobs Act to Congress, he supported a streamlined set of rules and responsibilities that would allow entrepreneurs to use online crowdfunding platforms to seek investors.  As long as a company is raising less than $1 million, and no investor parts with more than 10 percent of their annual income (capped at $10,000 per year), these crowdfunding efforts would be exempt from certain expensive SEC registration requirements. 

The House bill that passed yesterday is broadly consistent with the President’s proposal, which grew out of the White House Startup America initiative to promote high-growth entrepreneurship across the country.  The Obama Administration looks forward to working with Congress to craft final legislation that provides appropriate investor protections and empowers more entrepreneurs to raise capital and create jobs.

Tom Kalil is Deputy Director for Policy at the White House Office of Science and Technology Policy and Doug Rand is Senior Advisor to the Deputy Director.