The U.S. House overwhelmingly passed its first significant crowd-funding legislation, in the form of H.R. 2930, the Entrepreneur Access to Capital Act.
The bill (now in the Senate) amends the Securities Act of 1933, by allowing entrepreneurs to crowd source (online) up to $2 million per year in investment capital directly from individuals without having to register the investors with the SEC.
However, the commencement and completion of the raise do need to be filed with the SEC.
Entrepreneurs (the “issuers”) must provide potential investors with audited financial statements in order to qualify for the $2 million cap, otherwise you are capped at $1 million.
Individual investments from crowd-shareholders are capped at $10,000 (or 10 percent of their annual income), whichever is less.
To be clear, this is not free money; these are bona fide investor-securities for which they will receive a return on their investment as well as ownership interest in your enterprise, be it film, music, games, art, books, inventions, startups, etc.
Many filmmakers have raised funding for films on popular gifting sites like Kickstarter and IndyGoGo. These sites have found success raising free money for ultra low budget films and other projects through crowdfunding models where people can pledge as little as $1 and as much as they like to a variety of different projects.
That is free gift-money that cannot be paid back, so project benefactors have no financial interest in your film, nor can they take a charitable deduction on their gift (though some sites have contrived charitable workarounds.)
H.R. 2930 specifically amends the “Requirements with Respect to Certain Small Transactions” (Section 4A of the Securities Act), by providing for registration exemptions for certain crowdfunded securities -- the details of which are summarized at the end of this article.
Some important points worth highlighting are:
>> The $1m/$2m funding caps and the $10,000 investment cap are pegged to the Consumer Price Index for all Urban Consumers, so they can be adjusted over time (this prevents the caps from becoming outdated.)
>>A requirement that the issuer or broker use a 3rd party for cash management (this keeps prying fingers out of the cookie jar.)
>>A requirement that the issuer or broker raise at least 60% of the target offering to take possession of the funds (this is a good because it keeps the issuer from collecting money for a project they can’t afford to finish.)
>> Raising crowdfunds does not preclude issuer from raising capital by other means (this allows crowdsourced equity to participate in traditional capital structures alongside (other equity investors, tax credits, collateralized and mezzanine loans, etc.)
>> Background checks are required for issuers and brokers/intermediaries.
>> Crowdfunded shares cannot be resold for 1 year, unless the shareholder is an accredited investor or the issuer.
>> The act does not specify which enterprises can be crowdfunded and which enterprises will be banned, if any.
