Senate passes legislation to legalize crowdfunding

The US Senate passed amended legislation to legalize crowdfunding today. The CROWDFUND Act was approved by nearly a 3-to-1 ratio.

<a href='http://meincmagazine.com/business/news/2012/03/senate-passes-legislation-to-legalize-crowdfunding.ars'>Read the whole story</a>

 

[Natanael_L]

Is Kickstarter affected by this? *gonna read the laws if i find them*

 

[Control Group]

Is Kickstarter affected by this? *gonna read the laws if i find them*

If I understand this correctly, no. Kickstarter isn't really an investment platform, it's a speculative pre-order system. All you get for your money is a product and/or perks for your funding level. That is, the Kickstarter model has no means for you to get a return on your investment; it's a purchase.

These bills - I think - deal with actual investing, in which you get equity in the business for your money. It's venture capital, rather than a product purchase, meaning you're investing with the expectation/hope of making money on the investment.

AIUI, the laws as they currently stand prevent engaging in VC funding in small amounts, presumably to protect average individuals from being conned out of their life savings by phony investment schemes.

 

[rpgspree]

I think investor protection is important, but given the news about crowdfunded projects sailing passed the $1 million mark, I think the cap is a little low.

EDIT: Thanks Control Group for clarifying. Then again, why the hell was this level of detail not in the original article?

 

[knbgnu]

Is Kickstarter affected by this? *gonna read the laws if i find them*

No, kickstarter works off of a donation model with rewards, while this apparently authorizes true investment.

Personally, I'm a bit confused, because this seems to already be covered by the original intent of a corporation.

Also, it seems that the average funder on crowdfunder is donating over $13,000, which seems to be a great deal more than a 'democratic' funding system would have.

 

[Control Group]

Is Kickstarter affected by this? *gonna read the laws if i find them*

No, kickstarter works off of a donation model with rewards, while this apparently authorizes true investment.

Personally, I'm a bit confused, because this seems to already be covered by the original intent of a corporation.

Also, it seems that the average funder on crowdfunder is donating over $13,000, which seems to be a great deal more than a 'democratic' funding system would have.

There are various rules about who can be involved in an IPO. Once the stock is being traded on the open market, individual "average" investors can obviously buy and sell shares. At the IPO stage, though, the average Joe can't get in on the action.

I believe this legislation addresses the possibility of crowdsourcing venture capital/IPO investment money.

 

[Sirrah91]

Fix your headline. Last I checked, going from "smoke all you want" to "any more than an ounce for personal use is illegal" is called *criminalizing*, not *legalizing*.

 

[protyase]

Fix your headline. Last I checked, going from "smoke all you want" to "any more than an ounce for personal use is illegal" is called *criminalizing*, not *legalizing*.

No, this is legalizing. If passed into law private companies will now be allowed to solicit openly for investors and take investments from basically anyone (as opposed to just SEC Accredited Investors) - all of which is not legal in the US today.

They'll also be allowed to have many more investors without having to register their shares with the SEC.

 

[joshv]

I find it amazing that laws must be passed to make such a thing legal.

How about the government stick to prosecuting fraud and leave us to figure things out for ourselves. I forget, we are just too darned stupid aren't we.

 

[ppor]

When companies reach some magic number of investors, like 250 or something, I think they have to follow corporate reporting and shareholder regulations. So this bill makes sense. For companies with a crowdfunding business model, there will be hundreds of investors who don't care as much about fraud or shareholder rights.

 

[Leaping Gnome]

EDIT: Thanks Control Group for clarifying. Then again, why the hell was this level of detail not in the original article?

Exactly! I am reading this thinking WTF is crowdfunding? It has never had an article on Ars before, this article gives no explanation of what it is or why a reader should care about this law.

 

[flamacue]

EDIT: Thanks Control Group for clarifying. Then again, why the hell was this level of detail not in the original article?

Exactly! I am reading this thinking WTF is crowdfunding? It has never had an article on Ars before, this article gives no explanation of what it is or why a reader should care about this law.

I also was confused, and thought the article needed more context / explanation.

 

[crosslink]

The article, as written, needs more context and cues for people who may be astute but not up on all of the associated details and jargon.

 

[pavon]

I find it amazing that laws must be passed to make such a thing legal.

How about the government stick to prosecuting fraud and leave us to figure things out for ourselves. I forget, we are just too darned stupid aren't we.

The thing is this law isn't about legalizing crowdsourcing. It is about getting rid of nearly all the responsibilities that corporations have to their investors, under a certain investment amount. No prospectus, no reporting to the SEC, no transparency. All those regulations added after the dot-com bubble and Enron (and some that predate those) are gone for startups.

 

[Alfonse]

I find it amazing that laws must be passed to make such a thing legal.

How about the government stick to prosecuting fraud and leave us to figure things out for ourselves. I forget, we are just too darned stupid aren't we.

The thing is this law isn't about legalizing crowdsourcing. It is about getting rid of nearly all the responsibilities that corporations have to their investors, under a certain investment amount. No prospectus, no reporting to the SEC, no transparency. All those regulations added after the dot-com bubble and Enron (and some that predate those) are gone for startups.

So you're saying that laws that were passed to protect ourselves are being more or less undone. So that we can turn around and fuck ourselves over in another 10 years, so that those laws can be passed again, then 10 years later repealed so that we can fuck ourselves over again, so that those laws can be passed again...

Idiocy.

 

[bthylafh]

Any insight as to why those 26 senators voted against the act? I gather that nearly all of them were Democrats.

 

[charleski]

When I read 'crowdfunding' the first thing I thought of was 'rent-a-mob', which made me a bit confused at first. But hey, given the way campaign funding works in the US, anything is possible....

 

[Kressilac]

Have to say this is the first bill coming out of Congress that makes me smile. It's the first sign in a long time that our government might get how times have changed and we no longer live in the 70s.

 

[MrReqel]

Slighty off topic.

What is it with American bills and acronyms?

Can someone please explain to me why every bill has to have an acronym?

It seems a bit excessive.

Edit: Grammar.

 

[rpgspree]

EDIT: Thanks Control Group for clarifying. Then again, why the hell was this level of detail not in the original article?

Exactly! I am reading this thinking WTF is crowdfunding? It has never had an article on Ars before, this article gives no explanation of what it is or why a reader should care about this law.

Well, I did know that crowfunding was, thanks to ars' coverage of services such as kickstarter, but the fact that the bill was aimed at a different kind of crowdfunding and how that differs from normal public trading would have given the bill much needed context.

 

[Kestrel]

Slighty off topic.

What is it with American bills and acronyms?

Can someone please explain to me why every bill has to have an acronym?

It seems a bit excessive.

Edit: Grammar.

Marketing. Sponsors of bills find it easier to get support from other members of Congress and the public when those bills have a catchy name, rather than "HB-90345, you know, the one about the oil drilling and tax breaks and stuff".

 

[Bicentennial Douche]

The CROWDFUND Act (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure)

I bet that there are at least 100 people in US Government whose job is nothing but coming up with these acronyms.

 

[sporkwitch]

The CROWDFUND Act (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure)

I bet that there are at least 100 people in US Government whose job is nothing but coming up with these acronyms.

Those jobs are important though, they're doing it for the children

 

[Mesago]

Damn 'merkins and their incessant need to make acronyms. STFU!

 

[Mike Victor]

I find it amazing that laws must be passed to make such a thing legal.

How about the government stick to prosecuting fraud and leave us to figure things out for ourselves. I forget, we are just too darned stupid aren't we.

The thing is this law isn't about legalizing crowdsourcing. It is about getting rid of nearly all the responsibilities that corporations have to their investors, under a certain investment amount. No prospectus, no reporting to the SEC, no transparency. All those regulations added after the dot-com bubble and Enron (and some that predate those) are gone for startups.

So you're saying that laws that were passed to protect ourselves are being more or less undone. So that we can turn around and fuck ourselves over in another 10 years, so that those laws can be passed again, then 10 years later repealed so that we can fuck ourselves over again, so that those laws can be passed again...

Idiocy.

Not idiocy. Idiocracy!

 

[PanzerWatts]

I'm glad to see this law pass.

 

[Workaround]

This is actually a pretty good bill. The protections passed after the dotcom bubble had the unintended consequence of putting venture capital into an oligopoly with large Wall Street firms running the show. The only reason there's any controversy IMO is the people bought and paid for by big investment banks are raising a stink about it. This provides the opportunity for the smaller investor to take advantage of some of the same advantages that big-money venture capital firms have. I have enough in my "play money" fund to do something like this and I'm quite interested (Play Money meaning my trading fund that I take a lot of risks with. I put about 5% of my savings in this fund, and I've done very well with it thanks to the kickass stock market we've had recently).

The CROWDFUND (Senate bill) adds an important provision that the EACA (House bill) didn't have - that the platforms for crowdfunding need to be SEC approved and subject to regulatory oversight to prevent fraud.

There's 2 downsides to the proposal(s). The first is that we're going to potentially start seeing a lot more advertising for these kinds of things... "Get involved in my company from the getgo and share in the future profits! Go to www.crowdfunder.com and search for Dongle And Widgets Inc today!" (or ads directly from the crowdfunding services).

The other downside I don't really view as a downside, but it's going to make it very easy and seemingly very attractive for less-informed investors to get involved in very risky business proposals. For someone who's got a basic grasp of finance, this isn't an issue.... if I invest in a crowdfunded business, I'll know I'm putting my money into a high-risk venture and that I stand a good chance of losing it all. But as 0% down ARM mortgages, the dotcom bubble and penny stock websites prove, not everyone will understand the risks involved - and get suckered in by marketing.

 

[Leaffe]

I find it amazing that laws must be passed to make such a thing legal.

How about the government stick to prosecuting fraud and leave us to figure things out for ourselves. I forget, we are just too darned stupid aren't we.

The thing is this law isn't about legalizing crowdsourcing. It is about getting rid of nearly all the responsibilities that corporations have to their investors, under a certain investment amount. No prospectus, no reporting to the SEC, no transparency. All those regulations added after the dot-com bubble and Enron (and some that predate those) are gone for startups.

So you're saying that laws that were passed to protect ourselves are being more or less undone. So that we can turn around and fuck ourselves over in another 10 years, so that those laws can be passed again, then 10 years later repealed so that we can fuck ourselves over again, so that those laws can be passed again...

Idiocy.

Not really, those regulations are still in effect for big investing (you know, the type of stuff like insurance, pensions, IRA...basically any of the publicly traded stuff...the stuff that can really shake the market if it fails).

This is relaxing those regulations for low-investment startup ventures. By nature, these are much more risky investments, but they carry the potential for very high rewards. This type of investment has been hampered by those regulations.

Basically, it is like a casino. Previously, only high rollers were allowed in at all. If this bill passes, it opens up the casino for anyone.

Of course, a lot of people will lose money...that's how that level of investment works. But at the same time, it will stimulate a huge burst in startups and small business. Honestly, I think this is a fantastic thing. Savvy small-time investors will be able to add some risk to their portfolios, and startups (like mine) will have an alternative strategy of funding (other than VC and AI).

 

[MoonShark]

EDIT: Thanks Control Group for clarifying. Then again, why the hell was this level of detail not in the original article?

Exactly! I am reading this thinking WTF is crowdfunding? It has never had an article on Ars before, this article gives no explanation of what it is or why a reader should care about this law.

I also was confused, and thought the article needed more context / explanation.

Add me to that list. Thank you to the commenters who provided some context.

 

[MrReqel]

Slighty off topic.

What is it with American bills and acronyms?

Can someone please explain to me why every bill has to have an acronym?

It seems a bit excessive.

Edit: Grammar.

Marketing. Sponsors of bills find it easier to get support from other members of Congress and the public when those bills have a catchy name, rather than "HB-90345, you know, the one about the oil drilling and tax breaks and stuff".

Cheers

 

[crustytheclown]

I have to admit that I never heard of crowd funding before. I looked it up and was surprised to see that crowd funding should not need to be declared legal by the government. Its a form of pooling one's money. The Senate was concerned about fraud, hence the legislation I guess. We really need to get away from this Nanny state of fascism.

Let people pool their money and if they lose it because of fraud, then that's a criminal and civil litigation problem.

PLEASE push for limiting Congressional session terms to like four 1 month periods per year or something so they do not waste their time on BS legislation like this. This Ruling Class is killing the USA with 6-7 figure salaries and nonsense legislation.

 

[krimhorn]

Slighty off topic.

What is it with American bills and acronyms?

Can someone please explain to me why every bill has to have an acronym?

It seems a bit excessive.

Edit: Grammar.

Marketing. Sponsors of bills find it easier to get support from other members of Congress and the public when those bills have a catchy name, rather than "HB-90345, you know, the one about the oil drilling and tax breaks and stuff".

Precisely. It's also much easier to sell to the public at large. Imagine bills that have particularly onerous elements (or are in their entirety onerous bills) with a catchy name you can obfuscate (if not outright lie) about the contents of the bill and have the public buying into it. Without that it's more difficult to sell.

At least CROWDFUND isn't a silly one and says something (however little) about what the bill is about.

 

[Collie147]

I don't know why but I read this as "Senate passes legislation to legalize crowdSURFING" and immediately focused on "3-to-1 ratio"

 

[TomXP411]

Is Kickstarter affected by this? *gonna read the laws if i find them*

These bills - I think - deal with actual investing, in which you get equity in the business for your money. It's venture capital, rather than a product purchase, meaning you're investing with the expectation/hope of making money on the investment.

So what you're talking about is really a form of small, less regulated stock market.

 

[TomXP411]

How about the government stick to prosecuting fraud and leave us to figure things out for ourselves. I forget, we are just too darned stupid aren't we.

I think this is to *prevent* fraud.

We're not talking about a Mom n Pop store who takes on a partner to open a new branch.

We're talking about companies that take investment money from hundreds or thousands of people... there needs to be a way to track that investment and prove ownership - just like the way the stock market works for large companies.

I think the idea here is to prevent the kinds of con artists that bilk grandparents out of their retirement money on the promise of a 200% return on their investment.

 

[TomXP411]

This is actually a pretty good bill. ... (lots of good stuff follows)

It's really too bad the article didn't cover any of this... it should have been at least twice as long, including explaining why this bill was necessary in the first place.

 

[bobthe]

EDIT: Thanks Control Group for clarifying. Then again, why the hell was this level of detail not in the original article?

Exactly! I am reading this thinking WTF is crowdfunding? It has never had an article on Ars before, this article gives no explanation of what it is or why a reader should care about this law.

++

 

[Tundro Walker]

Maybe I'm cynical, but this seems like the government is just patting citizens on the head condescendingly and saying "ok" to something that's been going on for a long time just to act like they're giving their blessing.

 

[X-AxSys]

I can only imagine this legislation has allowances in it to allow crowdfunding to companies to be trekked via various means in the campaign offers of politicians or those seeking office with little if any transparency. One can imagine Companies creating "let us donate money to this political campaign or cause in your name just sign here..."

 

[dadsfolk]

When companies reach some magic number of investors, like 250 or something, I think they have to follow corporate reporting and shareholder regulations. So this bill makes sense. For companies with a crowdfunding business model, there will be hundreds of investors who don't care as much about fraud or shareholder rights.

Right. And also right are some of the other commentors.

The SEC regulates public companies. But you can't ignore SEC regulations just because you're private, if you have more than a certain number of investors (something funny has happened here, which I don't fully understand, in which, via a loophole, Goldman Sachs and others have been able to add "private" investment rounds - e.g. Facebook - to provide interim financing, blow up the stock price, and cash out on an IPO).

However, there's always been a significant barrier to early investment by individual - e.g. you need at least $50 K at even the earliest levels of "angel" investing, and you couldn't join a VC fund without a lot more.

Recently, several organizations have decided to create VC funds by getting small amounts of money from a large number of people - risk a little, occasionally gain a lot. This opens early-stage investing to large numbers of people with small contingency funds - except you have a ton of SEC regulations to deal with. This legislation is a means of clearing those hurdles while protecting against fraud - both at the con artist level and the "beat the SEC's rules pre-IPO" level. I think the $2K limit is a bit small, if the company limit is $1 million - I expect a sop to the VCs and investment banks - since while it limits losses, it severely limits gains as well. I'd think that up to $50K would be better, although a $10K limit would be more conservative. $2K requires a *lot* of people to generate $1 million.

I'm actively investigating this avenue of investing, but I'm afraid I can't find my references at the moment. Here's an example of an organization which has been working this market (and it looks like they'll be dented by the legislation):

Crowdsourced Fundraising Platform ProFounder Now Offers Equity-Based Investment Tools