As the Senate prepares to take up the House-passed Jumpstart Our Business Startups Act, a popular proposal to free up capital through “crowdfunding” has pitted consumer advocates against entrepreneurs.
The idea behind crowdfunding is simple: Instead of going to a bank for loan, a startup or small company seeking capital makes an “open call” to a community of potential small donors who pool their resources, typically on the Internet.
President Barack Obama touted the power of crowdfunding in his American Jobs Act last year and in his legislative agenda last month. Support for the concept has come from such strange bedfellows as Silicon Valley executives, artistic nonprofits, the U.S. Chamber of Commerce and associations representing self-employed, female, minority and small-business owners.
The recession “has been terribly difficult for small businesses,” said Frank Knapp Jr., president and CEO of the South Carolina Small Business Chamber of Commerce. “The loans have dried up dramatically, both for outright loans or for lines of credit. The financial institutions are gun shy now of making ‘risky’ loans.”
Knapp’s group belongs to the American Sustainable Business Council, an association that promotes corporate and social responsibility and that is pushing for crowdfunding proposals on Capitol Hill.
The broad appeal of crowdfunding helps explain why the House passed the JOBS Act by a generous 390-23 margin last week. In addition to clearing the way for crowdfunding over the Internet, that bill includes several other measures aimed at boosting small businesses and entrepreneurs.
These include measures that would relax Securities and Exchange Commission regulations on a new class of “emerging-growth companies” and for companies seeking to go public and to solicit capital through ads. Obama has signaled support for the legislation, and Senate Majority Leader Harry Reid (D-Nev.) was expected to take up the House version of the JOBS Act today and open it to amendments.
But consumer advocates, watchdog groups and some economists are raising alarms. Taken together, the JOBS Act’s various provisions represent a dramatic rollback of financial regulations that date back to the Great Depression, they argue. It would reverse protections enacted with the Dodd-Frank financial reforms, some warn.
“We’re all for channeling capital to small businesses,” said Marcus Stanley, policy director of Americans for Financial Reform. “At the same time, we have banks for a reason, as opposed to people standing on the street corner taking shares in companies. So you’ve got to strike a balance.”
Columbia University law professor John Coffee Jr. testified on Capitol Hill in December that rolling back SEC registration and disclosure requirements for companies seeking crowdfunding invites what’s known as “boiler room” fraud, in which scam artists create phantom companies and solicit investors by phone, email and other means.
Even some advocates of crowdfunding warn that the JOBS Act should not become a vehicle for throwing out too many SEC regulations. “We’re concerned about deregulating the process too much,” Knapp said. “For those who want to raise a great deal of money, there have to be safeguards for the consumer.”
The American Sustainable Business Council wrote to Senate leaders Wednesday to endorse an alternative crowdfunding bill introduced by Sen. Jeff Merkley (D-Ore.). Co-sponsored by Sens. Michael Bennet (D-Colo.), Scott Brown (R-Mass.) and Mary Landrieu (D-La.), the bill includes tougher rules than those in the House JOBS Act, such as stronger disclosure rules and a registration requirement for Internet crowdfunding sites.
The Merkley bill is said to have the blessing of such heavyweights as Google and YouTube. AOL co-founder Steve Case also praised crowdfunding this week in an interview with CEO Wire. Merkley is expected to push his approach as a JOBS Act amendment when the Senate takes up the bill.
Crowdfunding will let “small investors to pool their resources to fund promising new ventures,” he said in a statement. “At the same time, this bill protects those investors and sets fair rules of the road.”
The question for eager entrepreneurs is whether other more sweeping deregulations in the JOBS Act prove too controversial for the Senate — and the president — to swallow.