apple and orange

The differences aren’t miles apart, but not inches either.

As the topic for our Monday’s Startup Junkie Underground, the House (H.R. 2930) and Senate (S.1791) have proposed competing Bills on the topic of crowdfunding. It’s important, however, to know the differences between the two, because the devil is in the details. And, when it comes to H.R. 2930 and S.1791, the differences are pretty crucial. Crowdfunding advocates need to pay attention.

The Bills: House versus Senate

Lets start chronologically with H.R. 2930, since the House passed its proposal first. The key features of H.R. 2930 are, (1) investors can invest $10,000 per year or 10% or their annual income (whichever is lower); (2) new ventures may use crowdfunding intermediaries or go directly to the community; and, (3) federal laws regulating crowdfunding preempt any state laws attempting to regulate it.

The Senate proposal is actually quite different. For instance, (1) it limits investor participation in any deal to $1000; (2) it requires new ventures to use a qualified intermediary, thereby preventing any initiative from going directly to a community; and, (3) it does not, by default, preempt State laws, possibly requiring new ventures to register in multiple States before preemption applies.

Key differences and implications

The first key difference is the amount of investment. Under the House Bill, a person can invest up to $10,000 in any one investment. By contrast, the Senate Bill limits any investment to just $1,000 in any particular deal. That said, the Senate proposal removes a limit on the total amount of investment possible. In effect, it encourages a more diversified portfolio, distributing risk across new ventures; but it also potentially opens investors to bigger losses, since more money can be at risk.

The second key difference is the required use of an intermediary. The House proposal allows entrepreneurs to go directly to their community without using a third-party. For example, an entrepreneur seeking to open a cafe would not need to expose their company to investors from around the country on a crowdfunding website, such as IndieGoGo or Kickstarter. Rather, they can crowdfund directly from those that live/work nearby and are most likely to be their customers. By contrast, the Senate proposal imposes a third-party intermediary to qualify for an exemption from SEC rules.

Finally, the third key difference is federal preemption of state law. Essentially, the House proposal prevents any attempt by State lawmakers to impose local requirements on crowdfunding, but still allow’s states to require notice filings and fees. The effect is national uniformity: raising money via crowdfunding in California is the same as New York. The Senate proposal, on the other hand, allows States to enact more rules. The premise appears to be that State’s have the authority to regulate any crowdfunding initiative that operates solely within the state. Federal preemption would occur only if the new venture goes beyond state borders and acquires a certain amount of investors from out of state.

In Sum…

Whichever proposal one agrees with, both have strengths and weaknesses. Both proposals are seeking to identify the best methods to (1) mitigate risk, (2) prevent fraud, and (3) reduce the cost capital. In aggregate, a comparison of the two proposals would seem to indicate that a comprise is in the future.

The House proposal allows for more direct community engagement and lower costs of capital nationally; but it also limits how much people can invest yearly and potentially opens up the door to more fraud by not letting State’s enact protective provisions for new ventures solely funded by local investors.

The Senate proposal allows individual to invest more, but at lower stakes, and empowers State’s to enact laws to protect what local crowdfunding initiatives (likely the greater proportion of new projects); but it also increases the cost of capital and imposes more complicated steps on small business, the community most unable to afford the complications.

Via Kenneth PrioreCalifornia Business Attorney


udemy-logo-academyofyou-300x228social mkting for startups Ruby programming startup capitallllllllll