On the “Entrepreneur Access to Capital Act” or “Crowdfunding Exemption” Now Before Congress — Part 2

Two unusual and potentially highly important (yet surprisingly brief) bills are now pending before the US Congress. This blog entry will describe one of them and explain why I consider it to be a potential enormous game-changer in the capital raising world for small businesses.

The “Entrepreneur Access to Capital Act” (H.R. 2930) would create an entirely new exemption -- a 21st Century social media category exemption -- to the registration requirements under federal securities law. It is called the “Crowdfunding Exemption” and, yes, “crowdfunding” here has basically the same meaning it does in the internet world.

In Part 1 of this blog entry, I wrote about the background to and the provisions of H.R. 2930.

In this Part 2, I will write about what this bill may mean to the small and midsized business, as well as the bill’s present status.

What the Bill May Mean

A small business (an independent restaurant, bookstore, laundry, appliance sales and repair store, and any of a thousand and one other small companies) may be able to raise capital while also expanding their customer list, deepening their community roots, and finding alternatives to or enhancements for traditional financing, by availing themselves of this new exemption.

Imagine that you have owned and operated a single restaurant or a small chain of restaurants in a locality or region, maybe for years and have a loyal customer base, maybe for a short time but you have won rave reviews and have a passionate following. You would like to increase the equity margin of your business to provide additional working capital absorbers against the shocks of falling revenues or to enable you to undertake that expansion of your table space or your employee roster, or to shine up your balance sheet before the next meeting with your lending bank, or to acquire the location and equipment of another restaurant that is closing.

You cannot afford to spend $25 thousand or $50 thousand dollars or more to raise money through a private placement, even if you could get a local broker to work as placement agent for you (at a hefty six to ten percent or more of gross raised). And while you some deep pocket friends, not all qualify as accredited investors, and you do not believe you can raise the funds you need from that group alone. And you have been introduced to an angel investor but he wants to be more than a passive investor and demands to receive a hefty preference for advancing you funds.

But you do have the customers.

Now you have a way, at much lower expense, to directly offer them the chance to buy into the business they like. None of them can put up a large sum, but with just 50, you could raise $500 thousand this year; with 100, $1 million. And you likely won’t find them demanding outsized returns or management roles: after all, none of them is putting up more than $10 thousand, so if anyone balks at your terms, you just proceed to the next potential investor.

Subject to what course the SEC’s rulemaking takes, you won’t have to furnish a lengthly and costly PPM, and if you keep your fundraising at $1 million or less, you don’t have to get your financial statements audited.

Where the Bill Stands Now

The bill was approved overwhelmingly in the House of Representatives in November 2011 and was sent to the Senate, where it is in committee. The President has publicly endorsed it.

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