The U.S. House overwhelmingly passed its first significant crowdfunding 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 crowdsource (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% 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:
During the Senate Banking Committee's December 1st hearing on spurring job creation through access to capital, Senate Banking Committee Chairman Tim Johnson said in his opening statement that they will hear from witnesses who will "provide insight on proposals to expand the scope of Regulation A offerings, to permit general solicitation of investors in Regulation D offerings, and to allow individuals to solicit and sell small amounts of stock over the Internet through crowd-funding."
Johnson continued, "They will address the size of a private offering and the amount of money that a crowdfunder should be able to risk without full regulatory protection. They will discuss the types of markets where these securities should trade. They will also describe the existing investors' safeguards, such as disclosures about the business and financials, and how current proposals would affect those safeguards."
The amendments to Section 4A are as follows:
''(6) transactions involving the offer or sale of securities by an issuer, provided that--
''(A) the aggregate amount sold within the previous 12-month period in reliance upon this exemption is--
''(i) $1,000,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, or less;
''(ii) if the issuer provides potential investors with audited financial statements, $2,000,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, or less;
''(B) the aggregate amount sold to any investor in reliance on this exemption within the previous 12-month period does not exceed the lesser of--
''(i) $10,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics; and
''(ii) 10 percent of such investor's annual income;
''(C) in the case of a transaction involving an intermediary between the issuer and the investor, such intermediary complies with the requirements under section 4A(a); and
''(D) in the case of a transaction not involving an intermediary between the issuer and the investor, the issuer complies with the requirements under section 4A(b).''
H.R. 2930 goes on to describe the statutory Requirements to Qualify for Crowdfunding Exemption, for issuers and brokers, which includes cautionary language, background checks, website requirements, etc.
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