Small businesses may soon have more access to capital than ever, if a new bill passed by the House of Representatives makes it through the Senate and gets signed into law.
The bill, known as the Entrepreneur Access to Capital Act, will reduce current Security and Exchange Commission regulations originally designed to protect investors from shaky investment schemes and will formally enable what's known as crowdfunding.
Crowdfunding is a relatively new social media phenomenon that enables large group of unaccredited investors to pool their money and raise capital or revenue for an organization. Until recently, crowdfunding has strictly been used to raise money for non-profits and charitable organizations. If passed into law, the EAC Act will allow crowdfunding to be used to invest in small businesses.
There are some stipulations. There's a $10,000 limit per investor (or 10 percent of their annual income, whichever is less) and a company can raise a maximum of $1 million for each offering ($2 million if audited reports are used). But there's no limit on the number of investors that can join in.
The bill, which passed in a surprisingly bi-partisan effort in the House last week by a 407-17 vote, now heads for the Senate. Given the overwhelming support, it seems likely the bill has a good chance to pass in that body as well.
Lawmakers may be responding to constituent's calls for more ways to build capital in smaller businesses and startups. Lack of capital has become an increasingly big concern for small businesses in the wake of banks and other lending institutions tightening their purse strings on small-business loans.
Crowdfunding has had good success in the non-profit realm, with tools like FundRazr and WhatGives!? enabling fundraising using social media platforms like blogs and Facebook. Political campaigns have also made use of crowdfunding sources.
If crowdfunding is allowed for commercial investments and does take off, it represents a way for businesses to circumvent traditional bank loans to raise capital. Hopefully, the SEC can manage these new types of opportunities, since the potential for abuse, as with any other investment, is certainly there.
Given the popularity of social media and its use in non-profit fundraising, there is a real chance this kind of funding could succeed. Small businesses will want to watch and see how this bill progresses in Washington.
Brian Proffitt is a veteran technology journalist, analyst, and author with experience in a variety of technologies, including cloud, virtualization, and consumer devices. An adjunct instructor at the Mendoza College of Business at the University of Notre Dame, he can be followed on Twitter @TheTechScribe and Google+ at +Brian Proffitt.
