Crowdfundbeat Media Group – June 11th, 2016 – H.R. 4855 Fix Crowdfunding Act sponsored by Representative McHenry will be voted this week in the House. The bill amends the Securities Exchange Act of 1934 to exempt crowdfunding securities transactions from its registration requirements.
June 9, 2016
The Honorable Patrick McHenry
U.S. House of Representatives
Washington, DC 20515
Dear Representative McHenry:
As one of the earliest pioneers in the crowdfinance movement, I am writing to express my strong support for H.R. 4855, the Fix Crowdfunding Act of 2016.
Although viewed as a novel financing method that utilizes modern technology to marry the people’s capital with innovation, crowdfinance is as old as America and is governed by the very same tenets of liberty that led to her founding 230 years ago. Granting its citizens the freedom to invent and to profit from one another’s inventions is what enabled America to transform from a vast farmland into the greatest economic superpower in the history of the world. It is what provided upward mobility for generations of Americans. It is what helped create a thriving middle class. And it is what fueled some of mankind’s most significant innovations.
Crowdfinance is rooted in American accomplishments, and it is the key to ensuring prosperity for future generations.
By augmenting the existing crowdfund law, H.R. 4855 will not only boost innovation by enabling entrepreneurs to more readily and affordably access greater amounts of capital, H.R. 4855 can actually play a critical role in mitigating investment loss. Most importantly, H.R. 4855 will help the U.S. tackle two imminent national emergencies: a retirement crisis and a burgeoning wealth gap.
Highlighted below are less obvious ways that H.R. 4855 will benefit the U.S. economy in years to come.
Giving issuers the ability to “test the waters” by soliciting non-binding indications of interest from potential investors prior to commencing an offering can be an effective way to weed out inferior business models or products – before investors cut checks. Like rewards-based crowdfunding, “testing the waters” can be invaluable in gauging demand for both a company’s stock as well as its products. Companies that fail to generate interest during this test-period have an opportunity to go back and perfect their product, business model or financing before proceeding. Or, if need be, they can cancel the offering altogether – saving investors from financing a flawed company. Ideally, stronger companies that have survived the “testing stage” will move forward with their financing. As more and more companies are bred in this manner, H.R. 4855 can ensure the production of more proficient businesses leading to a much more productive economy.
H.R. 4855 alleviates capital risk by encouraging two critical types of diversification: investment diversification as well as investor-base diversification.
No one would argue that startup investing isn’t highly risky. But a lot of that risk can be offset through diversification. No financial advisor would ever recommend someone putting all of his money into one asset class, let alone, one stock. By spreading one’s crowd-investment capital across multiple investments, there is much greater chance of generating a respectable return.
By opening unaccredited crowdfunding to fund structures, H.R. 4855 will trigger the emergence of new funds chartered to allocate capital across multiple businesses or assets. This will provide smaller investors with a much greater opportunity to diversify their crowdfund holdings by investing in a “basket of companies” as opposed to hanging their hopes onto just one.
Issuers also benefit from diversification. Crowdfinance gives an issuer an opportunity to build a large, impassioned and well-diversified investor base. As crowdfinanced offerings ultimately make their way to the public markets or begin “trading” on venture exchanges, their crowd-investor foundation will prove vital to ensuring that their companies remain more appropriately valued based on their fundamentals – not on the “mood swings” of a handful of mega-investors.
Trading too far away from fundamentals is one of the most troublesome flaws in today’s public equity markets. One order for a thinly-traded small cap from Fidelity could make or break a market maker. Yet, the financial impact from crowd-investor Jane Doe deciding she needs to sell her 300 shares to pay for a root canal is insignificant. Institutional holders currently possess way too much influence over a stock price. By democratizing and diversifying investor bases, stocks will be more inclined to return to trading on fundamentals – bringing confidence back into the public markets.
Finally, H.R. 4855 democratizes the investing landscape by giving even the tiniest of investors the ability to access alternative growth products and build diversified retirement portfolios. While researching a white paper highlighting the monumental impact of tax-deferred micro alternative investing, we uncovered a staggering correlation between America’s retirement system and its national wealth gap. It appears that America’s wealth disparity began to spike just as the IRA and 401k started replacing defined benefit plans. This was also the same timeframe that American investors were separated by financial stature and divided into two distinct classes: accredited and non-accredited. As depicted in the chart below, unless and until all citizens are granted equal access to investment products and the same opportunities to build well-diversified retirement portfolios, America’s wealth disparity will continue to rise.
By fostering tax-deferred micro alternative investing, H.R. 4855 can help reverse America’s mounting wealth gap.
Thank you for your leadership and tireless efforts in democratizing U.S. financial markets. I look forward to seeing this legislation pass with strong bi-partisan support.
About “Fix Crowdfunding Act”
Official Title as Introduced: To amend provisions in the securities laws relating to regulation crowdfunding to raise the dollar amount limit and to clarify certain requirements and exclusions for funding portals established by such Act.
This bill amends the Securities Act of 1933 (Act) to increase from $1 million to $5 million the aggregate amount of securities sold to all investors by an issuer that qualify for the crowdfunding exemption from certain prohibitions relating to interstate commerce and the mails.
(Crowdfunding is a method of capital formation where groups of people pool money, typically composed of small individual contributions, and often via Internet platforms, either to invest in a company or to support an effort by others to accomplish a specific goal.)
The bill amends the Jumpstart Our Business Startups Act (JOBS Act) to declare that a crowdfunding portal shall have a reasonable basis for disqualifying issuers from offering securities through the portal if through a background check it has found that an issuer has made an untrue statement of a material fact, omitted to state a material fact necessary to avoid making misleading statements, or engaged in fraud or deceit. No intermediary (crowdfunding portal) shall be liable for an issuer’s material misstatements and omissions unless, in connection with the offer or sale of a security, it knowingly made or omitted such statements or engaged in fraud or deceit.
The bill amends the Securities Exchange Act of 1934 to exempt crowdfunding securities transactions from its registration requirements.
The Investment Company Act of 1940 is amended to exempt from the definition of investment company, and so exclude from coverage by that Act, any issuer that, for the purpose of making a crowdfunding offering, holds the securities of not more than one issuer eligible to offer securities (a single-purpose fund).
The bill allows single-purpose funds to sell and offer for sale securities according to crowdfunding requirements, and considers them venture capital funds.
The Act is further amended to permit an issuer, before commencing a crowdfunding offering, to solicit non-binding indications of interest from potential investors in the prospective offering if:
- no investor funds are accepted by the issuer, and
- any material change in the information furnished during the actual offering from the information furnished during the solicitation of interest is highlighted to potential investors in the information filed with the Securities and Exchange Commission.
No enforcement action may be brought before May 16, 2021, against crowdfunding portals established under the JOBS Act.