Last Updated on Tuesday, 17 January 2012 11:18 Written by dbhalling Tuesday, 17 January 2012 11:18

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According to an article, entitled “House Passes First Crowdfunding Legislation”  the House has passed a bill modifying the securities law to allow “crowdfunding.”  The proposed legislation appears to be a fairly well crafted piece of legislation, which is quite unique for Congress lately.  The bill is less than 2000 words and does not appear to have any special interest provisions.  The Bill would allow companies to raise up to $1M online within a year without audited financial statements and up to $2M online with audited financial statements.  Another positive of the Bill is that it does not require investors to be accredited to invest.  However, it requires that no one investor contribute more than $10k or 10% of their income, whichever is less.  The Bill appears to require a number of statutory warnings about how risky it is invest in the company.  It makes it difficult for an investor to sell their stake in the company within a year of the purchase.  It also does not require a broker to be licensed with the SEC to sell shares in the company.  However, it does require someone acting as a broker to provide information to the SEC.  The SEC could expand these requirements under its rule making authority.  In general, I consider this good news for start-ups.

The downside of this legislation is that it is a band aid to fix the problems with our Securities Laws.  Every academic study of the effectiveness of our Securities Laws shows that they have been either totally ineffective at protecting investors or worse counterproductive.  The real answer to the lack of funding for start-ups would be to repeal all Securities Laws and Regulations except the common law requirements under contract and tort law.