US crowdfunding laws could be changed before they take effect

Rules governing crowdfunding in the US could be amended before they are even fully introduced.

More and more small businesses and startups are taking to crowdfunding as a means of raising finance without going through the banks. But in the US, small firms are finding this much harder than they are elsewhere, and legislation has so far done fairly little to help.

Changes to US security rules were enshrined in the Jumpstart Our Business Startups (JOBS) Act in 2012, increasing the number of investors a private company can have from 500 to 2,000. The law also removed some barriers faced by businesses considering a stock flotation.

But crucially, the JOBS Act also lifted a ban on “general solicitation”, which was preventing entrepreneurs from advertising equity sales to “accredited investors” – wealthy individuals who are willing to buy a stake. The law will even allow these small businesses to obtain finance from the general public online through equity crowdfunding.

It was met with at least scattered praise at the time, but the JOBS Act has so far failed to convince its critics that it beings many genuine benefits. Some provisions, such as the equity crowdfunding rules, have not even been implemented yet because officials are still trying to determine how they will play out in practice – and that part of the law has been criticised for making it harder for businesses to use their social networks to raise funds to invest.

As a result, a group of Republicans in the House of Representatives and led by Patrick McHenry are already preparing to table an amendment, which could potentially change the equity crowdfunding rules before they have even been implemented. Mr McHenry was the originator of the law, but says that it was considerably altered on its journey through Congress.

Because it’s such a new industry, governments are still trying to figure out how to handle crowdfunding. Regulations were implemented by the UK’s Financial Conduct Authority (FCA) last month that will protect investors’ cash in loan-based systems so that if the company goes bust, investors will not lose out. Crowdfunding platforms need a third party in place who can take over operations if they should go under themselves, and like banks, they also need to hold onto a reserve of capital.

As time goes on and crowdfunding becomes more commonplace, industry and governments will get a better sense of how to deal with it. At the moment, small firms are still focusing on the huge financing potential that this growing industry could provide.