‘Crexit’ Votes Will Help U.S. Entrepreneurs and Investors

In yet another blow against the Brexit chicken littles, not only have the large British companies comprising the FTSE 100 gained back all the losses in market value after the vote to exit the EU occurred, small entrepreneurial firms also appear to be gaining strength.

Investment-based crowdfunding, or equity crowdfunding, is “vibrant post-Brexit,” the CEO of the UK’s biggest equity crowdfunding site told Business Insider. Though Darren Westlake, CEO and co-founder of the Crowdcube, expressed personal disappointment that “Leave” beat “Remain,” he noted that transactions on the crowdfunding web portal among investors and entrepreneurs actually increased by 18 percent in the first week after the vote.

This is yet another reminder that if US policymakers are worried about sluggish growth, as indicated by recent jobs and business investment figures, they should focus not on Brexit-hyped effects but on overregulation here at home. And the good news is that this evening, members of both parties in the U.S. House of Representatives are finally doing that.

Tonight, the House is slated to vote on two bills that expand upon the equity crowdfunding deregulation in the Jumpstart Our Business Startups (JOBS) Act of 2012. They are the Supporting America’s Innovators Act (HR 4854) and the Fix Crowdfunding Act (HR 4855), introduced by Rep. Patrick McHenry (R-N.C.)

CEI, as well as our friends at Generation Opportunity and the Main Street Growth Project, sent a letter of support for these bills. Addressing Reps. Jeb Hensarling (R-Texas) and Maxine Waters (D-Calif.), CEI noted in the letter that the Title III crowdfunding provisions finally went into effect May, more than four years after President Barack Obama signed the original JOBS Act – supported by both Hensarling and Waters – into law.

And the provisions Hensarling and Waters voted for were made substantially more burdensome due to changes made in the Senate and in the slow implementation by the Securities and Exchange Commission. “As a result, many talented startup entrepreneurs will be unable or unwilling to pursue this option, to the detriment of their firms and the middle-class investors who could grow wealthy with them,” the letter stated.

Though unfortunately in the forging of consensus, some important provisions were dropped – including increases in the capital-raising thresholds to be on par with the UK and other foreign nations and more clarity on the ability of startups to “test the waters” through marketing and advertising – the bills still have plenty great in them. And the 57-2 margin that both bills received in the House Financial Services Committee – and similarly large margins they will likely get in the full House tonight – show that there is still a large bipartisan consensus in favor of the JOBS Act and its aim to at least modestly deregulate the capital markets for entrepreneurs and the ordinary investors who wish to take a chance on them.

Though there still is and still will be plenty of red tape for companies raising capital through the crowdfunding provisions of the JOBS Act – as well as the same red tape all businesses face in their general operations – investors and entrepreneurs utilizing these provision will be free of many regulations from Sarbanes-Oxley and Dodd-Frank that force firms to employ lawyers and accountants at the expense of developing cutting-edge new products and the new jobs to go with them.

The crux of the Fix Crowdfunding Act is to allow special-purpose vehicles with lead investors to negotiate with startup entrepreneurs. This is similar to the method in which venture capital and angel investor funds safeguard their investments. It will also allow larger and growing firms to crowdfund by increasing the market valuation threshold to $75 million from $25 million.

As Waters was quoted by the Wall Street Journal as saying, “Both of these changes will help to provide investors with a larger choice of high-quality crowdfunding companies and a higher degree of finance savvy.”                                 

The Supporting American Innovators Act makes a simple, yet very consequential, change. It updates securities laws so that limited liability companies (LLCs), the preferred structure of many small businesses, can have a maximum of 500 investors without triggering SEC registration requirements. The JOBS Act rightly raised the shareholder threshold for SEC registration for regular corporations, and this bill provides a needed parity for entrepreneurs and investors who choose to utilize LLCs.

Consistent with the different variations of “Brexit” being discussed, these bill could be said to be part of a “Crexit”: an exit from at least some of the regulations that burden access to capital through the avenue of equity crowdfunding.

 As my colleague Iain Murray has put it: “The U.K. could set an example for the world, demonstrating the wealth-creating, welfare-enhancing capability of competitive market discipline, rather than the cold hand of regulation. That’s a lesson of which U.S. policymakers could use a refresher.” These Crexit bills may be a sign that slowly but surely, U.S. politicians of both parties are learning this lesson.