CEI Report on Crowdfunding Urges Congress, Regulators to End ‘Millionaires Only’ Rules for Investment

WASHINGTON, Nov. 18 – Today, during Global Entrepreneurship Week, the Competitive Enterprise Institute released a new report on how regulation threatens entrepreneurs and their abilities to start businesses, create jobs, and bring new products to market. The report, titled Declaration of Crowdfunding Independence: Finance of the People, by the People, and for the People, also includes historical examples of crowdfunding, like how Henry Ford financed the first affordable American automobile, which would likely not be possible in today’s regulatory environment.
“Crowdfunding essentially involves raising money from a crowd of ordinary people for both charitable and entrepreneurial ventures without going through a ‘middleman,’ like a major stock exchange or financial institution. Yet even though we live in the age of the app, such capital is being stalled by rules and regulations passed before most homes had telephones,” explains CEI senior fellow and author of the report John Berlau. “As a result, crowdfunding’s potential to create jobs and increase income mobility is being held back as entrepreneurs struggle with mounds of red tape from old securities laws.”
Key points of the report include:

  • Crowdfunding has positive effects on job growth, revenue for entrepreneurs, and follow-on interest from institutional investors. On average, firms that met their goals in crowdfunding campaigns hired two new employees by the end of the campaign. Since many of these firms had only one or two employees before a crowdfunding campaign, these efforts frequently doubled the size of many firms.
  • The most potential comes from equity- (ownership interest) and debt-based (specific rate of return) crowdfunding, both of which are either banned or heavily restricted by arcane securities laws today, but were historically used in the United States to build cars, railroads, and financial institutions.
  • Due to fear of running afoul of arcane or vague SEC rules, there is frequently a de facto “millionaires only” rule for investment in new business that limits entrepreneurs’ capital-raising ability and deprives average investors the opportunity to grow wealthy through early-stage investment in a company.
  • While the United States leads the world in crowdfunding campaigns on popular sites like Kickstarter and IndieGogo, these campaigns are overwhelmingly donations- and rewards-based. The donors get nothing more than recognition, souvenirs like T-shirts, and or a sample of the product produced.
  • The Jumpstart Our Business Startups (JOBS) Act of 2012 was supposed to alleviate some of those problems, but the SEC has yet to implement provisions to allow crowdfunding offers of $1 million or less. Congress and the president should expand the JOBS Act by creating an upper limit for crowdfunding exemptions from securities laws of $10 million and decrease the “accredited investor” net worth exemption from $1 million down to $500,000, or preferably lower.

View the CEI report and more by John Berlau at cei.org.

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