Equity Crowdfunding Limitations: Navigating the Path to 5M per Year

The landscape of equity crowdfunding has seen significant progress since the implementation of the JOBS Act, particularly Title III, which was aimed at providing small businesses and startups a platform to raise funds from the public. However, the current fundraising limit of $1 million per year poses a challenge for businesses seeking larger sums of capital. This article explores the current state of equity crowdfunding and the ongoing efforts to increase the funding limit to $5 million per year.

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On March 23, 2016, Representative Patrick McHenry introduced the Fix Crowdfunding Act to the U.S. House of Representatives. The bill was designed to address the limitations of Title III by increasing the annual fundraising limit from $1 million to $5 million. This increase would particularly benefit businesses in the seed round that require substantial capital. However, the bill was revised, and the provision to raise the limit was eventually removed.

Regulatory Impediments and Consumer Protection Concerns

The proposed Fix Crowdfunding Act aimed to address some of the constraints of the current law, including the addition of a “test-the-waters” provision. This provision would allow potential entrepreneurs to gauge interest in their offering before committing significant resources. Despite these attempts, the bill was further revised before being passed by the House, and the increase in the limit to $5 million was ultimately removed due to concerns from consumer protection groups regarding investor scams.

Amendments and Current Legislation

While the Fix Crowdfunding Act did not become law, it did introduce amendments that are still relevant today. One such amendment involves the use of special purpose vehicles (SPVs), which enable many investors to pool their investments through a single investment company. This can help startups manage their communications and keep their cap tables clean, as smaller investments are aggregated into a larger entity.

The Legislative Journey Continues

Currently, the proposed amendments to increase the funding limit to $5 million are in the hands of the U.S. Senate. Whether they will send the bill back to the House with a higher spending limit remains unclear. However, as equity crowdfunding continues to grow in popularity, public opinion and demand for greater fundraising limits may eventually influence the legislative process.

Conclusion and Outlook

The journey towards increasing the equity crowdfunding limit to $5 million per year may be lengthy, but it reflects a continuous effort to support and sustain the growth of small and medium-sized businesses. As the technology sector increasingly relies on crowdfunding platforms, future legislative revisions are likely to play a crucial role in shaping the future of this financial instrument.

References

For further reading and detailed information, refer to the following sources:

H.R.4855 - 114th Congress 2015-2016: Fix Crowdfunding Act “Tech Sector Pushes for Fewer Crowdfunding Restrictions” - Source: [Tech Sector Article Link] The Fix Crowdfunding Act: What it Fixes, What it Does Not