It is safe to say that the lawyers, professional investors, and bankers that dominate the SEC’s Advisory Committee on Small and Emerging Companies dislike the idea of crowdfunding. At its meeting this morning, the Committee declined even to recommend that the SEC staff study the issue for potential agency rule making. Yes, the group considers the idea of crowdfunding to be that unworthy.

I confess that until recently I shared their view.

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How many stockholders does it take before a company must begin formally issuing publicly available reports under the federal securities laws? Presently, the rule is that a company must meet reporting obligations once it reaches 500 stockholders “of record.” The rule, first adopted over 50 years ago, is not without its critics.

Many argue that the thresh hold is too low and thus forces many smaller, privately-held companies to begin reporting too early in their development. Others argue that, because the rule is tied to holders “of record,” larger companies are able to game the system (by holding “street securities” and using special investment vehicles) to avoid reporting obligations entirely.

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I participate on two different committees (one for the American Bar Association, the other for the Washington State Bar Association) that are tasked with analyzing and commenting on proposals for crowdfunding legislation. I spent this past weekend digging into the various alternatives that are now making their way through Congress and various state and federal administrative bodies.

I thought it might be worth sharing my observations about the major issues — highlighting both the areas of general consensus and the areas of significant difference. My aim here is not only to inform readers, but also to refine my own thinking.

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President Obama is throwing his political weight behind a number of entrepreneur-friendly initiatives, including boosting the existing $5 million Reg A offering limit 10 fold to a total $50 million. According to the Washington Post:

One of the Obama provisions would increase the amount of money that can be raised through small public offerings that don’t require companies to undergo an extensive Securities and Exchange Commission registration process. The limit for such “mini public offerings” would increase from $5 million a year to $50 million.

via Obama to ask Congress for small business tax breaks, investment incentives.

This move is not surprising, as Reg A’s existing limit has been the subject of much prior discussion. President Obama’s suggested upward revision to $50 million, however, is aggressive on the upward side, and will likely be welcomed by a Congress anxious to help out ailing small businesses.

I wrote earlier this month that the urgent push for crowdfunding legislation has waned in the Senate. Well, it appears that the North American Securities Administrators Association (the “NASAA”) is using this window of opportunity to roll out a proposal of its own. NASAA’s proposal joins H.R. 2930, S. 1791, and S. 1970 as another possible alternative for handling crowdfunding under state and federal securities laws.

NASAA claims that its proposal represents a “compromise” between the competing federal proposals. Highlights of an early draft being circulated among NASAA members include the following key points:

  • A limit on the aggregate offering amount of $500,000 over any 12-month period;
  • A $1000 cap on the amount of investment raised from any single investor;
  • The use of an intermediary that, in turn, is registered as a broker-dealer (albeit one freed of certain restrictions);
  • A notice to be filed prior to the offering with the securities regulator of the issuer’s home state;
  • A disclosure document that informs investors about the issuer, the offering, and various risk factors; and
  • A ban on general advertising and investor communications, apart from reference to, and use of, an intermediary’s web site.

NASAA’s proposal, obviously, advocates retaining state authority to regulate securities offerings made pursuant to its proposed exemption. This is a significant difference between it and both H.R. 2930 and S. 1791, and will no doubt generate significant debate. But, as the proposal itself acknowledges, it is not viable without federal implementing legislation of some kind. A significant question therefore remains whether any such federal legislation will carve out an exemption that allows states to retain the control that NASAA’s proposal contemplates.