Everyone loves small businesses, even if they might not be the job-creating economic saviors we want them to be.  No one likes bailing out Wall Street, but Main Street?  That’s something we can all agree on!

On Wednesday, a subcommittee of the House Committee on Financial Services advanced a few interesting bills aimed at reducing regulatory burdens for small cap corporations. 

While some were approved by voice votes, suggesting broad bipartisan appeal, two ran down party lines, portending a difficult path ahead. 

Surprisingly, the subcommittee’s Democrats voted against H.R. 2930, or the “Entrepreneur Access to Capital Act,” a bill which will undoubtedly go by the pithier “Crowdfunding Act.”  (Note: by “undoubtedly” I mean “hopefully,” and by “pithier” I mean “coined-by-Jim-Saksa”).  “Crowdfunding” refers to the idea of letting a large number of investors give small amounts of money to a start up without the hassle of registering with the SEC.  Right now, non-profits can raise money this way from websites like Kiva and DonorsChoose.  Crowdfunding basically says: why not let start-ups raise capital this way, too?  (For a quick introduction to the concept, read Annie Lowrey’s article on Slate).  This bill would allow new businesses to raise up to $5 million before triggering registration requirements, provided that individual investments were limited to the lesser of $10,000 or 10% of the investors income.  These smaller companies could make general solicitations online without having to go through the pains of an IPO. 

I’m dumbfounded by Democratic opposition to this bill.  Crowdfunding has an innate connection to the green and creative economies – markets that Democrats like to support with public funds.  Why don’t we skip the Leviathan/middle man and let a community of small investors give their money directly to risky small ventures?  Moreover, at least one Democrat seems to dig the idea: there’s a version of it in President Obama’s Jobs Act.  And the same Democrats who voted no on Crowdfunding then voted yes for a few complementary bills.    

One, H.R. 2167, raises the shareholder threshold for mandatorily registering with the SEC from 500 to 1,000 shareholders (for companies with market capitalization under $10 million).  Both this and the Crowdfunding act address the complaint that regulatory costs related to raising capital is too high for many small businesses – and the need to protect investors too low – to justify obligatory SEC registration.  If anything, the Crowdfunding bill is less deregulatory, as its individual investor amount limits protect potentially naïve investors from betting everything on the next Pets.com. 

Another bipartisan winner, H.R. 2940, directs the SEC to expand the registration exemptions under Rule 506, allowing issuers to market securities to accredited investors via general solicitation under Regulation D.  This law change is potentially huge.  Right now, Rule 506 allows a company to raise an unlimited amount of money from an unlimited amount of accredited investors (plus 35 non-accredited individuals, provided that they are “sophisticated”, which sadly has very little to do with being able to appreciate the delicate complexities of Louis XIII de Rémy Martin).  The only real limitation preventing this from becoming a way to do a wealthy-person-only IPO (minus a whole host of reporting requirements) is the prohibition on general solicitation.  Think about this: the Crowdfunding Act could help the next Facebook get off the ground; this law could help the current Facebook stay underground

Finally, the “Small Company Job Growth and Regulatory Relief Act” also passed down party lines, but Democratic opposition was less-than-unexpected this time around, as it aims to substantially weaken Section 404(a) of the Sarbanes-Oxley Act.  Section 404 requires management and the external auditor to both sign off on the adequacy of a reporting company’s internal controls in its 10-K.  Right now, the SEC exempts companies with market capitalization rates under $75 million.  Representative Fincher’s bill wants to raise that amount just a teensy bit, to $500 million.  Personally, I don’t see Democrats backing a bill that makes life easier for CEOs and CFOs anytime soon.

These bills have only just emerged from subcommittee, so they are all a long ways away from passage.  The House Committee on Financial Services must give them the OK before it can be put before the entire House, and then a companion bill must make its way through the Democratically-controlled Senate.  Regardless, should any of these bills make it through the legislative warzone that is the 112th Congress, they could have a major impact on how small businesses raise initial capital.