Crowdfunding: Connecting Investors and Job Creators

Chairman McHenry Hearing Preview Statement

Over 2 years into our economic recovery, America’s labor and capital markets continue to face unprecedented challenges. Nearly 14 million Americans remain officially unemployed – with an additional 11 million underemployed – and small businesses continue to struggle to access capital, despite an endless number of government initiatives.

Fixing this mess will not occur overnight nor will it be erased by more government regulation.

The purpose of the hearing is simple – in an economic environment in which lending to job creators and entrepreneurs remains dismal, we must find new and modern means for capital formation to ignite our sputtering economy.

An existing and innovative means to connect investors and job creators is Crowdfunding. Crowdfunding is essentially the ability of individuals to pool their money in support of a common cause. Crowdfunding has traditionally taken place in the realm of charity or the arts, but through online communities and social networking, it could have positive implications for America’s small businesses and investors.

If crowdfunding sounds familiar, it is because politicians have used it for generations, although it has been called something different.

In the 2008 Presidential Election, then-candidate Obama, through small contributions alone, raised over $100 Million. That is advanced crowdfunding.

This makes one ask: if crowdfunding can finance a candidate’s campaign, surely the SEC can permit crowdfunding to empower citizens to invest seed money for America’s entrepreneurs and innovators.

During President Obama’s job’s speech last week, he said, “We’re also planning to cut away the red tape that prevents too many rapidly growing startup companies from raising capital and going public.”

I applaud the President for finally recognizing that regulatory red tape has kept American startup companies from raising capital and hiring workers. It has never been a secret.

Unfortunately, news and information travels a bit slower at the SEC. Despite recent efforts to relax rules on general solicitation and quiet periods, overall, the SEC has resisted calls to modernize securities regulations to meet the needs of today’s economy.

For instance, recent studies show that most startups use lines of credit, such as a credit card or home equity, as a first step to financing. The difficulty with this is two-fold: fewer people have access to credit lines or home equity sufficient to start a business; and starting a small business with a credit card at 15 to 25% interest is a tremendous burden for a new business. Thus, most business ideas never make it past the dinner table.

By updating regulations for today’s economy, conventional barriers to capital can be a thing of the past. As recently as 2009, two ad executives started a crowdfunding campaign called “BuyABeer.com” to buy the Pabst Blue Ribbon Beer Company. Illustrating the true potential of crowdfunding, they were able to raise over $200 million in pledges from over 5 million individuals through social networking sites such as Facebook. The average pledge was just $40, demonstrating that impact of even small donations. However, the SEC shut down the venture due to outdated regulations.

This example and thousands like it highlight the fact that America does not lack access to ideas or creativity, it only lacks access to capital.

This bill simply heeds the President’s call to cut the red tape for startups and allow everyday investors to connect with entrepreneurs. In today’s fast-paced world of information and innovation, all Americans, rather than just banks and venture capitalists, should be able to invest in the next Google or Apple.

I am interested to hear from our witnesses about crowdfunding, and immediate actions the SEC can take to protect investors and increase access to capital.