If you missed it over the holiday weekend, be sure to read Joe Wallin's guest post on an alternative to crowdfunding here. Joe challenges crowdfunding proponents to ask Congress to democratize startup financing in a more fundamental way. I don't agree with Joe's approach, but he's a leading thinker on securities law reform and I think crowdfunding advocates would be smart to confront and assess his view.
Yesterday, Adam Gering left a comment on Joe's post about the 500 shareholder threshold, and that made me look again at the Merkley crowdfunding bill.
Quick recap: there are at least three different crowdfunding bills in the current Congress: one that has passed the House, the McHenry bill, H.R. 2930; one introduced by Senator Scott Brown, S. 1791; and one introduced by Senator Jeff Merkley, S. 1970.
In a prior post, "Third #crowdfunding bill is no charm," I dissed the Merkley bill and suggested Sen. Merkley is no real fan of crowdfunding.
Adam's comment raises a point I didn't cover in that "third bill" post, and that has to do with whether or not the "crowdfunders," those shareholders who are shareholders by virtue of owning shares issued under the crowdfunding exemption, count toward the 500 shareholder limit (or 1,000, or greater, shareholder limit, assuming legislative efforts backed by Second Market succeed).
As Adam puts it,
"If they just increase the number to 1000 shareholders (as has been proposed), I think a company would still severely regret in the future having sacrificed half their shareholder limit for only $500K of seed funding."
The McHenry and Brown bills cover this, by providing that "holders of securities issued pursuant to" the crowdfunding exemption shall not count as shareholders of record for purposes of the numerical cap. (See Section 3 of each bill.)
But the Merkley bill lays down no such solution. Instead, it kicks the subject over to the SEC, stating that "The Commission may, "as appropriate," exempt from" the shareholder count "securities acquired pursuant to an offering made under" the crowdfunding exemption.
Merkley's language is discretionary: the SEC may decide, as appropriate, to issue rules to exempt crowdfunders from the shareholder cap. If there's no rulemaking on this point, then crowdfunders count against the limit, and Adam's objection applies. Even if there is rulemaking on this point and it ends up at the same place the McHenry and Brown bills start at, Merkley's crowdfunding exemption will have entailed more delay, more uncertainty, and less utility for at least a year.
Flickr photo by Preconscious Eye.