ACT: McHenry pushing crowdfunding as alternative to banks

ASHEVILLE – When U.S. Rep. Patrick McHenry was growing up in Gastonia in the late 1970s, his father and a friend who lived down the street decided to start a lawn service in addition to their day jobs.

They managed to buy a 48-inch Toro riding lawn mower but needed a truck to transport it, McHenry told the Council of Independent Business Owners here last month. So McHenry’s father got what was then called a Master Charge card (now MasterCard), “the great innovation of its day … and bought a truck and he was in business.”

“That business didn’t change the world. It wasn’t Google. It wasn’t Facebook,” McHenry said. “But it changed my life and gave my brothers and sisters an economic opportunity we wouldn’t otherwise have. It put all five of us through college.”

Now McHenry, R-Lincoln, is trying to make it easier to tap one of today’s newer financial innovations: Business crowdfunding, the process by which dozens or hundreds of people can provide money to help businesses start or expand.

The House last month passed a McHenry bill to loosen restrictions on using crowdfunding and another McHenry bill to make some types of angel investing easier, both with almost no opposition. They now await action in the Senate.

The crowdfunding bill “doesn’t solve the great debate that we’re having here in Washington on so many challenging issues of policy where perhaps the left and right don’t see eye to eye,” he said in floor debate. “But on this we came together. … It’s a meaningful step.”

An alternative to banks

This year’s bills are an extension of McHenry’s continuing work to add sources of financing for small businesses.

He wrote the crowdfunding section of a 2012 law that significantly eased rules on the required disclosures, advertising by and size and types of companies that could use crowdfunding.

Part of the idea was to make the method of raising money attractive to companies hoping to eventually make it into the Fortune 500, not just the corner coffee shop or a young singer looking for money to record their first album.

Businesses sometimes use websites like Kickstarter and GoFundMe to raise money, but people who send money through those sites typically receive no ownership interest in the business or project that benefits. In other words, those who give are making donations, not investments.

The 2012 law set up a process allowing the creation of privately owned crowdfunding portals that match companies with investors, who do get an ownership interest. They started operations in May.

McHenry and others are concerned that lending to small businesses has not recovered quickly after the Great Recession last decade.

Federal figures say bank lending to small business in 2014, the last year for which figures are available, was 12.9 percent less in inflation-adjusted dollars than it was in 2000. In real dollars, the amount of such loans in 2014 was a little less than two-thirds the total in 2007, the year before the financial crisis and real estate bust dramatically slowed the national economy.

“We don’t have … the economic opportunity for capital, for risk takers to get their ideas started and rolling,” McHenry told the CIBO crowd.

“Part of that is born out of the incompetence of large banks and their risk-taking measures, but a big part of that as well is due to regulation, limiting opportunity for banks to lend,” he said.

McHenry’s new crowdfunding bill makes it easier for investors to pool assets to invest in a company and raises thresholds for how large companies can be before they have to go to the time and expense of registering their securities with the federal government.

The venture capital fund eases a key size restriction on certain funds that invest in young companies.

McHenry received at least two awards from business and crowdfunding groups for his work on the 2012 bill and spoke at the 2013 World Economic Forum in Davos, Switzerland, about the issue.

The art of the possible

In an interview after his CIBO talk, McHenry said he would like to see Congress ease rules on banks adopted after the 2008 financial crash, “but it’s hard to get bipartisan agreement.”

The rules were intended to make the American financial system more stable and reduce the chances of government being called on to prop up major banks and other institutions.

“My interest is in insuring that people have a variety of choices for banking,” McHenry said. “Rather than have that debate on (deregulation), I’m trying to shift the debate to utilizing technologies and using innovative forms of financing to provide those opportunities.”

His effort has gotten support in the crowdfunding industry. Raymond Keating, chief economist at nonprofit advocacy group the Small Business and Entrepreneurship Council, told a House committee in written testimony that McHenry’s bill “provides key fixes that are needed.”

But a state financial regulator said at the same April hearing it was too soon to alter the rules because some are only now being implemented.

“There is not now any way to provide a thoughtful answer to the question of what steps will or will not improve or ‘fix’ federal crowdfunding, because we do not yet know what will work, what will not, or even what the new marketplace will look like, under existing law,” said William Beatty, securities director of the Washington State Department of Financial Institutions. “There is no data whatsoever about what is or is not working.”

McHenry significantly narrowed the scope of the crowdfunding bill he is pushing this year in response to concerns by other House members.

Josh Dorfman, head of Venture Asheville, said he is glad to see McHenry working on the issue. His organization is an arm of the Economic Development Coaliation for Asheville-Buncombe County that aids small businesses.

Dorfman thinks the changes McHenry seeks would have more impact on companies in the Research Triangle than in Asheville, but said the availability of financing for startups and young companies is an issue in both places.

“If you polled any small business community around America, they would confirm” that access to credit is a significant problem, Dorfman said.

Loosening the purse strings

Here are summaries of two bills regarding business financing being pushed by 10th District U.S. Rep. Patrick McHenry.

Crowdfunding bill

–Allows funds called special purpose vehicles to invest in startup companies via crowdfunding rules designed to relieve the companies of the obligation of filing extensive disclosures with the federal government. SPVs are intended to let ordinary investors put money in alongside a wealthier or more experienced lead investor who can look after the fund’s interests. The change opens up a new source of funds for startups and makes it easier for young companies using crowdfunding to attract other venture capital later.

–Raises the thresholds at which companies are required to register their stock with the federal government. The cap would rise from $25 million to $75 million for companies that have reported revenues and from $25 million to $50 million for companies that do not have revenue.

Registration is a cost to the companies and requires that they provide information to the government and others. The change is designed to remove what advocates of crowdfunding say is a disincentive for companies to use the method instead of other forms of financing.

Venture capital bill

–Increases the number of people who can invest in certain venture capital funds without triggering requirements for registering with the federal government from 100 to 250. To be exempt from registration, which carries paperwork and other costs, such a fund can invest no more than $10 million in any one company.

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