Part 1: The law that could save sustainable journalism will be destroyed unless the US Senate acts now!

I recently argued that upstarts like Matter that have made successful pitches on Kickstarter are not the solution to solving journalism’s long-term problems. Why? Because crowdfunding, in its current form, does not permit people to make investments. Rather, crowdfunders make donations, or in some cases loans. The outcomes are variable and generally unsustainable

When David Cohn started the crowdsourced journalism non-profit Spot.us four years ago, it worked on a similar premise to Kiva, whereby donors received part or all of their money back if and when a crowd-funded story sold to a legacy media outlet. Cohn prevented  any one person from influencing which stories were funded by limiting each donor to funding 20% of the total amount raised for each pitch. (Of course this system is potentially flawed in that one donor can spread his/her money out to friends etc, but at least Cohn tried to implement a system of checks and balances.) But Spot.us was designed to assist existing organizations, not create entirely new media outlets.

We’re on the brink of a revolution that could lead to saving sustainable journalism and create many jobs

But we may be on the brink of a journalism revolution. Currently, only accredited investors are able to invest in newly formed companies, which prevents Kickstarter, Spot.us, and any other crowdfunding site from raising capital for startup companies and entrepreneurial journalism ventures.

Forbes reports:

Under current federal and state securities laws, startups are prohibited from selling stock or other securities via crowdfunding sites or social networking sites.  Such laws include:

  • A prohibition against “general solicitation” – which means that a company may not offer or sell securities unless there is a substantive, pre-existing relationship between the company (or a person acting on its behalf) and the prospective investor (see “Can I Raise Money For My Startup Via Twitter?” );
  • Disclosure and state law compliance requirements if the investors are not “accredited investors” — which usually makes the offering of securities too costly and onerous for a startup (see “Ask the Attorney – Securities Laws”);
  • A requirement that any intermediaries (including websites) must be registered with the SEC and applicable state securities commissions as a “broker-dealer” in order to legally accept any transaction-based compensation in connection with the sale of securities (see “Ask the Attorney – Beware of Finders”); and
  • A requirement that any company that has 500 or more shareholders and total assets exceeding $10 million must register with the SEC and file periodic reports.

These laws were designed with good intentions: Nobody wants to see Mom and Pop lose their hard-earned money to a snake oil salesman! But in today’s crowdfunded world, they no longer make sense. And when tech-savvy Americans realized this, they sought action.

In the United States Congress, Rep. Patrick McHenry (R-NC) (who made some excellent contributions to 2010 Census oversight, which I know from my time spent running MyTwoCensus.com), introduced crowdfunding legislation that was one of the most popular bipartisan initiatives in recent history, garnering support from Democrats all the way up to President Obama himself. McHenry’s bill, the Entrepreneur Access to Capital Act,  H.R. 2930 (full version here), passed 407 to 17.

This makes total sense. Republicans generally don’t believe that the government should be able to tell people how to spend their money (anyone can gamble or booze away all of their savings, can’t they?), and Democrats don’t see why accredited investors who are members of the “top 1%” should be the only folks permitted to invest in startups, thus preventing the upward mobility of the masses.

Specifically, the highlights of H.R. 2930 are as follows:

- Create a crowdfunding exemption from SEC regulations for firms raising up to $2 million, with individual investments limited to $10,000 or 10 percent of an investor’s annual income.

- Excludes crowdfunding investors from counting as shareholders for purposes of calculating the 499-shareholder cap under 12(g) of the Securities Exchange Act

- Preempt state law and exempts the ban on general solicitation for the new crowdfunding exemption.

But now, as always seems to be the case as of late with the American government,  just when we’re on the brink of something great, the millionaire’s club also known as the United States Senate has failed to move forward with this legislation, thus preventing it from making its way to President Obama’s desk to become a law.

Despite Senate Republican Scott Brown of Massachusetts championing similar legislation to the resolution that the House of Representatives passed, lobbying groups like the NASAA (North American Securities Administrators Association, “the oldest international organization devoted to investor protection”) have wielded their influence over the 100 people who control the fates of the other 300+ million.

What needs to happen now is simple: An online campaign of the magnitude of the SOPA/PIPA variety must be enacted to create swift and effective action to boost America’s economy by causing the US Senate to pass comprehensive crowdfunding legislation.  Sites like crowdfundinglaw.com and startupexemption.com have already been set up to explain this law and advocate its passage. And using a Wefunder.com petition, more than $6 million has already been pledged to support investment in new ventures if this legislation is passed.

But will Google, Craigslist, Wikipedia, and all of the other organizations that led the charge against SOPA and PIPA step in to assist with this one?

As someone who is not interested in the “rewards” that Kickstarter campaigns promise their donors, but rather direct return on investment in monetary form, I and other like-minded people would be happy to invest in startups despite our lack of accredited investor status. I don’t gamble in casinos, but I’d be happy to gamble on good ideas and innovation.

Coming soon: Direct effects of crowdfunding legislation on new journalism business models…