Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Crowdfunding And The Community Bank Portal

In 2010, I wrote an article about how community banks should be more active (regulations permitting) in helping to fund the equity in small business. Since that time, S. 2190 came along from the Senate and it appears on the surface to potentially open up the doors that were recommended. There are a lot of unanswered questions in the legislation, and there is the risk that it could lead to a market that fleeced the public, and provided less capital to the small business community. This is the first of a number of articles that I will be writing on this topic, due to its importance to the growth of U.S. employment.

The Portal

The rules provide for a portal through which funds can be solicited. The amounts are small (generally a few thousand dollars for most people) and about $10 thousand for wealthy people. The absolute risk is less than what they could lose on a day when they bought a new car, or when they bought stock options that did not work out. The problem is less with the amounts, and more with the public perception of the portal. I believe that it is fine for the SEC to regulate the portal, but I think the bank regulators are in a much better position to monitor the operators of the portals since they already have Federal audits in place, and can simply add this compliance feature.

There is going to need to be some background checking on anyone that registers on a portal, and the banks are already set up to do these checks.

Since the portal customer company can use the portal to raise equity, and use the bank to get financing, it leads toward more one-stop shopping for the company and one less administrative issue for the small business.

The customer company appears to be able to continuously raise up to $1,000,000 per year, and no one is in a better position to maintain the records, tax returns, and collateral documents for the customer at the lowest cost than a lender. If there are annual reporting requirements, the bank already has this process in place for loans and a trained staff that is use to being regulated.

It is going to take more capital to start the typical small business in the future since more small businesses will need to be global (export based) not local (consumer based). This Senate bill is a good first step. We need to see if the regulations for the bill can come out more quickly than the 270 days proposed. The new proposed legislation is a great step forward if administration can be simplified, and the cost of issuance does not creep up to devour a lot of the funds raised.

Summary

S 2190 is a "net positive" for small business. The key is that there is a good balance brought between "safety", "soundness", and "speed". It has to provide money quickly, with reasonable return expectations, and with enough information to make current and ongoing assessments. There are many other issues, like how you exit one of these investments, but this is a good first step.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.