Sister organizations dedicated to representing rapidly developing Crowdfunding industry and supporting SEC, FINRA during rule making period post JOBS act
NEW YORK, May 7, 2012 – A group of top debt and equity crowdfunding platform and industry experts today announced the creation of the Crowdfunding Professional Association (CfPA), which will operate as a complementary sister entity to the Crowdfund Intermediary Regulatory Advocates (CFIRA) organization. Both non-profit organizations have been formed as a result of the Jumpstart Our Business Startups (JOBS) Act, which was signed into law on April 5th. By creating a legal framework for “crowdfund investing,” this historic act unleashes the potential for a much larger and expanded global crowdfunding community. The goal of the Crowdfunding Professional Association is to facilitate a vibrant, credible and growing global crowdfunding community while advocating for an industry view versus personal interests or a single company perspective. The complementary CFIRA organization is focused exclusively on channeling industry expertise to support the Securities & Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other affected governmental and quasi-governmental entities, including state regulators, in the establishment of industry regulation, standards and best practices.
“Having worked over the past two years in developing the framework and foundational elements of the acts that passed both houses of Congress and ultimately the JOBS act signed by our president, I am thrilled to join with a broad coalition of crowd pioneers in the creation of a truly crowd-sourced professional association,” said Sherwood Neiss, co-author of the CrowdFund Investing Framework in the JOBS Act, co-founder of Startup Exemption and a founding member of the leadership group behind both non-profit crowdfunding sister entities. “In addition to its formation, we are announcing the appointment of the association’s first executive committee chair, and a governance structure and founding team. As challenging as it was to enact this law, we as industry participants recognize that the difficulties in developing the industry have only begun and that we must collaborate to ensure that crowdfunding is both preserved and developed to achieve its maximum potential in terms of credibility, transparency and best practices.”
Berkeley Geddes, CEO of Grow America Insight and DooBizz.com, has been elected chair of the Crowdfunding Professional Association Executive Committee and Governance Board. The Crowdfunding Professional Association’s Executive Committee will work closely with Mr. Geddes to build a lasting network and organization that will provide advocacy, foster integrity and champion the burgeoning global crowdfunding industry and vast ecosystem. For more information on the governance structure visit http://crowdfundingprofessional.org/leadership/
“America needs to get this right,” said Mr. Geddes. “As a nation, we need to lead and restore our seed funding markets in support of good people with good ideas, chasing their dreams. As members of the crowd, we can build a powerful and credible crowdfunding coalition that fuels the creation of new ideas, new businesses and jobs. We look forward to supporting the evolution of this community and harnessing the experts, entrepreneurs, pioneering platforms and visionary investors across the globe.”
The Crowdfunding Professional Association’s core principles are designed to achieve the following objectives:
- Establish the highest ethical industry standards to ensure the successful expansion of the crowdfunding industry
- Develop broad crowdfunding training and certification programs to solidify the implementation of necessary ethical standards and practices
- Create ongoing industry trade show summits, symposiums and sub committees to further develop an ecosystem of industry experts, best practices, and leadership and mentoring opportunities
- Represent the industry through media and government relations to ensure major thought leaders understand and have access to the fundamental industry facts/research, crowdfunding experts and platform leaders
“We welcome the creation of this industry body, which we view as strategic to not only fostering new forms of crowdfunding investments, but also to preserving the unique innovations and progress achieved by the early adopters and founders of the industry,” said Brian Meece, co-founder and CEO RocketHub. “Having an organization that represents the industry is essential and we look forward to supporting the efforts of the Crowdfunding Professional Association and the development of this vital industry.”
For a complete overview of membership, leadership and sponsorship opportunities visithttp://crowdfundingprofessional.org/join/. Basic membership is free for the first year.
“Crowdfunding’s promise for igniting new, early-stage ventures is revolutionary,” said Alan E. Hall, a founding sponsor of the Crowdfunding Professional Association and founder of Grow America SpringBoard and Mercato Partners. “We look forward to supporting this groundbreaking development through the Crowdfunding Professional Association. It is our desire to help drive and mold this new capital creation model from its very foundation to ensure that it develops efficiently and safely. Managed properly, crowdfunding can fuel the involvement of hundreds of thousands of additional entrepreneurs, and allow many more investors to participate in the creation of companies and jobs that our economy so desperately needs.”
“We look forward to coordinating our efforts with the Crowdfunding Professional Association and are committed to complementing their mission with our laser focus on ensuring that a crowdfunding investment framework thrives in the U.S. so entrepreneurs can innovate and create new jobs,” said Candace Klein, co-chair of CFIRA and founder and CEO of Bad Girl Ventures and SoMoLend. “During this critical 270-day rule-making period and beyond, we will serve as a voice of the industry with the appropriate regulators and provide continuing regulatory education to the industry. CFIRA and CfPA will closely collaborate to make this happen.”
“Fostering the adoption of best practices for the operation of crowdfunding platforms globally is essential to the success of our industry,” said Carl Esposti, founder of Crowdsourcing.org and leader of the CAPS Accreditation Program for crowdfunding platforms and a founding Crowdfunding Professional Association executive committee member. “The Crowdfunding Professional Association is a critical piece of the puzzle and central to establishing accessible Crowdfunding Accreditation for Platform Standards, which is why I’ve worked to support the creation of this association and am pleased to serve on the executive committee.”
“Over the past year, we have hosted crowdfunding summits around the world to raise awareness, share best practices and to foster a coalition of crowdfunding industry participants,” said David Drake, Co-Founder of The SoHo Loft Capital Creation Events and a founding member of the leadership group behind both non-profit crowdfunding sister entities. “We are delighted to be a part of the formation and launch of the Crowdfunding Professional Association and view its function as central to the success of our industry.”
“As a founding supporter of the Crowdfunding Professional Association, our law firm is committed to not only establishing a thriving industry association, but also 100 percent behind this innovative new capital creation model,” said Daniel DeWolf, Co-Chair of the Venture Capital and Emerging Companies practice group of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.“We look forward to helping build a strong foundation for the industry and its varied ecosystem of participants.”
“The potential applications of crowdfunding are just beginning to break the surface,” said Steve Cinelli, Chief Executive Officer ofPRIMARQ and a founding Crowdfunding Professional Association executive committee member. “Real Estate equity share finance empowered by crowdfunding platforms is emblematic of the diversity of this industry. Whether crowdfund investing in companies, participating in real estate price movement or other alternative asset classes, the Crowdfunding Professional Association will play an important role in addressing capital formation in key segments of economies both at home and abroad.”
About Crowdfunding Professional Association
The Crowdfunding Professional Association is dedicated to facilitating a vibrant, credible and growing crowdfunding community while also advocating for an industry view versus a single company perspective. Uniting a broad-based coalition of industry participants, the association is committed to ensuring the credible development of the industry, including a commitment to the highest ethical standards. The association’s collaborations and insights are shared broadly to avoid onerous, stifling bureaucracy that can endanger innovation, idea generation and job creation. For more information visitwww.crowdfundingprofessional.org.
Crowdfund Intermediary Regulatory Advocates, or CFIRA, was established following the signing of the Jumpstart Our Business Startups (JOBS) Act. CFIRA is an organization formed by the crowdfunding industry’s leading platforms and experts. The group will work with the Securities & Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other affected governmental and quasi-governmental entities to help establish industry standards and best practices. For more information, visit www.CFIRA.org.
CONTACT: Barbara Thatcher, Thatcher+Co, +1-408-701-7528, firstname.lastname@example.org
SOURCE Crowdfunding Professional Association
Now that we did it, we want to acknowledge those of you who were actively responsible for working with us to make this possible!! There are many others that went to incredible lengths, so a BIG THANKS to them as well. Italics are events along the way and green are people in DC that if we didn’t have behind us, would have fallen apart.
|Aug, 2010||Sherwood Neiss, Jason Best & Zak Cassady-Dorion||The Startup Exemption||Faced with the funding void came up with the idea for equity-based crowdfunding then headed to Washington and worked tirelessly even past the signing ceremony at the White House and are still going!|
|October, 2010||Karen Kerrigan||Small Business & Entrepreneurship Council||Agreed to take up the challenge and stepped up to the plate and hit one home run after another for us by connecting to key players in Washington|
|David Saltzman||Squire, Sanders & Dempsey||First Securities lawyer to vet our framework and provide critical feedback|
|January, 2011||CrowdFund Investing framework brought to Washington, DC|
|Tom Leonardis & Whoopi Goldberg||Whoopi Goldberg||Initial backers of the idea|
|Gerald Laporte & Kevin O’Neill||The SEC||Took the time to have our first meeting with the SEC|
|Prof. Steve Stralser Ph.D.||Thunderbird||Initial and ongoing guidance|
|Daren Westlake||Crowdcube.com||First equity-based platform in the UK. Shares data & success stories with us|
|Kathy Korman & Josh Frey||EO||Contacts from Entrepreneurs Organization that started to get the message out|
|Christina Shapiro & Commissioner Walsh||Mayor Bloomberg’s office||Initial meetings and interest in our framework|
|February, 2011||Chairman, Rep. Darrell Issa(Peter Haller, Hudson Hollister & Drew Colliatie)||Oversight & Gov’t Reform Committee||Asked us for initial questions to put in letter to SEC. Letter stirred up our first press in the Wall Street Journal. Called first Hearing on Hill.|
|Rich Sloan||StartupNation.com||Allowing us to post about our framework/solution to the capital crunch/jobs crisis|
|March, 2011||Angus Loten||Wall Street Journal||First main street reporter to cover our work|
|Susan Antilla||Bloomberg News||First negative article – that just made us stronger|
|Paul Spinrad/Jenny Kassan||Sustainable Economies Law Center||Wrote the initial crowdfunding petition to the SEC. Provided continual input and guidance.|
|April, 2011||Ruth Hedges||FundingRoadmap.com||A huge initial supporter and constant advocate|
|Dana Mauriello||Profounder||First US Crowdfunding platform to express interest in our initiative|
|Valto Loikkanen||GrowVC||Int’l Crowdfunding platform expresses interest in our initiative|
|Kevin Lawton||Author, The Crowdfunding Revolution||One of our main sources of guidance & insight from this point forward. An incredibly valuable asset.|
|Amy Cortese||Localvesting||Provided great quotes and statistics for our testimonies on the impact of investing locally|
|Michael Shuman||Author & Expert||Another one of our sources for guidance & insight from this point forward|
|Chad Parks & Gerard Bush||The online 401k & BRPR Group||Fellow entrepreneurs who encouraged us to push forward|
|Amy Millman Jere Glover||Shared prior experiences to prep us for the path ahead|
|May, 2011||Our first Hearing on Capitol Hill, CrowdFund Investing as a viable business model wins Startup Weekend Miami|
|Dany Ramos, David & Doramary Russell, Eddy Borja, Mark, Stacy Cumberbatch||Startup Weekend||The team that rallied around the idea so we can prove to Washington that there’s market demand for CrowdFund Investing|
|Diana Perez||Diana Perez Design||For great graphic art from Startup Weekend to the Rally|
|Michael Sauvante||Commonwealth Group||Thought-leader in the Securities space provides experience and advice|
|Steve Cinelli||PRIMARQ||An early ‘accredited investor crowdfunder’ comes out with support & guidance|
|June, 2011||Verne Harnish||The Gazelles||As an entrepreneur thought-leader started to promote our cause and get the message out to his followers|
|Daniel Weinmann, Hernan Efron, Henrique Bastos, Thomas de Lara||Catarse.com||The largest Brazilian Crowdfunding platform comes out in favor of our framework for Brazil|
|President Obama(Doug Rand)||The White House||Asks us for a summary of what CF is and how it can benefit America’s Entrepreneurs and create jobs|
|Lucas Sommer, David Sinopoli||Socialated||Set up our social media campaign – hello twitter!|
|August, 2011||Jason Best, Zak Cassady-Dorion, Kevin Lawton, Paul Spinrad, Ruth Hedges, Danae Ringelmann, Steve Cinelli, Michael Sauvante, Jennifer Kassan, John Romano, Fred Bryant, Onnie Carr||CrowdFund Investing Thought-Leaders||CrowdFund Investing Thought-Leaders Meeting in San Francisco. Discuss and adjust the CrowdFund Investing Framework and build more support as a industry group|
|September, 2011||Dana Mauriello, Sherwood Neiss||Profounder & Startup Exemption||The “Crowdfunding Hearing” in the House|
|President Obama||Includes Crowdfunding in the American Jobs Act|
|Representative Patrick McHenry, (Ryan MintoKunal Pahwa)||Introduces HR2930 based on our framework|
|Dylan Ratigan, Tammy Caputo||Dylan Ratigan Show||Interviews Sherwood to discuss Crowdfunding|
|Hazel Henderson||Ethical Markets||Another early supporter and advocate to all their followers|
|Derek Slater||For personally coming out and endorsing our work by writing about it|
|October, 2011||Tom Coleman||State Department||Starts spreading our message in the State Department|
|David Drake, Dara Albright||Soho Loft Capital Creation||Ardent supporters and PR machine from this point forward|
|Marc Billings||Incubate Miami||Rallying the Miami crew behind CFI|
|Freeman White||Launcht||An early supporter and advocate. Showed up in Washington more than once and his presence made a difference|
|Billy Parish||Solar Mosaic||CF Platform that comes out and starts advocating|
|November, 2011||The House passes HR2930 407-17! CrowdFund Investing Rally to encourage the Senate not to wait! Fast Company and NPR cover the event.|
|Gertrude & Edward Neiss, Ktjen Khong, Andrew, Roger & Sulin Best. Patrick Menasco, Karin `Brandenburg, Marc Wallace, Chris Brookfield, Karen Kerrigan, Josh Frey, Dennis Alloy and many others||Major financial backers for the Rally (and those who love and believed in us without question). Long time friends and supporters that showed up on a miserable, freezing rainy day to hold signs on the Mall|
|Todd Anderson||Deal Flow Media||Asks us to Keynote the first Crowdfunding Conference|
|Ryan Feit||Wharton MBA||Reaches out to help organize the ‘student vote’|
|Senator MerkleySenator Bennet, Senator Brown (Andy Green, Brian Appel, Brian Murphy, Marne Marotta, Nat Hoopes)||Introduced 2 Senate versions of the House Bill. Builds upon HR2930 by adding back into the legislation parts of our original framework.|
|Bobbie Gossage, Darren Dahl||Inc Magazine||Write an article about our work|
|December, 2011||Crowdfunding Hearings in the Senate, We hold a ‘What is Crowdfunding’ briefing for Senate Staffers at Jones Day with the assistance of Karen Kerrigan and Freeman White of Launcht|
|Andrew Sherman||Jones Day||Graciously hosts us at their offices for a teach-in with Senate Staffers on Crowdfunding|
|Brian Tsuchya||Startup Guru||CF Platform that comes out and starts advocating|
|Mike Chapman, Roy Deloach||DC Strategies||Washington insiders who provide constructive feedback on ‘working in Washington’|
|February, 2012||Ria Ancheta-Adrias||Nat’l Council of Entrep Tech Transfer||Hosts Sherwood & Jason for a Webinar|
|Melissa Mitchell, Matt Ewing||Ephibian.com||Build & launch LegalizeCrowdfunding.org to show the positive impact a change in the law could have.|
|Barry Gander||Canadian Advanced Technology Alliance||Started the push in Canada for our framework|
|March, 2012||3rd Crowdfunding hearing in the Senate. House passes JOBS Act including the Crowdfunding Bill. Merkley & Bennets bill is merged with Brown’s. It includes compromises that we suggested. The Senate version of CF is amended into the JOBS Act. It passes 77-23. And passes the House again.|
|Tim Rowe||Cambridge Innovation Center||Represents the voice of CrowdFund investing at the March US Senate hearing|
|Mike Piwowar||Senate Banking Committee||Takes 2nd meeting with us to discuss our compromise suggestions between all 3 CF bills to build bipartisan support.|
|April, 2012||President Obama||Sherwood, Jason, Zak and Karen attend the bill-signing event at the White House. We help organize a Leadership Group to address concerns of investor protection with the goal of forming the Crowdfunding Coalition to work with the SEC and represent the industry’s interests in both Washington, DC and to the Trade. The Crowdfunding Global ProfessionalAssociation CFGPA is formed for Trade Association and The Crowdfund Investing Regulatory Association CFIRA is formed as a potential SRO.|
|Dara Albright, Chance Barnett Jason Best, Nick Bhargava, Candace Klein, David Drake, Carl Esposti, Berkeley Geddes, Kevin Berg Grell, Alon Hillel-Tuch, Ruth Hedges, Brian Meece, Vince Molinari, Michael Norman, DJ Paul, Spencer Taylor, Brian Tsuchiya, Freeman White||The Crowdfunding Leadership Group||The amazing group of crowdfunding portals, experts and advocates that are continuing the relay in the 270-day rule making process with the SEC. These guys and gals are a phenomenal group of spirited, dedicated, and motivated people. Jason and I are beyond happy to be taking on this next phase with such a knowledgeable and experienced group.|
* And special thanks to Professor Michael Moffett from Thunderbird who told us that by suffering through FORAD (the highest level finance class at Thunderbird) we might amount to something. Professor Nancy Maveety Sherwood’s Political Science 101 professor from Tulane who provided the initial primer on how a Bill becomes Law! Alex Jacobs, Chris Brookfield and Marc Wallace for being a sounding board for 10+ years and the entire T-bird group for providing the encouragement to ‘keep o,n keeping on!’ And of course SNN, Todd and Benners because they had to listen to it over and over and over …
The following was reprinted with permission from Steve Reaser of The Funding Launchpad. Click here to see the original
President Obama signed the Jumpstart Our Business Startups (JOBS) Act on April 5, 2012, and the final, authoritative text of the bill has finally been made available to the public – you can take a look at http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf. Note that Title III is the crowdfunding part.
There have been a number of brief summaries floating around the web, but they all miss points that we believe are important – this bill is simply very long and detailed. Instead of a summary, we chose to provide you with a comprehensive look at Title III of the JOBS Bill, in plain English. Its long, but if you can hang in there you’ll be an expert on the new crowdfunding legislation and will most certainly win friends and influence people.
I. Crowdfunding Exemption
In general, a company (a.k.a. an “issuer”) can’t sell securities (e.g. stock) to the public, unless that company has either (a) registered its securities offering with the SEC (an expensive, time consuming process – think IPO), or (b) has an exemption from registration that it can rely on.
You’ve probably heard of Reg D offerings (504, 505 and 506 offerings). Reg D is one example of an exemption from registration; if the company follows the prescribed steps, jumps through the appropriate hoops, sells only to certain investors, etc, etc, then they can sell shares of their company without a registration. It still requires a somewhat tedious legal process, but its way easier than registering. Exemptions are good.
The JOBS Act creates a new exemption from registration for securities sold via crowdfunding offerings, so long as certain criteria are met, namely:
(A) no more than $1,000,000 is raised via crowdfunding in any 12 month period; and
(B) no single investor invests more than a specified amount in the offering, namely:
i. the greater of $2,000 or 5% of the annual income or net worth of the investor, as applicable, if the investor has annual income or net worth of less than $100,000; or
ii. 10% of the annual income or net worth of the investor, as applicable, if either the annual income or net worth of the investor is equal to more than $100,000, capped at a max of $100,000 invested.
(C) the offering is conducted through a registered broker or “funding portal” (a new term made up by the JOBS Act); and
(D) the issuer complies with certain other requirements that we’ll get to below.
Let’s look at a couple of examples of those dollar limits.
An investor who makes $30,000 per year (or who has $30,000 in net worth) can invest up to $2000 in crowdfunding campaigns in a given year. If their annual income or net worth is $80,000, then the investor can invest up to $4,000. If their annual income or net worth is $100,000 or more, then he/she can invest 10% of his/her annual income/net worth, up to a maximum of $100,000 (in the case that their income or net worth is $1,000,000).
Also, note the bit about the broker or funding portal. This is important, as it essentially forbids companies from crowdfunding their own offerings on their own websites – companies must go through an intermediary if they want to crowdfund, and those intermediaries must in turn be registered with the SEC. What does that mean? Read on.
II. Requirements on Intermediaries
The JOBS Act requires crowdfunding intermediaries to register with the SEC, either as a broker (which is an expensive and onerous process), or as a new thing called a “funding portal”. It isn’t clear yet what registering as a funding portal will entail – the SEC is writing the requirements at this very moment. What is clear is that the SEC has broad discretion with respect to this requirement – they can make funding portal registration as simple, or as burdensome, as they see fit. In addition to the SEC, funding portals will also be required to register with FINRA, the financial industry self-regulatory organization.
Moreover, the JOBS Act imposes a host of other requirements and limitations on crowdfunding intermediaries, including:
(A) providing certain disclosures and investor education materials to investors
(B) ensuring that the investor has reviewed educational materials and answers questions indicating that he/she understands the risks involved
(C) performing certain background checks on the issuer
(D) provide a 21 day review period before any crowdfund securities are sold
(E) ensure that an issuer does not receive investment funds until its target investment minimum has been reached, and that investors may cancel their commitments to invest as provided by the SEC (no word yet on how these cancellation provisions are going to look)
(F) ensure that no investor surpasses the investment limits set forth above in a given 12 month period in the aggregate – i.e. the limits described above with respect to investors apply to all crowdfunding investments in a given 12 month period, not just to individual investments, and the burden is on the intermediary to monitor this
(G) take steps to protect the privacy of investors
(H) not pay finders fees to promoters or lead generators with respect to investors (it appears to be okay to pay finders fees for issuer leads)
(I) not allow the intermediary’s directors, officers or partners to have a financial interest in an issuer using its services
All this, plus “meet such other requirements as the Commission may, by rule, prescribe” – it is clear that Congress does not intend for being a funding portal to be easy. Presumably this is why companies are forbidden to crowdfund themselves without an intermediary – by heavily regulating the intermediaries, and requiring all crowdfunding dealflow to go through registered intermediaries, Congress and the SEC keep crowdfunding on a tight leash, in theory safeguarding against fraud and abuse.
III. Requirements on Issuers
But wait, there’s more! The JOBS Act also imposes substantial requirements on companies seeking to utilize the crowdfunding exemption. For starters, they have to file with the SEC, the intermediary, and all potential investors, a beefy disclosure document that will include, at a minimum:
(A) name, legal status, address, website, etc.
(B) names of directors, officers, and 20% stockholders
(C) “a description of the business of the issuer and the anticipated business plan of the issuer” – the devil is really in the details of this one, and it remains to be seen whether the SEC will require this “description” to be 4 pages or 40 in order to be sufficient
(D) prior year tax returns, plus financials – see below for details
(E) description of intended use of proceeds
(F) target offering amount, deadline, and regular progress updates through the life of the offering
(G) share price and methodology for determining the price
(H) a description of the ownership and capital structure of the issuer, including a lot of detail about the terms of the securities being sold, the terms of any other outstanding securities of the company, a summary of the differences between them, a host of disclosures about how the rights of shareholders can be limited, diluted or negatively impacted, “examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions”, and a disclosure of various risks to investors
We mentioned financials above, and this is a big one.
Companies looking to raise $100,000 or less via crowdfunding can provide financials that are merely certified as true by the officers of the company. Companies looking to raise between $100,000 and $500,000 must provide “reviewed” financials, which means they have to pay a CPA to go through them. Companies looking to raise over $500,000 must provide full-blown audited financial statements prepared by a CPA. Moreover, every year after a successful crowdfunding offering, issuers must file with the SEC and with investors reports of the results of operations and financial statements of the issuer.
Finally, an issuer must clearly disclose any compensation it pays to any person promoting its offerings through a broker or funding portal. In addition, issuers are not allowed to advertise the terms of the offering, except for notices with direct investors to the intermediary. Again, this goes back to the underlying principle that general solicitations for crowdfunding must at all times flow through an SEC-registered intermediary.
IV. Other Important Stuff
The JOBS Act goes on to clarify certain other features of the crowdfunding landscape, notably:
(A) the SEC has 270 days to make the rules that will flesh out this new law.
This is worth some elaboration. The way these things work is that Congress passes a law, which is essentially a skeleton, and then instructs the SEC to make rules to flesh out the law. Although, by all accounts, Congress got way more granular with this bill than is typical, there is still plenty to be fleshed out by the SEC.
Moreover, until the SEC has finished its rulemaking process, the current rules remain in effect. Assuming the SEC takes all 270 days allowed for rulemaking, this would mean that nobody could start crowdfunding under the new exemption until 2013 (to say nothing of the further delay caused by intermediaries having to be approved as a registered funding portal). Moreover, the SEC could miss this 270 day deadline – it’s not as if Congress is going to fire them.
So, the point is, while we technically have a law, in reality, its going to be awhile before anybody can use it.
(B) Crowdfunded shares shall, “conditionally or unconditionally”, be exempted from the 500 shareholder cap.
This is another big change.
Note that, prior to the JOBS Act, a company was essentially forced to go public if it ever got to 500 shareholders and $10 million in assets. A separate provision of the JOBS Act increases this threshold to 500 non-accredited investors or 2000 total investors, and excludes from the headcount employees who have received certain company stock as compensation.
That in and of itself is good news. But the provision in Title III is even better, as it hints that allcrowdfunded shareholders will be excluded from the headcount – a tremendous benefit, given that a successful crowdfunding campaign is likely to bring in well over 500 non-accredited investors. We say “hints” because the SEC still has to make the rules, but we’re hopeful.
(C) The states are not permitted to layer extra regulations on top of crowdfunding offerings or crowdfunding intermediaries, and are very limited in their ability to impose filing fees on crowdfunded securities. However, Congress affirms the rights of the states to bring enforcement actions if they feel crowdfunding offerings are violating state securities laws. Moreover, states are to be provided with the details of crowdfunding offerings.
(D) an investor can sue an issuer, as well as its directors, partners and officers, for making an untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading (i.e. the standard fraud test for securities)
(E) crowdfunded securities cannot be transferred or resold for the first year after purchase, unless transferrred to the issuer, an accredited investor, as part of a registered offering, or to family members in some circumstances (i.e. death, divorce)
(F) only US offerings are eligible for the crowdfunding exemption. In addition, certain companies such as publicly listed companies, investment companies, and private equity and hedge funds may not use the exemption
(G) using the crowdfunding exemption does not preclude the raising of funds through other means – this is a good thing, it means companies can do a crowdfunding round simultaneously with an angel financing round under Reg D 506 or similar (though there are some pitfalls there – make sure to consult a securities lawyer)
(H) Certain “bad actors” who have violated securities laws in the past are forbidden from using the new exemption – if you’re not sure what this means, you’re probably in the clear
V. Wrap Up and Our Two Cents
If you’re still reading, then congratulations, and we’re sorry. We would have preferred this summary to have fit into a tweet; but this is the law we have been given. In fact, this is only the beginning – the bill is just the skeleton; the flesh must still be added by the SEC.
So, what does this all mean?
Well, on one hand, the bill is certainly more complicated than it could have been. A lot of industry proponents would have liked to have seen the original House bill passed, which was a lot less restrictive (but then again, after SEC rulemaking, who’s to say that we wouldn’t have ended up in exactly the same place?). For us personally, as a company who intends to be a crowdfunding intermediary, this looks like a lot of work. Weekends that could be spent on a mountain bike (or given the 270 day timing, on skis) will instead be spent filling out a lengthy application to register as a funding portal and to join FINRA. Yes, that will be annoying.
But, on the other hand, we get it. We understand that Congress and the SEC are concerned with protecting investors from fraud and abuse, and rightly so. Balancing investor protection with the promotion of economic growth is not an easy task, especially when you’ve got interest groups pulling from all sides. Would we have drawn the lines exactly where they did? Perhaps not. But, do we think what they’ve done is reasonable on the whole? Yes, we do.
We’re glad to see that the per-investor maximums are higher than they were in some iterations of the bill. We’re also pleased that crowdfunding offerings are required to go through an intermediary – we have been arguing for months that this is the best way to safeguard the integrity of the crowdfunding ecosystem.
More generally, we’re happy to see that our politicians and regulators are trying to build a system that the public trusts, and that is sustainable, and effective, and a durable part of our financial landscape. There is a lot of red tape; but then again this is the securities industry – investment-based crowdfunding is a fundamentally different animal than donation-only crowdfunding.
Above all, we’re thankful for the opportunity we’ve been given to engage in this great experiment. The legal and compliance bills for issuers and intermediaries may turn out to be higher than many hoped, but at the end of the day, we got a crowdfunding exemption.
When the dust settles, entrepreneurs and small business owners will have access to a revolutionary new method of raising capital, and ordinary Americans will be given the opportunity to invest in their friends, family, and favorite companies, and not just the behemoths offered by Wall Street.
Will the system be perfect? Nope. Will some clever criminals find a way to game it? Quite possibly. But remember, Enron was publicly traded, and Bernie Madoff once served as the chairman of the Nasdaq stock exchange. No law or regulation is perfect, and no corner of the securities landscape is free from abuse. Our politicians have handed us a bipartisan bill (no small thing in an election year) and given us rules of the road.
Others can complain if they wish – we prefer to build.
This week the President signed the JOBS Act, which will make it easier for small businesses to raise funds to grow their businesses. A key component of the legislation, allows startups to gain capital through crowdfunding. Sherwood Neiss, a co-founder of Startup Exemption, talks about how the bill affects small business.
The New York Times came out with an article yesterday that caused me to seriously question the publication’s true allegiance. The piece, written by Andrew Ross Sorkin and titled, “JOBS Act Jeopardizes Safety Net For Investors”, uses Groupon’s current woes as an excuse to denounce the overwhelmingly bipartisan jobs bill just days before Obama is expected to sign it into law.
His title alone makes me cringe. Since when does investing come with safety nets? Investing involves risk. In fact, the entire concept of investing is weighing risk versus reward. Mr. Sorkin, do you even comprehend the magnitude of what your article intimated? You are basically insinuated that it should be the Government’s responsibility to assure investment returns. Somewhere, Ayn Rand is rolling over in her grave.
Let’s get one thing straight, I am all for investor protections. But unlike you, Mr. Sorkin, I also support a capital markets system that provides fairness to ALL investors, not just to the 1%. I further endorse a bill that allows for investor protections without sacrificing our nation’s greatest innovators. For far too long our capital markets have been hijacked by PIPE funds, program traders and a handful of supersized investment banking and institutional firms at the expense of our small businesses. The JOBS Act democratizes our capital markets, brings equality to retail investors as well as emerging companies, and most importantly, it hands the capital markets back to the 99%.
The “Crowdfunding” component of the bill that you condemn actually levels the investment playing field by permitting smaller investors to invest prior to a company’s greatest growth spurt as opposed to having to wait until its IPO when the majority of the appreciation had long passed. Why do you take issue with the 99% being afforded the same opportunities to grow their money as the 1%?
Since you obviously lack an understanding of crowdfunding, allow me to educate you. The Crowdfunding Marketplace could not be more distinct from the unbalanced conventional markets you outwardly shield from crucial regulatory reform.
Unlike most public market investors, crowdfund investors are long term, benevolent shareholders who invest in a company, not because they have a “get rich quick” mentality, but because they truly appreciate a company’s business, its mission, its value to the community and its potential impact on society. In fact, crowdfunders value a company’s business so much that they are currently funding projects without even receiving an equity stake. Imagine a PIPE investor forgoing his equity because his true motive is to see the company succeed? I can’t even envision him not securing his return by demanding a steep discount plus a warrant kicker for “risking” his capital.
Crowdfunding allows businesses to obtain shareholders whose interests are more aligned with their own. This alliance gives companies a greater chance to succeed. If crowdfunding achieves nothing else but altering investing behaviors and making it “chic” to be a long term shareholder again, it will go a long way towards improving our capital markets, our economic future and even advancing society as a whole.
Finally, Mr. Sorkin, please understand that if you regulate the risk out of our capital markets, you will be regulating our nation right out of innovation, growth, global competitiveness and yes, job creation. Not every company will succeed. In fact, many will not. But our capital markets were built on the back of many failures as well as successes. Had it not been for those failures, there might never have been an Apple, Intel, Microsoft, Google or a Facebook and you would have written your irresponsible propaganda cloaked as journalism with a fountain pen instead of on a keyboard.
The New York Times needs to stop decapitalizing the markets under the pretense of investor fairness when their actions will only lead to greater injustice. If it truly wants this nation to prosper, it will put an end to encouraging mediocrity and dependency through careless rhetoric of unwarranted safety nets.
As published in Inc.com: http://www.inc.com/sherwood-neiss/why-you-can-feel-good-about-the-jobs-act.html
The crowdfunding provisions have more than enough protections for investors, and they’ll give entrepreneurs the capital they need
CrowdFund investing (aka equity-based Crowdfunding) is about to become the law of the land. Opponents have spent months screaming about how it would be an open invitation for investment fraud and a menace to small investors if it passed. Now that it has passed, it’s time to set those fears to rest. Crowdfunding will become a great source of funding for entrepreneurs and fully transparent way for investors to get in on the ground floor of what will be the greatest businesses of the future.
Every entrepreneur, at one time or another, has felt the pinch of the capital markets. Inspired by the success of donation-based crowdfunding, social media as marketing tool, and the principles of seed financing, the three of us—Jason Best, Sherwood Neiss and Zak Cassady-Dorion—decided to create a solution. The result is a framework that allows an entrepreneur to raise a limited amount of capital from his friends, family and customers on SEC-registered websites with prudent investor protections.
Why is CrowdFund Investing so necessary? With the collapse of the markets in 2008, the traditional means of financing startups and small businesses—credit cards, home equity lines, bank loans and venture capital—disappeared.Banks stopped lending and venture capital shifted away from seed stage investments to larger, more secure deals. What was left was a funding void for businesses looking to raise $250,000 or less in seed or early-stage funding. According to the SBA, this round is the most critical capital a young company can get. Lack of it is the #1 reason why startups fail in the first 5 years.
Only entrepreneurs with clean records need apply
We carefully crafted our framework to protect investors, drawing on similar programs exempt from SEC rules. It is a rule under which entrepreneurs (who pass fraud/background checks) and small businesses with revenues of less than $5M (that aren’t foreign corps, public or investment companies) could raise up to $1M by either selling Common Stock or using revenue based financing on SEC-registered websites.
The law manages investors’ expectations
Investors would have to pass a quiz proving that they understand there is no guarantee of return, that they could lose their entire investment and that their liquidity/return is limited to any dividends, sale, public offering or a merger of the company. Once they understood that, the amount they could invest (i.e., risk) would be limited—between $2,000 and $10,000, depending on their income.
Standardized forms (generic term sheets & subscription agreements) based on industry best practices would be used to maintain transparency and reduce time and expense for all parties. Post-funding, standardized and automated reporting for use of proceeds would be required on a quarterly basis by entrepreneurs so people would know what is going on. All of this would be overseen by a Self Regulatory Organization (SRO) that reports to the SEC on what is taking place on CrowdFund Intermediaries with the goal to protect investors.
Platforms would provide the SEC real-time offering reports that include information on: deals funded, entrepreneurs’ names, social security numbers, addresses, date of births, amount of capital raised, list of investors and individual dollar amount contributed. This way regulators would know who is crowdfunding, who is backing them and how much they’ve raised.
Social media would enforce integrity
And most importantly social media would control the process. Entrepreneurs would only be allowed to solicit people in their social network using Facebook, Twitter, Linkedin, etc. Platforms would use social media tools to create a deal room for each idea where interested investors can publicly pick apart the entrepreneur, the idea, the business model and the investment opportunity. And most important, no money would be exchanged until the entire crowd decided to fund the entrepreneur and the entrepreneur’s funding target was 100% met. So if you say you need $50,000 to expand your business, you only receive the money when you have secured commitments for the entire $50,000.
Not so easy, right?
If implemented as designed, these protections would allay everyone’s concerns. Entrepreneurs would get the capital they need. Investors would get the disclosues they need to make informed decisions. Regulators would stay informed on what is happening in the capital markets.
Think it can be gamed? Well consider this. You know those eBay ratings that guide your decision to send $1,000 across the country in exchange for a product? You are going to see similar ratings for both entrepreneurs and investors on CrowdFund Investing sites. Know those comment fields with the like buttons on Facebook? You are going to see those on the communication panel where interested investors will require answers of an entrepreneur and those answers will be rated and further discussed (just because that’s how we like to do things in an open dialog on the internet today).
Now take any fraud example you can think of and run it through this scenario. How many con artists want to register with the SEC? How many want to target those closest to them? (That’s how crowdfunding through social media works: You are limited by soliciting your social media connections.) Yes, once the law is implemented a bad guy could cold-call an investor and claim to be crowdfunding the next Facebook. But that would be fraud, just as it is today, and the perpetrator could go to jail. The CrowdFund Investing framework restricts all communication to crowdunding intermediary sites, and in doing so provides the tools to protect investors. In 5 years, chances are the SEC will be using these tools to crack down on larger scale fraud.
Now that the JOBS Act has passed, we are moving to the next phase of development on a two-track strategy. First we’ll help build a self-regulating organization, like Nasdaq, to be the voice of the Crowdfunding industry and work with the SEC to regulate funding platforms and keep investors educated.
Second, we’ll work with the SEC on their rule-making progress. It is vitally important that entrepreneurs and small business people stay tuned in. The SEC will begin with 90 days of rulemaking, and then open their draft rules for 90 days of comments. These comments are very important to the process. Entrepeneurs have the most to gain (and lose) so we must continue to fight for rules that provide fair balance between the needs of investors and entrepreneurs.