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Nightly Business Report Interview with Jason Best

5 Apr

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Why Crowdfunding & the JOBS Act is a Win for Entrepreneurs and Investors

28 Mar

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.

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An Update from the Startup Exemption Team

1 Mar

To view the original version of this post, click here:
An update on the Process to Legalize Crowdfunding from the guys who brought Crowdfund Investing to Washington, DC

Dear Crowdfunding Followers,

Here’s the latest from the guys leading the charge to legalize Crowdfund Investing (CFI) in Washington, DC.

LegalizeCrowdfunding.org goes live.
Already 138 entrepreneurs have registered to create 2,500+ jobs, which will have over $100M in stimulus! Let’s show Washington, DC the power of Crowdfund Investing! If you are an,

  1. Entrepreneur: Register to show how many people you need for your business (eg: jobs you will create) and the economic impact it will have.
  2. Investor: Register to show the impact your dollars will have stimulating our economy.
  3. Crowdfunding Supporter: Send an email to your Legislators, Tweet and Post about the site!

Endorse Crowdfund Investing!  SBE Council plans to send this group letter to U.S. Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY) in the coming week.  If you would like to sign onto the letter and add your name to the growing list of groups representing small business owners and entrepreneurs that are urging the U.S. Senate to take action, please send your name, affiliation and email contact information to SBE Council at info@sbecouncil.org.

Status of Legislation

  1.  The Good: As it stands we have 3 bills before Congress.  HR 2930 passed the House with an overwhelming 96% approval – Yes that’s true bipartisan support.   President Obama came out and endorsed the Bill with a Statement of Administrative policy and also included our framework in the Startup America Legislative Agenda.  Things have slowed down in the Senate but to help move things along we went back to Washington and presented them with some Commonsense Consensus ideas that pull the best of the 3 bills into one.
  1. The Bad: NASAA’s opposition to crowdfunding is also in opposition to the needs of our economy, entrepreneurship and jobs.  NASAA argues that they are best suited to regulate simple, transparent markets for businesses on Crowdfunding Intermediaries.  This would create 50 different markets for Crowdfunding, rendering Crowdfund Investing dead on arrival.  This is part of the reason it is so hard for small businesses to raise money today; different bureaucratic, costly rules for each states.  Since CFI is based on community financing, we believe the crowd can do a better, faster, cheaper and more efficient job of determining which ideas, if any, should be funded and with how many dollars.  It is that simple.  Leave the heavy-handed, traditional regulation and oversight for the larger businesses that can access traditional capital.  We advocate state regulation preemption, while preserving the enforcement power of the states to pursue fraud when it occurs.

Would you like us to speak to your organization/group about Crowdfunding?  We are finding there is much confusion about what Crowdfunding is, how Crowdfund Investing differs, how investors are protected and what CFI means for our economy.  Please contact us to discuss your event and how we can participate in sharing this information.   Here are a few of our upcoming events:

  1. Feb 29th - Crowdfunding & Startup Investing
  2. Mar 6th - The Future of Startup Financing: A North American TeleForum on Crowd funding
  3. March 13th – The Soho Loft Crowdfunding Conference, Los Angeles, CA
  4. March 20th – TiE Arizona @ Thunderbird, Glendale, AZ
  5. March 28th – 30th MIT Global Startup Workshop - Istanbul, Turkey
  6. April 19th The Crowdfunding Conference, 2012 - New York City

Loudsauce Campaign:  Our
friends at Laudsauce have launched a campaign to place a one-page ad on the back of Politico.    Politico is seen by 32,000 eyes in DC so let’s show all those folks working on Capitol Hill how Crowdfund Investing Equals JOBS.

Fund the fight:  None of this is happening for free.
If you haven’t yet, please donate $50 to help us get this legislation across the finish line!  Every $50 donation will get your name listed in the ‘I support Legalizing Crowdfunding’ section of the website.

Crowdfund Investing Blog Posts:  If you haven’t had a chance to see any of our recent posts, here they are:

Contact us:  Got a comment?  Need to speak to us?  Here’s how …
Sherwood Neiss, sherwood@startupexemption.com, 202-247-7182
Jason Best, jason@startupexemption.com
Zak Cassady-Dorion, zak@startupexemption.com

 

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The Startup Exemption Headlines Crowdfunding Conference on March 13, 2012 in Los Angeles

25 Feb

The SoHo Loft Capital Creation Event Series Announces the Agenda for the Capital Creation and Crowdfunding Conference

in Los Angeles

 

BriefingWire.com, 2/24/2012 - Roswell, GA, Feb. 24, 2012 — Today the SoHo Loft announced the agenda for its upcoming Capital Creation and Crowdfunding Conference, the definitive forum for learning about the rapidly evolving marketplace for private company stock. The two-day event will be held in Los Angeles, CA on Tuesday, March 13th and Wednesday, March 14th.

In this remarkable moment in history, the U.S. regulatory environment, its capital markets and the innovation that drives those markets are simultaneously on the threshold of dramatic change. We are currently witnessing the embryonic period of a cutting-edge stock market just as we usher in a new era of mass media. At the same time, new legislation aimed at facilitating capital formation is being introduced to support this modern infrastructure. There has never been a more opportunistic time to capitalize on change.

TSL’s Capital Creation and Crowdfunding Conference provides attendees with key insight into the direction of the U.S. capital markets during this period of regulatory transformation and the rapid progression of the developing ecosystem. Attendees will get a fresh look at how capital formation is changing as well as learn where new growth opportunities exist, how social media is transforming Wall Street and most importantly, how to capitalize in this changing paradigm.

Attendees will also get to know the players who are shaping the Private Company Marketplace (PCM) including the private shares desks and exchange platforms, crowdfunding experts, secondary private share buyers and angels, private stock analysts, legislators and seasoned entrepreneurs. There will also be ample networking sessions to exchange ideas, discourse and opportunities.

THE AGENDA:

DAY ONE: CROWDFUNDING – TUESDAY, MARCH 13TH

· 1pm – Registration, pre-networking, Demos
· 130pm – Opening Remarks and Introduction

· Employing Crowdfunding to Enhance Capital Formation and Create Jobs
· Rep. Patrick McHenry to discuss his bill, HR 2930 also known as the “Crowdfunding bill”

· “How you can make a difference and be heard” by Jason Best, Co-Founder and partner of Startup Exemption
· 3 to 330pm – Coffee Break: Snacks and Networking Under the Buttonwood Tree

· The Capital Markets of Tomorrow – Meet The Pioneers of Crowdfunding

· 330 to 415pm Panel: “Legalize it” – The transforming regulatory landscape to introduce a new asset class

· Panelists include:
1. Jason Best, Co-Founder of Startup Exemption
2. Jouko Ahvenainen, Co-founder of Grow VC
3. Richard Salute, Capital Markets and SEC Practice Director with J.H. Cohn
4. Mitchell Littman, Esq., founding partner of Littman Krooks LLP
· 415pm to 445pm Panel: The relationship between Angels and Crowdfunding

· Panelists include:
1. Julia Dilts, Co-Founder and CEO of Maverick Angels
2. Charles Sidman, Managing Partner of ECS Capital Partners and Angels
3. Wil Schroter, Serial Entrepreneur & CEO of Virtucon Ventures
4. Candace Klein, Founder and CEO of Bad Girl Ventures and SoMoLend
5. Connie Koch, President of the Southern California Region of Keiretsu Forum
· 445pm to 515pm Panel: Establishing the Infrastructure to enhance Crowdfunding:

· Panelists include:
1. Gene Massey, CEO of MediaShares
2. William Davis, President of Gate Impact
3. Alon Hillel-Tuch, Co-Founder of RocketHub
4. Steven A. Cinelli, Founder, CEO, PRIMARQ Inc.
· 515 to 545pm – Coffee Break: Snacks and Networking Under the Buttonwood Tree
· 545pm to 7pm – Presentations:
· 545pm: Case Study: One start-up’s experience utilizing Crowdfunding
· 605pm: “Models and approach to building the new sustainable finance sector” by Jouko Ahvenainen, Co-founder of Grow VC
· 625pm: “Transforming an Idea into a Business” by Julia Dilts, Co-founder and CEO of Maverick Angels
· 645pm – Closing Remarks, Meet our Sponsors
· 7pm – Cocktail Party, Extensive Networking

To register for tickets, please visit http://tslccla.eventbrite.com/. Only ticket holders will be permitted into the event. Press Passes will be provided to qualified members of the media at no charge. To receive Press Passes, please contact dsa@thesoholoft.com. To view detailed bios of our distinguished speakers, please visit http://www.thesoholoft.com/our-network/speakers-2/

ABOUT THE SOHO LOFT CAPITAL CREATION EVENTS:

The Soho Loft Capital Creation (TSLCC) Event Series is the only global event platform where accredited investors; accomplished angels; microfinancing groups; CIOs of investors; select merchant and investment bankers; VCs; family offices; incubators; private equity firms; pre-IPO mutual funds; secondary stock buyers, sellers and equity analysts from across the world assemble in order to exchange ideas, discourse and opportunities that will help reshape the capital markets and stimulate economic growth. Our mission is to bring awareness and drive capital to the private company marketplace (PCM) as well as to help develop its infrastructure so that it can mature into a viable and functional institutional marketplace that facilitates capital formation, innovation, expansion and job creation. For additional information please visit us at http://thesoholoft.com and www.facebook.com/TheSohoLoftevents.

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On Feb 29th, 1pm EST Startup Exemption Co-Founders to Speak on Crowdfunding

23 Feb

National Council of Entrepreneurial Tech Transfer Presents

Crowdfunding Webinar Mini-Series

Upcoming Webinar:

“Crowdfunding and Startup Investing”
Wednesday, February 29, 2012, 1:00-2:30pm ET 
Presenters:
Jason Best, Co-Founder, Startup Exemption
Sherwood Neiss, Startup Exemption
 

Register for this free series here:

(or go to: https://www2.gotomeeting.com/register/415957282)

ABOUT THIS WEBINAR

A rare glimpse of Crowdfund Investing.  This free webinar will focus on different aspects on what Crowdfunding is, to what it looks like today, how it differs from Crowdfund Investing, what framework for Crowdfund Investing is to the legislative process in Washington DC, the hurdles to becoming law and dealing with everyone from leading Representatives and Senators all the way up to the White House.

AGENDA:

  • Overview of Crowdfunding
  • Introduction of the concept of CrowdFund Investing
  • Where it came from
  • How it works
  • Entrepreneurs
  • Social Networking
  • Local
  • Innovation
  • What is happening globally with Crowdfunding and why we must pass this now to effectively compete
  • What we ran into in DC when we began to explore CrowdFund Investing
  • Decided to try to make a change
  • Created Startup Exemption
  • Created a common sense regulatory framework
  • Began to push for it
  • Who is against CFI?
  • How has legislation moved through Washington DC?
  • Review chart of different bills
  • Current state of the process

 

SERIES DESCRIPTION:In November, the House of Representatives passed The Entrepreneur Access to Capital Act amending the Securities Act of 1933. The bill would allow a new registration exemption for companies raising crowdfunded financing. Companies may raise up to $1 million within a 12-month period without registering the securities with the Securities and Exchange Commission (SEC).

The Crowdfunding Webinar Mini-Series will feature a balanced array of presenters from government agencies, universities, VC and Angel groups to present the advantages and issues for individual investors, policymakers, Congress and the Administration better understand the implications of crowdfunding.

 

ABOUT THE PRESENTERS:

 

Jason Best

Jason Best is a Co-Founder of Startup Exemption and brings over 10 years of executive management experience at 2 SaaS healthcare businesses (one of which he co-founded) in the bay area.  His work there included starting a business from the ground-up during the dot com crash, building broad coalitions of US medical societies in support of Internet-based physician-patient communication and changing FDA regulations to enable physicians to receive electronic medication and device warnings instead of paper.  This change dramatically increases patient safety while reducing time and costs for physicians and the pharmaceutical industry.

He is a successful entrepreneur and consultant to technology companies on business development and strategy issues to enable companies to grow quickly and effectively.  In both 2010 and 2011, his work in strategy development, building scaleable processes, partnership development and branding/marketing, led to one of his clients, Kinnser Software, being named by Inc. Magazine as one of the 500 fastest growing private companies in the USA.

In Dec 2010, he also Co-Founded A Single Production Company, a documentary film company based in Bangkok Thailand.  He has served as the Executive Producer for its first feature “The Cheer Ambassadors”.  The film will premier at the Bangkok World Film Festival in January 2012.   He is also working on a program with local entrepreneurs and educators to create a more entrepreneurial Web development industry in Thailand.

Jason earned his MBA from the Thunderbird School of Global Management, the world’s top international MBA program as well as a BA from William Jewell College, ranked by Forbes and US News and World Report as one of America’s best national liberal arts colleges.  He has lived and worked in Europe, South America and Asia.  He grew up in Louisiana and is now based in San Francisco, California to be near snow skiing, the ocean and wine country.

Sherwood Neiss

Chances are this entrepreneur has already helped you, your child, someone very close or even your pet.  As a 3-time INC500 winner whose company won E&Y’s Entrepreneur of the Year, Sherwood understands the keys to entrepreneurial success from concept to company to sale.

Sherwood Neiss started his post-MBA career on Wall Street and moved to Silicon Valley where by his 29th birthday reached the personal and financial goals he set for his 30th year.  Wondering what to do next and also left struggling with a debilitating family dilemma, he used his entrepreneurial drive to help turn his family adversity into a multi-million dollar company that today is helping millions of sick children, animals and adults get better by being more compliant with their medicines.

Sherwood Neiss co-founded FLAVORx (www.flavorx.com) the company makes 42 yummy flavors that take the yuck out of medicine.  His structured approach helped not only build a business model that threw off millions of dollars in cash but also helped grow the business from one pharmacy to over 80% of the pharmacies in the United States.   He raised millions of dollars in capital and saw the culmination of his endeavors with the sale of the company in 2007.

Sherwood is an avid public speaker.  He speaks at universities and seminars around the world about what it takes to be an entrepreneur, how to fund your idea and build a winning company.  He testified at three Congressional hearings;  one on the impediments to capital formation under Sarbanes-Oxley and two regarding access to capital for entrepreneurs and Crowdfund Investing.  His SOX testimony was one of the reasons the Small Business Exemption to section 404(b) audit requirements was passed in July 2010.

Most recently Sherwood won the November 2010 & May 2011 Startup Weekend Challenges in Miami to use smartphones for instant polling & for an equity based crowdfunding platform.  Currently he advocating for the SEC to update the securities laws to make it legal for groups of people to pool small dollar amounts of money together to invest in startups aka “Crowdfund Investing.”

When not working, Sherwood is an avid traveler.  He lived in Japan for a year and post-sale of FLAVORx took his second backpacking trip around the world.  In addition to speaking at universities and businesses around the country he invests in real estate in the U.S. and Brazil, is part of a Private Equity group in Los Angeles, is working on a clean tech project in Puerto Rico and is involved with several other start-up ventures.

 

 

WEBINAR DURATION: Each session is a 90-minute webinar with 60 minutes of presentation and 30 minutes of Q&A.

COST: Free, but registration required by clicking on register the Register button above.

HOW TO PARTICIPATE?: This webinar is online. You need a computer with web access for the visual/audio. You may also dial-in using the audio-only telephone number. The call in details and instructions on how to join the webinar will be sent to you via email after you register. Once registered to the webinar you will receive a reminder email 24 hours before the start of the webinar with instructions on how to join.

QUESTIONS TO SPEAKERS: Q&A is conducted by a chat box to the speakers.

WHO SHOULD PARTICIPATE IN THE WEBINAR?: National and international media, federal and state government officials, venture capitalists, angel investors, Global 1000 companies, industry representatives, university officials, entrepreneurs and individual investors.

SLIDES AND VIDEO: The slide presentations and video recording will be available on this page. If you are unable to join the live webinar, you may view the recorded video that will be posted within 24 hours after the scheduled webinar ends.

If you have questions about this webinar, please email NCET2′s Research Commercialization and SBIR Center at support@ncet2.org

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Crowdfunding Takes a Hit as Profounder Shuts Its Doors

21 Feb

Our own real-world Stephen Colbert skit is playing out before our eyes.  Security Regulators are up in arms about the prospect that the average American can decide if he or she is smart enough to invest $10, $100, $1,000 or $10,000 into an entrepreneur they know, via would be SEC-registered websites, that would allow entrepreneurs (who had cleared background and security checks) to raise money from their friends and family.  Hence they are spending millions of dollars on lobbyists and staffing Senate hearings with opponents to derail Republican–led legislation that the House of Representatives passed with 96% approval. (Yes this is the same House that rarely passes things with such bi-partisan approval). This was also endorsed by a Statement of Administrative Policy by our Democrat President  –all of which is meant to help keep America competitive, spur innovation, encourage entrepreneurship and create millions of jobs.

There are two bills before the Senate.  Senator Reid must act to bring a Crowdfunding Bill much like the House version to the floor to vote on.  Entrepreneurs, The US House and The President get it.  Jobs won’t come if we don’t provide the capital.  Let’s not look to past to get us out of this problem.  Let’s look to the future and the success of Crowdfunding globally.  If 96% of the House thought it was worthwhile, shouldn’t we expect the same from the Senate?  Are we really going to let Special Interests that care more about their own power than our future economic prosperity kill crowdfunding legislation in the Senate?

Even before the equity-based crowdfunding site Profounder had a chance to show to the U.S. (ps -this is already legal and flourishing in the UK) the power of harnessing a few dollars from the crowd to spur innovation, encourage entrepreneurship and create jobs, they have shut their doors.  In a statement to their followers they said, “the current regulatory environment prevents us from pursuing the innovations we feel would be most valuable to our customers, and we’ve made the decision to shut down the company.”

An inside-Beltway battle is being fought between the people trying to propel our country forward, America’s job creators, and those holding us back, Regulatory agencies including groups like the North American Securities Administrators Association ( www.nasaa.org )..  They are more concerned with clinging to outdated laws written 78 years ago than the economic needs of our country.  Current regulations, were written before most homes had radios, much less the Internet.  This was during a time when your “social network” was a stack of business cards that you could write letters to send via the US Post Office.   Now, this deeply entrenched bureaucracy prevents entrepreneurs from using the Internet and social media to go to their friends and family for investments.

The U.K. has just updated their security laws to allow their citizens to finance their nation’s job creators much in line with what ProFounder was trying to do.  What the UK realizes, is with the advances in technology and the Internet, there is power to a group of interconnected people vetting an entrepreneur in an open and transparent platform where they can decide if she or he is worthy of funding.  As of last week, it was going so well that the UK Government began to offer tax credits to their citizens to encourage investment.

The financial markets in the US for entrepreneurs and small businesses are STILL FROZEN.  With all the talk about it, the reality for most small businesses is they have no access to working capital.    Access to capital is the number on concern according to a recent study by the Small Business & Entrepreneurship Council.  Allowing Main Street to step in and fill the void left by Wall Street, the banks and Venture Capital can only help propel our country forward.  We need to stand together.  We need to legalize Crowdfunding.  If you are an entrepreneur register at LegalizeCrowdfunding.org now!

Sherwood Neiss and Jason Best are Co-Founders  for the Startup Exemption, which brought the idea for “Crowdfund Investing” to Washington a year ago.  They have recently launched LegalizeCrowdfunding.org to quantify the impact the legalizing crowdfunding can have on our nation. 

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The Commonsense Crowdfund Investing Compromise

13 Feb

Great progress has been made to legalize Crowdfunding in the US with 3 bills before Congress.  We have seen Crowdfunding gain traction in the US with 2 donation-based projects raising over $1.5M each on Kickstarter.  In addition, the UK is accelerating it’s push to encourage Crowdfunded Investments by offering a new tax credit.  Now is the time to push Crowdfund Investing legislation over the finish line here.

As we move the Crowdfund Investing legislation forward it is important to keep the following in mind.  1) It has to be written so a market can successfully be formed, within the confines of the regulations.  (i.e., Trying to crowdfund $250,000 in increments under $1,000 is going to be nearly impossible if entrepreneurs are forced to raise 100% of their funding request in order to be funded).  2) It has to be easy to understand from an entrepreneur’s, an investor’s and intermediaries point of view.  3) It needs to be fair, without needless bureaucracy and costs where the advances in the Internet and technology can offer enhanced security and streamlined process and 4) It needs to be done in a way that our Nation’s Job Creators can start capitalizing on its effectiveness NOW… without getting bogged down by lengthy SEC rule making.

In order to help advance this legislation, the Startup Exemption,which represents over 5,000 active crowdfunding followers (including entrepreneurs, investors, intermediaries, security lawyers, authors, and security experts) sought a consensus on the 3 bills.  The goal was to take the best of them and consolidate it into one that would provide access to capital without undue bureaucracy.  It is important to keep in mind that the technology built into today’s Internet can allow both the transfer of information between entrepreneurs and potential investors as well as intermediaries and regulatory agencies without lengthy and costly bureaucracy — all in a transparent and accountable fashion.

 We hope the compromise ideas (click here for the full PDF) we put forth in these pages are helpful as you  push this legislation across the finish line.

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The 80-20 Rules Applied to Crowdfunding – Why Larger Single Investments Will be Critical

26 Dec

According to Wikipedia, The Pareto principle also known as the 80-20 rule states that, for many events, roughly 80% of the effects come from 20% of the causes.  The validity of the 80-20 rule can be seen throughout the economy.

Why is the 80-20 rule important to consider in relation to the Crowdfunding bills that are moving through congress?  Because where Congress sets the Crowdfund Investing limits, will determine if this legislation will create or destroy jobs and innovation. The Startup Exemption framework originally suggested $10,000 or 10% of an investors Adjusted Gross Income (AGI).  Our rationale for the $10,000/10% AGI was to cap the maximum an individual could invest based on their income but also cap the total amount anyone could put into one endeavor at $10,000. This was to provide significant investor protection for unaccredited investors who choose to invest in this high-risk asset class yet allow higher net worth individuals for flexibility to use their cash as they see fit.

The current bills before Congress each limit the maximum amount an investor can risk at different levels.  The $10,000/10% AGI we advocate matches what is in HR2930.  The Senate bills take different and more dramatically smaller positions; between $500 & $1,000.   If these lower caps from the Senate bills are enacted, it will kill the value of this legislation and will dramatically limit or eliminate the possibility of any new jobs or innovation being created via Crowdfund Investing.

Applying the 80-20 rule to crowdfunding, the theory would assume that 80% of the crowd will provide the majority of the count of contributions but the 20% of the crowd will provide 80% of the dollar value of the financing.  If this theory is true, then it is crucial that the 20% of the investors that will provide 80% of the investment dollars are able to provide larger dollar investments.

To prove this, we reached out to several of the major crowdfunding platforms and asked them for statistics on a few of their larger projects.  We specifically asked for the larger projects because we anticipate the average amount entrepreneurs will seek in their initial rounds will be $50,000.  Here’s what the data showed.

On Crowdcube, the UK’s first and largest crowdfunding platform that just successfully funded the first £1 million (approx. $1.57M) project (need we say any more about how powerful crowdfunding will be), the data revealed the following:

  • From a group of projects that raised collectively $280,800, individuals who invested less than $1,000 accounted for 81.2% of the total number of investors.
  • The remaining 18.8% of investors, who invested greater than $1,000, accounted for 93.8% of the total financing!

Indiegogo, one of the largest donation-based crowdfunding platforms which has been around longer was able to pull data from a much larger data set.  (They have funded over 25,000 projects).

  • The data indicated the more money one raises, the more reliant on $500+ contributions one is.
  • For campaigns that raised between $500 – $5,000, 24% of funding came from $500+ contributions.
  • For campaigns that raised over $5,000, 46% of total funding came from $500+ contributions.
  • For campaigns that raised over $10,000, 50% of total funding came from $500+ contributions.
  • For campaigns that raised over $20,000, 53% of total funding came from $500+ contributions.
  • For campaigns that raised over $50,000, 65% of total funding came from $500+ contributions

Profounder, one of the first to try equity-based crowdfunding but forced to augment its model for the time being, was able to share these statistics from all projects funded on their site:

  • 24% of the total number of investors contributed less than $1K.  These individuals delivered just 4% of all funding raised.
  • 76% of individuals who invested greater than $1,000 delivered 96% of all funds raised.
  • The average investment was a little over $1,700/ investor.
  • These statistics closely match what Crowdcube discovered.

The data demonstrates how important it is to allow investors the opportunity to make investment decisions at a level that is appropriate to their income/net worth, while capping the total investment level for all unaccredited investors. $10,000 or 10% of AGI (whichever is smaller) should be that limit.  The larger contributions are critically important to successfully funding companies.  If overly restrictive limits of $500, $1,000 or even $5,000 are enacted it would have a grossly negative impact in the potential for crowdfunding.

What this theory leaves out though is the importance of the small dollar donations from something other than money — a voice and a potential customer base.  While 20% of a crowd might provide 80% of the financing, if it weren’t for the 80% who expressed interest in a company in the first place by pledging small dollar funds, those larger investors would not be stepping up to the plate with 80% of the financing.  There is validity to the voice the 80% puts behind their dollars because it shows that there is interest from the crowd for the product.  Market research like that prior to launching is invaluable and something any traditional financier would look for.

We urge the Senate to enact the investment limits from our framework: $10,000/10% AGI (Whichever is lower).

 

 

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Post Rally Update

22 Nov

We have a problem and we need YOUR HELP. Everyone we met with last week after the rally said the same thing:  “If you don’t get this bill passed in the Senate by the end of the year, you will have no chance of passing it at all because 2012 is an election year.”  If you read no further, please click this link to identify your Senators, call them and tell them “I support HR2930, the Crowdfunding Bill as a solution to getting capital flowing to community entrepreneurs so that we can create jobs!” It may sound crazy but grass roots calls are powerful.

12 months ago, everyone said allowing an entrepreneur to go to his friends, family and community to raise small amounts of capital to fund their startup or small business would never be made legal.  After the last 9 months of work, we have proven there IS a market for Crowdfund Investing (CFI) and that President Obama, the US House of Representatives, the Small Business and Entrepreneurship Council and the US Chamber of Commerce all agree. Crowdfund investing is a part of the solution to the jobs crisis.

Now the problem, the SEC, State regulators and special interests with DEEP pockets and tons of influence are throwing a full-frontal assault at the Senate to stop our progress and they are using fear mongering by spreading nonspecific threats of fraud!

They are marketing “fraud” because, like sex, it sells newspapers.  They want you to focus on some seemly scary generic issue from the past rather than focusing on how today’s technology, Internet and social media can identify winning ideas and fund them. They don’t want you to focus on how crowdfunding by nature will expose fraud and they are avoiding the basic way all investors are taught to protect themselves against loss, DIVERSIFICATION.  WHY?  To protect their turf and dollars.

How can they claim their number one concern is ‘investor protection’ when they haven’t brought anyone to justice for the financial meltdown?  According to their argument, the financial markets should have ceased to exist with the 2008 financial meltdown because of fraud and loss of investor confidence. However, the markets DIDN’T stop functioning because people understand the risks and rewards of investing, especially over the long-term.  Why then, do special interests treat CFI any different?  CFI will do a much better job at backing winning ideas with money, experience, knowledge, marketing power and investor protection than any one investment an individual makes in a Fortune 500 company or someone they don’t know who comes to them with a Reg D offering.

Fraud historically has been one-to-one.   The principals of crowdfunding are based on many-to-many communication in an OPEN DIALOG where NO investor will partake if an entrepreneur hasn’t won over the confidence of the crowd.  We’d love to think that crowdfunding has the ability to finance 100% of the ideas, but history shows that only 40% of the ideas will be successful in raising money via CFI. Not every idea is great and the crowd is able to determine this.  That’s what we call investor protection at work.

They tell us to our faces they are willing to work with us but their quotes in the media reveal the opposite.  They need to join the Internet Age.  The way we did things in the past is NOT the way we will do them in the future.  They need to look at how we mitigate fraud through crowd-vetting.  Understand that social media is based on connectivity and trust.  And using the principles of crowdfunding we can get a limited amount of capital from our friends, family and community to innovate, create jobs and not be left behind China!

We need more of your support to stop the nonsense.  We need your financial support to help offset the costs (travel, marketing, additional rallying, etc) of getting the message to the Senate (Jason, Zak and I as well as Karen Kerrigan of the SBE Council have been incurring all the costs on our own). We also need you to call your Senators and tell them you are in favor of the Crowdfunding bill that went thru the house, HR 2930.  We aren’t looking for long-term financing.  This bill either passes by the end of the year or dies for good as everyone in Washington told us.  Remember January 1st is the beginning of an election year.  The special interests are banking on the fact that we don’t have the interest, support or money of those that this would most benefit.  We need to prove them wrong!

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Helping Fund the Fight to Make Crowdfund Investing LEGAL

Changing the Security Laws isn't easy and it sure isn't cheap. Everything that you see here costs us money. If you support our cause, if you wish to see it legal for entrepreneurs to go to their friends, family and community to crowdfund money, then help us fight the cause with a small donation. You have no idea how much every dollar helps us achieve this goal!
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More Proof that Crowdfund Investing is Less Risky than the Special Interest Opponents Say

22 Nov

The following is an excerpt from Kevin Lawton, the author of the Crowdfunding Revolution.

I recently re-ran a quick study of the risk-vs-reward profile of penny stocks vs initial angel investments in startups (data from the Kauffman Foundation’s AIPP).  See below.  It’s yet another confirmation that early stage investments are actually less risky and have better returns than “penny stocks” (which the public has access to without limitation).

Fraud has been trotted out as the ad naseum bogeyman, but it’s been nothing but a red herring.  Failure is the issue.  Given any degree of risk, a portfolio is necessary to mitigate against investment failure.  So far, I can not find a person (at least one who has any wealth left) who does not have a portfolio.  And thus, for any high-risk asset class where one can lose 50% of the time, having 1% of fraud is a tiny and noisy component in investment failure.

The issue has always been an education thing (i.e. the portfolio).  Beyond that, if a system suppresses crowdfunding in a futile attempt to fight the 1 unit of fraud, it will not only suppress the 99 units of investment, but often a 3x .. 10x economic multiplier (so up to a 1000 units).  Most of the crowdfunding projects tend to have a geographic locality component.  And as Amy Cortese points out in Locavesting, local businesses have a strong local economic multiplier.

But I’m most curious why we are starving private equity of some serious profits and deal flow.  Please see my brief post about how I applied a black-box hedge fund technique to amp up Venture Capital IRR from 30% to 46%.  Allowing crowdfunding platforms to flourish, opens up the door for some bigger players to access investments in smaller companies, and frankly eat some of the VC pie.

Crowdfunding platforms will include crowdsourced diligence & fraudster detection, which will rival the response time and accuracy of anything that Venture Capital has ever seen. We just need the government to get the heck out of the way…

-Kevin Lawton

Author of The Crowdfunding Revolution and serial entrepreneur

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