Startup Exemption

Entries tagged as ‘Crowdfunding SRO’

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

March 28, 2012 · 1 Comment

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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US House Approves Senate Version of Crowdfunding! Off to the President!

March 27, 2012 · Leave a Comment

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Crowdfunding Industry to Unite Behind Regulatory Organization to Protect Investors

March 23, 2012 · Leave a Comment

PRESS RELEASE

March 23, 2012, 2:29 p.m. EDT

Crowdfunding Industry to Unite Behind Regulatory Organization to Protect Investors

WASHINGTON, DC and NEW YORK, NY, Mar 23, 2012 (MARKETWIRE via COMTEX) — With the passage of the JOBS Act, the Crowdfunding Industry is uniting behind a Self Regulating Organization (SRO) to monitor and oversee this new marketplace and ensure investor protection. The Crowdfund Intermediary Regulatory Association will commit to providing investor protection and market integrity through effective and efficient regulation of those within the crowdfunding industry. CFIRA will create rules, oversight and a united voice for the CrowdFund Investing platform companies as the industry is formed. CFIRA announced today that the founding partners will be:

  • Startup Exemption, The CrowdFund Investing authors that wrote the framework for the Crowdfund legislation passed by Congress.
  • The SoHo Loft Capital Creation (TSLCC) Events, the definitive event platform for the private markets aimed at facilitating capital
  • formation and job creation.
  • Gate Technologies & GATE Impact, a platform and electronic marketplace and that provides regulatory compliant private market transactions.

CFIRA is a membership organization that includes members of the CrowdFund Investing and donation-based crowdfunding community as well as representatives of related industries including angel and venture capital firms. CFIRA will provide intermediaries with regulation, reporting, and compliance oversight and will provide investors with educational tools to help make more informed decisions about the opportunities and risks of CrowdFund Investing. CFIRA is committed to working with the SEC to create reasonable and appropriate regulations and oversight to reduce fraud and protect investors.

“Empowering Entrepreneurs to access limited amounts of capital to innovate and create jobs is an important part of this organization’s strategy,” said Jason Best, Co-Founder of Startup Exemption.

“With uniform rules developed by the Industry that include social media, intermediaries will provide a regulated environment for CrowdFund Investing to take place with transparency and investor protection,” added Sherwood Neiss.

“Both the legislation and the industry acknowledge the need for proper oversight to maintain efficient and effective marketplace. Particularly given the new nature of crowdfunding, delivering education that informs investors on the risks and opportunities of investments is the only way a viable industry can be created,” stated David Drake, Co-Founder of The SoHo Loft Capital Creation Events.

“Organizations like these are good for our economy, good for the industry, and an essential part of our approach toward a secure and transparent marketplace that works for all Americans,” concluded Vincent Molinari CEO of GATE Technologies.

Inspired by the JOBS Act, CFIRA is an industry-led effort that allows CrowdFund Investing intermediaries to register to oversee their operations in a way that is akin to other SROs that oversee the financial markets.

About Startup Exemption Startup Exemption is the name Sherwood Neiss, Jason Best and Zak Cassady-Dorion created to describe their CrowdFund Investing (CFI) framework. The framework is an exemption under Regulation D Securities Offerings that would allow startups and small businesses to raise a limited amount of seed and growth capital from their social networks using SEC-registered websites. Their framework was the basis for the three Crowdfunding bills considered by Congress and was endorsed by the President. It passed the US House in November, 2011, 407-17 and the US Senate on March 22, 2012 as part of the JOBS Act 73-26. The path from idea to law in 579 days can be found at: www.startupexemption.com .

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; CIOs of investors; merchant and investment bankers; VCs; family offices; incubators; private equity firms; pre-IPO mutual funds; equity analysts; entrepreneurs; legislators and legal and tax professionals 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 help develop the infrastructure of the rising private markets so that it may 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 .

About Gate Technology GATE Technologies is an innovative financial technology company creating a new market infrastructure for bringing efficiency, transparency to the unstructured global alternative asset markets. The company offers fully automated, customizable solutions for qualified investors with value-added content and analytics, transparent execution, and dematerialized settlement, clearing, and depository functions. GATE Developing Markets will work together to create the first global common infrastructure for illiquid securities, with a goal of enabling all market participants. www.gatetechnologies.com

About GATE Impact GATE Global Impact LLC is the impact investing-focused subsidiary of GATE Technologies, LLC., GATE Impact provides market infrastructure and related services for the emerging impact investment industry — public and private investments with a sustainable social and/or environmental component that also generate a healthy rate of financial return. www.gateimpact.com

Vincent Molinari
Vmolinari@gatetechnologies.com
631-692-9350

Jason Best
jason@startupexemption.com
415.999.2271

Sherwood Neiss
sherwood@startupexemption.com
202.247.7182

SOURCE: GATE Technologies

mailto:Vmolinari@gatetechnologies.com
mailto:jason@startupexemption.com
mailto:sherwood@startupexemption.com

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