Startup Exemption

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Answers to the Arguments Against Making Crowdfund Investing Legal – Part 1

January 5, 2012 · 3 Comments

There are two sides to every story.  The same can be said for those who support and those who are against Crowdfunding.  The proponents tend to be entrepreneurs, innovators, and America’s jobs engine.  They are the ones advocating in favor of allowing entrepreneurs to raise a limited amount of capital from their friends, family & community.  They are a fragmented group by nature, heads in the sand, focused on their businesses without deep pockets or the backing of special interests.  The major opponents to crowdfunding are the SEC, FINRA and NASAA.  They are government bureaucratic agencies with a vested interest in the current system, widespread oversight and deep pockets.  Their job is to protect and regulate the large, often complex, public markets.  However they tend to do so at the expense of small businesses.  Overly bureaucratic rules, we see time and again, have a trickle-down effect on small businesses that hamper growth.

The following chart summarizes the arguments for and against Crowdfund Investing.

 

Lobbyists Against CFI

Advocates for CFI

1) CFI will undermine important investor protections and prevent State Securities Regulators from enforcing meaningful parts of state investor protection laws. 1) CFI provides the same enforcement at the community level with hundreds of people, that the highly bureaucratic and costly process of only a few eyes does at the state level. Both State Regulators and users of CFI will actively be regulating the CFI industry: making sure the entrepreneur is real and making sure the investment opportunity is sound. Unless hundreds of people agree together no business will be able to raise their funding round. In addition, CFI users will provide something that State regulators can’t: the ability to decide pre-funding if an idea is worthy through an open dialog between and among the investors and the entrepreneur. Regulators can determine if enough information is disclosed but they cannot control the conversation that will either foster or deter investments. This conversation among the participants is the key element of investor protection that will be handled better by the participants, who have a vested interest in finding the truth, rather than the State Security Regulators.
2) Provisions of the Crowdfunding Bills would preempt the states’ authority to review offerings of “crowdfunded” securities 2) Current State-based regulations do not fit into the way business is done in the internet age.  The SEC will have strong regulatory power over all Crowdfund Investing Websites and only SEC-regulated sites will be able to conduct CFI.  This will limit who can crowdfund and provide a filter of crowdfunded securities.  If startups and small businesses are forced to file with all states, they would spend all of their time and the majority of the funds they raised in filing fees and regulatory process.  Streamlining the process with SEC oversight, while preserving the enforcement powers of states to pursue bad actors is what CFI proposes.  This will lead to more organization and structure for those companies that go on to larger, more traditional rounds of financing that require state review.
3) It is crucial that the states retain full authority to review securities offerings in this area, given the significant fraud in this segment of the market. 3) Before any entrepreneur can use any CFI platform they will have to submit to a fraud/background check.  No other form of current capital raising makes this mandatory.  Unless an entrepreneur’s fraud/background check comes out clean (we also advocate for having a minimum credit score), he won’t be able to raise capital on CFI platforms. The opponent’s argument misses the transparency and speed that the social Web provides in investor protection. If you are confused about transparency think of all the data we emit on the internet on a daily basis.  Any false moves can and will be uncovered and disclosed.  For easy examples think of what happened with Representative Weiner and actor Alec Baldwin – their actions were immediately discussed on the internet: this is the nature and power of Social Media.  Our framework also proposes a “one-touch” filing mechanism so that states can receive a “unified dataset” on a regular basis. This is the same data that they would seek in their review, and much of the same data found on a SCOR filing form. State Regulators fighting to be the ones to control this process will only make the process longer, more bureaucratic, and end up costing more for the same effect.
4) Protections provided by state review are even more essential because companies offering exempt securities under the Crowdfunding Bills will not issue ongoing reports like true public reporting companies. 4) We agree, there is nothing more transparent than communication. The reporting and communication that takes place for public companies is required because of the complexity of their organizations and broad spectrum on their investors.  Public companies need to file public reports so investors can see what they are doing. (Albeit we’d love to see a report of how many investors are reading a corporate’s 10k’s). Because CFI is based on community financing, the social interactivity between the entrepreneur and investors will provide the communication and transparency about what is happening with the company and money invested.  All this information will take place on CFI platforms, which will be open to the community investors as well.  Again, a degree of transparency much more acute than that of public companies. Because of the open nature of the SEC regulated CFI platforms that we are proposing, when one investor has a question, all investors will be able to see the question and the answer. Today, if an investor has a question about a public company chances are it will go unanswered or only addressed at an annual meeting.  CFI will provide immediate and continual reporting.
5) Further, as crowdfunding centers on community investment, the oversight should be vested in the regulator with the most direct interest in protecting that community. 5) Agreed, regulators need to provide the oversight for complex organization for which there is no other advocate for the investor.  In CFI platforms those most directly connected to the community are the entrepreneur and those investing in them.  The difference is now the community has a ‘role’ to play in Crowdfund Investing.  And that role is oversight.  Today more than ever, people aren’t haphazardly throwing money away.  They have seen too much fraud taken place in the “regulated” markets to make them overly optimistic and confident about what someone says they are going to do, nonetheless someone they aren’t directly related.  The oversight is going to be better regulated by individuals that know the entrepreneur and expect him or her to live up to what they say than a 3rd party regulator who is not related to the entrepreneur at all.  Community banks tend to have lower default rates because of the relationship between the banker and the lendee.  The same will be said for crowdfunding.
6) Strongly oppose provisions of the Crowdfunding Bills that would expand the registration exemption under Rule 506 of Regulation D by requiring the U.S. Securities and Exchange Commission to remove the long-standing prohibition against the general solicitation of these offerings 6) Prohibiting general solicitation had a time and place prior to the advent of the Internet and advances in Technology.  Before these advances it was easier for one-to-one fraud (the majority of fraud) to take place.  By restricting the communication channel down to two people it is easier to take advantage of unsuspecting individuals.  By opening up the field of communication to regulated CFI platforms where general solicitation can only take place we still maintain how people are solicited and restrict it to these platforms.  Controlling who and how general solicitation takes place this way will provide the investor protection that the ban on general solicitation was put in place to protect.

 

 

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Crowdfund Investing – The Future of Startup Financing

November 21, 2011 · 13 Comments

Want to learn everything you need to know about crowdfunding to be a success?  Click here or click the image below.

Screen Shot 2014-05-15 at 4.47.39 PM

Buy our Book!

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Startup Exemption is the name entrepreneurs 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 four Crowdfunding bills introduced in Congress and endorsed by the President.  Their first bill passed the US House in November, 2011, 407-17 and the US Senate on March 22, 2012 as part of the JOBS Act with a vote 73-26. The path from idea to law in 460 days can be found at: www.startupexemption.com & www.legalizecrowdfunding.org.

Since the President signed the bill into law, they have started Crowdfund Capital Advisors, a strategy and technology consulting firm for investors, entrepreneurs, governments and NGO’s.  They can be found speaking globally about the shift crowdfund investing is going to make, how it will spur entrepreneurship & innovation and create millions of jobs!

 

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Categories: Funding Gap · Petition · Uncategorized · Woodie Neiss · Zak Cassady-Dorion
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Washington Times: Crowd-funding could boost entrepreneurship

September 28, 2011 · Leave a Comment

Updated regulations would allow investors to find innovators on the Internet 

From the Washington Times.  Click here for article:
Illustration: Crowd funding by Alexander Hunter for The Washington Times

A solution is gaining steam to help spur small-business growth and the anemic state of job creation. It requires updating Securities and Exchange Commission (SEC) regulations regarding general solicitation and accreditation so average Americans can choose to invest in small businesses.

Crowd-fund investing is a common-sense solution that has attracted the interest and support of President Obama. Republican Rep. Patrick T. McHenry of North Carolina recently introduced H.R. 2930, the Entrepreneur Access to Capital Act, legislation that aligns with the general framework supported by the president. So here we have a common-ground idea over which both sides of the political aisle agree on many key details. It’s time to move forward quickly so crowd-fund investing can help capital-starved businesses and our gasping economy.

Nascent entrepreneurs and growth-oriented firms continue to have a difficult time finding capital to expand and innovate. Of course, our nation has counted on the job-creating prowess of small businesses to lead us out of difficult economic periods. This time around, unfortunately, the uncertainties have become too great. New startups, which have fueled job creation following previous recessions, have not taken root at the same pace as in the past.

Weak demand, tight capital and credit markets, and policy uncertainties continue to erode confidence and entrepreneurial activity. The crowd-funding solution addresses a key concern that would help entrepreneurs identify new sources of capital, thus providing optimism and much-needed resources for investment and growth.

America, the land of opportunity, is being out-innovated. Other places, such as the United Kingdom and France, with similar capital constraints have already made crowd-fund investing legal. The crowd is vetting the ideas of entrepreneurs and backing only those they deem worthy. Fraud – a key issue of concern for regulators and legislators alike – hasn’t reared its wicked head, thanks to hundreds if not thousands of prospective investors picking apart the idea, the business model or the execution plan of the entrepreneur for bringing his goods or services to market. These discussions and vetting occur in open dialogues on Internet platforms.

While not allowable under existing U.S. securities laws, crowd-fund investing can provide a way for micro-angel investors, both accredited and unaccredited, to pool their individual small investments to support entrepreneurs and enterprises that have merit. If changes are made in U.S. laws, the funding rounds can occur via SEC-regulated websites. These websites will provide transparency, open communication, accountability and reporting among the investors, entrepreneurs and theSEC. This is an expanded version of “friends and family” fundraising, which uses an individual’s or business owner’s social networks to create jobs and grow the economy.

Mr. McHenry’s bill would provide a crowd-funding exemption to SECregistration requirements for firms raising up to $5 million, with individual investments limited to $10,000 or 10 percent of an investor’s income. The exemption would erase limits on the number of investors until the first $5 million of capital is raised. This exemption provides smaller investors an opportunity to support startups, which currently is not an option under SEC regulation.

In my recent testimony before the House Committee on Oversight and Government Reform subcommittee that Mr. McHenry chairs, I noted some other key provisions that may be considered to address fraud and accountability concerns. For example, there could be a requirement that investors take a brief online course about crowd-fund investing and review a series of disclosures that demonstrate they are familiar with the basics of investing and understand the risks.

In addition, general solicitation should be allowed only on registered Internet platforms where entrepreneurs and investors can meet and the crowd can vet in an open and transparent manner. Standards-based reporting would be submitted to the SEC by small businesses using the platform. A project would not get funded until it met its minimum target. It would be an all-or-nothing proposition. Only if the target was reached would money be withdrawn from donor accounts.

The proposed reforms to existing law are modest and follow the spirit of the Securities Act of 1933 and the Exchange Act of 1934. The modifications include anti-fraud safeguards and create a peer-to-peer system in which communities become the de facto seed and early-stage funders to entrepreneurs. There is wisdom in crowds. They are massively diverse and have a better collective intelligence. Every investor contributes to the crowd’s knowledge. An interconnected, knowledgeable crowd brings more experience. Together they will fund ideas that help small businesses – and the investors themselves – succeed.

A crowd-funding model, of sorts, has been taking place successfully online for the past five years. The current model allows a group of people to pool their money and “donate” it to fund an idea. More than $300 million has been donated to more than 500,000 artists, musicians and developing world entrepreneurs. Imagine what could be accomplished if investment dollars were devoted to promising U.S. entrepreneurs whose ideas only need the capital to launch into the marketplace?

Now it’s time to take action. Americans need to be allowed to do what they do best: come together as one to out-innovate, outproduce and outwork the rest of the world. The only question: How long will it take for our government to let us?

Sherwood Neiss, an entrepreneur, is founder of Startup Exemption and a member of the Small Business and Entrepreneurship Council.


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Academic and Legal Experts Speak Out – SEC Rules Hinder Capital Formation for Entrepreneurs

August 20, 2011 · 1 Comment

The following are some of the academic reports written about the current SEC rules and why they prohibit access to capital for small businesses & entrepreneurs:

Proceed at Your Peril: Crowdfunding and the Securities Act of 1933, Tennessee Law Review. Joan MacLeod Heminway & Shelden Ryan Hoffman, August, 2011

Crowdfunding Microstartups: It’s Time for the Securities and Exchange Commission to Approve a Small Offering Exemption, University of Pennsylvania Journal of Business Law.  Nikki D. Pope, August, 2011

Petition for Rulemaking: Exempt Securities Offerings up to $100,000 with $100 Maximum per Investor from Registration. Sustainable Economies Law Center. Jenny Kassan, July, 2010

SEC Regulations Barricade The Crowdfunding Floodgates, The Crowdfunding Revolution.  Kevin Lawton, November, 2010


Capital Offense: The SEC’s Continuing Failure to Address Small Business Financing Concerns, New York University Journal of Law and Business.  Stuart R. Cohn & Gregory C. Yadley – Fall, 2007

Security Regulations and Their Effects on Small Businesses, California Research Bureau. Rosa Maria Moller, Ph.D. - April, 2000

 

 


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