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 They are more concerned with clinging to outdated laws written 78 years ago than the economic needs of our country.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.
In tonight’s State of the Union Address the President said the following to a loud round of applause: “It means we should support everyone who wants to work and every risk taker and entrepreneur who espires to become the next Steve Jobs. After all innovation is what America has always been about. Most new jobs are created in startups and small businesses. So let’s pass an agenda that helps them succeed. Tear down regulations that prevent aspiring entrepreneurs from getting the financing to grow. Expand tax relief to small businesses that are raising wages and creating good jobs. Both parties agree on these ideas. So put them in a bill and get it on my desk this year!”
Crowdfund Investing is the zero-cost government initiative he is discussing that can create millions of jobs! The President gets it. The House of Representatives gets it! Now we have 2 bills in the Senate. Let’s get this on the desk of the President NOW so that we can get back to innovating and creating jobs!
With all the time and attention that fraud has received, we wanted to talk about a much more important issue, failure. Failure of early businesses happens 50% of the time – that’s just a fact of nature. If we were to hold that fraud would happen 1% of the time, then failure is 50 times more important in risk mitigation for investors. And nearly all Americans who invest in the public markets already mitigate against the risk of “losing it all” by way of holding a portfolio. Diversification has been practiced for centuries, and it’s no different in any asset class, be it public equities, commodities or crowdfund investing.
We believe that prudent risk and fraud mitigation currently in HR2930, along with law enforcement provisions in the bill preserve the power of state and federal officials to aggressively pursue those who commit fraud. Now, let’s create a plan to help more honest businesses succeed.
KNOWLEDGE & EXPERIENCE
When entrepreneurs talk about failure they talk about the lessons they learned and the experience they gained which is less sexy to the media than fraud. In crowdfund investing, the entrepreneur has access to his investors to gain knowledge and experience from them in order to attempt to reduce the rate of failure. The transparency and ease of many to many communication benefits all.
When investors talk about a stock’s failure, they always focus on the critical importance of diversification. WHY? Because everyone knows, a diversified portfolio is the best security against loss. Why focus on educating people about portfolio diversification when it is easier to claim crowdfund investing will open the floodgates to fraud?
So why do we bring this up? Because the opponents want you to focus on something that will grab the media’s attention (fraud).This also distracts the debate while trying to prevent regular Americans from supporting entrepreneurs with their own dollars.
There are entrenched interests that don’t want you to focus on how getting capital to entrepreneurs will stimulate innovation. They clearly don’t talk about alternative solutions. AND most importantly they don’t want to lose jurisdiction over the business and revenue they are currently generating. These are areas we hope the media starts to look into more fully.
Much of our new information economy is based on new ways of connecting people. Preventing entrepreneurs from soliciting financing from their fans and potential customer base, equates to a massive form of economic suppression. And it’s a suppression of the most powerful human right ever given, the 1st Amendment.
If the opponents took the time to think it through, they’d see that fraud is no more of an issue than in other forms of investing. With prudent safeguards in place, let’s focus the majority of our energy on the real issues – continued education about diversification.
Think we are wrong? Please tell us why. How does one “lose it all” when holding a portfolio of businesses? How does suppressing platforms which will drive Yelp-like crowdsourced checking & reviews of entrepreneurs help prevent fraud?
There has been a lot of progress to date in our effort to make Crowdfund Investing (CFI) legal. The proponents, including the President who included our framework in the American Jobs Act as well as leading Republicans on the Hill who introduced HR 2930, otherwise known as the Crowdfund Investing Act, get it.
Capital is hard to come by.
Wall St isn’t focused on entrepreneurs.
The banks aren’t lending and private money is only for a select few.
Since donation-based crowdfunding is working, let’s apply those tenants to equity-based crowdfunding and get capital flowing to entrepreneurs; also known as our nation’s net job creators.
The model we propose is itself, a self-vetting mechanism that utilizes the Internet, and the wisdom of crowds to help mitigate risk for investors. CFI isn’t free money. In a time of recession folks are even more cautious about their money and no one is going to look at this as a way to make a quick buck, entrepreneur, investor or crook. The crowd is more skeptical than ever before. And only those entrepreneurs that are transparent and accountable will be successful in raising capital, forming businesses and hiring Americans.
However the naysayers are surfacing.
A number of them can be dismissed because they do not want another competitor in the capital markets. (Our response to them is, step up to the plate and fund our nation’s entrepreneurs at the same degree or better than prior to the financial meltdown).
Another group are just naysayers with no solution, just vague fear mongering with little data.
And the final group is the conspiracy theorists that believe (with no hard data) it will open the floodgates to fraud. We adamantly refute this.
First, naysayers need to understand the framework and rules under which we are proposing CFI to take place. An entrepreneur wishing to raise capital would have to:
Submit to a background/fraud check (name, address, social security and date of birth) to ensure he hasn’t committed fraud.
He would have to pitch his idea on SEC-registered Crowdfund Investing platforms.
These platforms will be required to perform the fraud checks and contain an investor education component.
Investor education and terms of service will warn investors to only invest in people they know, products or services they believe in, entrepreneurs whom they can talk to about the idea and only those ideas that have the greatest number of 1st degree connections. eg: You can feel confident backing an entrepreneur with 89% first degree (meaning they know him personally) investors that represent at least 89% of the committed capital. However, you should be skeptical of an entrepreneur that only has 24% first-degree backers and they have only ponied up 10% of the amount needed. All of this is easily tracked and graphically displayed with standard web tools.
The platforms will enable open dialog where potential investors can pick apart the idea, the entrepreneur’s experience, the business model and the amount of equity offered. The entrepreneur will have to respond to each of the comments to the satisfaction of the crowd. The crowd will vote on the answers by using the “like” button. A higher number of likes the more confidence investors will have again. If an entrepreneur doesn’t answer the questions to the satisfaction of the crowd he/she won’t be funded, period. Again all of this can be tracked and graphically displayed for potential investors to see.
Our proposal is an all or nothing financing window. If a fraudster is trying to bilk people out of $1M and he hits a funding target of $999,999.00 he won’t be funded and no money will be exchanged. Anyone who is trying to raise capital will have to set small milestones and raise smaller amounts of capital, hit their milestones and go back for more with proof that they’ve achieved what they said they were going to do.
Of course, they will have to be transparent and communicate with their investors or again they won’t have the confidence going forward to raise additional money.
Another trigger will be the percent of 1st round investors that come back for a second round. The higher that percent the more confidence. The lower, the less likely they will raise additional funds.
So still think fraud can take place with all these triggers? If so, give us the example and let’s work it thru the model.
ps – Remember, this exemption is not be available to foreign issuers, investment companies, and public companies.
Last night President Obama delivered a speech to the nation in front of both houses of Congress. During his speech he laid out his plan to create jobs and jumpstart our economy.
He had the following to say: “Everyone here knows that small businesses are where most new jobs begin. And while corporate profits have come roaring back smaller companies haven’t.” “Ultimately our recovery will be driven not by Washington but our businesses and our workers. We can help.” “I agree there are some rules and regulations that do put an unnecessary burden on businesses at a time when they can least afford it.” So “we are … planning to cut away the red tape that prevents too many rapidly growing startup companies from raising capital and going public.” “We should have no more regulation than the health, safety and security of the American people required. And every rule should meet that commonsense test.” “We should be in a race to the top and I believe we can win that race.” “And it has been the drive and initiative of our workers and entrepreneurs that has made this economy the engine and envy of the world.” “Members of congress it is time for us to meet our responsibilities”
Today his Jobs Act was released with the following paragraph pursuant to his speech.
Reducing Regulatory Burdens on Small Business Capital Formation: As part of the President’s Startup America initiative, the Administration will pursue efforts to reduce the regulatory burdens on small business capital formation in ways that are consistent with investor protection. This includes working with the SEC to explore ways to address the costs that small and new firms face in complying with Sarbanes-Oxley disclosure and auditing requirements. The administration also supports establishing a “crowdfunding” exemption from SEC registration requirements for firms raising less than $1 million (with individual investments limited to $10,000 or 10% of investors’ annual income) …. This will make it easier for entrepreneurs to raise capital and create jobs.
The bolded line comes directly from what the Startup Exemption has been advocating within its networks in Washington, DC! Sherwood Neiss, the entrepreneur and Chief Advocate for the Startup Exemption said, “It is AMAZING to see Washington come together over this issue. Crowdfund Investing (CFI) is an AMERICAN opportunity. It has the ability to get capital flowing to our nation’s struggling entrepreneurs so that they can grow and hire. Our zero-cost government initiative has the ability to create over 500,000 companies and 1.5M net new jobs over the next 5 years.”
President Obama is pushing congress to enact the Jobs Act. If passed, the crowdfunding changes advocated by the Startup Exemption will be the first changes to the security laws in the past 20 years.
Next week President Obama will be talking about a plan to create jobs in America. Finally a subject both parties should be able to agree upon; jobs! The premise behind his action is correct, however his focus is not.
While we are in favor of improvements that advance our education system and infrastructure to keep us competitive in the world, the real long-term opportunity to pull us out of this recession lies in the hands of our nation’s entrepreneurs and the confidence we as a nation have to help them succeed.
Both the SBA and the Kauffman Foundation for Entrepreneurship will tell you that the bulk of net new jobs (those jobs created less jobs lost) during prior recessions came from small businesses and entrepreneurs.
So logically, helping foster the entrepreneurial engine in the USA will foster innovation, businesses and jobs; undoubtedly in a multiple of what our government can do through public stimulus.
However, the traditional capital that our nation’s entrepreneurs used prior to the financial meltdown has disappeared – I know I tried to raise capital for 2 ideas I have and I’m a seasoned three-time INC500 entrepreneur.
There’s a solution gathering support and it only exists today because of advances in the Internet and Technology. It is based on Crowdfunding where entrepreneurs pitch their ideas to average Americans and let them decide which ideas they would back with a few dollars in exchange for an equity stake in the company.
This form of investment is illegal in the USA because it breaks 80 year-old Security Laws on public solicitation and accreditation. However, American’s today are more sophisticated than they were 80 years ago, they have seen the financial crisis firsthand and are more skeptical than ever before freely giving away their hard earned cash. Go ahead, try and ask a group of 1,000 people for $50 each and see how successful you are.
If we can update the security laws to make equity-based Crowdfunding (aka Crowdfund Investing) legal, then we can put the power in the hands of the American people to decide which of their community entrepreneurs they want to back and those that they do not. The ones that rise to the top will not only have access to a small amount of critical seed capital that doesn’t exist in the markets, but knowledge, experience and marketing power from their supporters. Think about it. If you own Apple stock chances are you have an iPhone and rave about it. Subsequently, if you want to back your friends Korean BBQ Food Truck or Internet Startup, chances are you will not only be a consumer but an advisor and marketing agent for them as well.
Direct ownership will not only increase the chance of success (as social networks have time and again shown the ability of the crowd to rally behind an idea) but first-hand ownership will help entrepreneurs succeed thru shared knowledge and experience. More small successes will lead to an increase in consumer confidence, which is a direct economic indicator.
We are on the verge of a double dip recession. No one trusts our government. Let’s put something on the table that is good for the country that both side should be able to agree upon; a zero-cost framework that provides a limited amount of capital flow to entrepreneurs that has the ability to stimulate innovation and jobs, in a fashion that both mitigates risk and provides for investor protection.
The White House and The SBA launched the Startup America website with the goal of promoting entrepreneurship in the USA. To help them understand the problems and issues facing entrepreneurs, they asked this simple question:
To date there have been over 200 replies. Over 25% of those replies have to do with capital formation! No other issue adds up to as high a percent as that. And the suggestions range from access to capital to tax credits to regulatory changes.
Now is the time! Our idea is part of the solution! Thank you all for your support and let’s tell Washington to make it legal for the average American to take a few dollars and invest it in our community entrepreneurs!
Every week we see further proof of the ability of crowd funding to get cash flowing and our economy growing. The SEC, however, has yet to make any changes that would make equity-based crowd funding (aka Crowd Fund Investing) legal. The latest proof came when Michael Migliozzi II and Brian William Flatow started a crowd funding campaign to purchase Pabst Brewing Co. They created an online campaign and used the their social media channels, Facebook and Twitter, to spread the word. Amazingly, they were able to get 5 million people to agree to pony up $200 million!
The SEC found out about the money raise and put a stop to it. According to reports, Migliozzi and Flatow neglected to register the offering with the SEC. They also targeted unaccredited investors and did so in a public fashion. And 5 million people is a tad bit more than the 35 unaccredited investors the SEC currently allows under its existing exemptions.
Granted, what these gentlemen were doing was in excess but it proves a point. There is an interest on the part of the average American to support ideas they believe in. Not only that, they are willing to part with a few dollars to make it happen. While raising $300 million on the Internet isn’t probably the most smartest thing, allowing entrepreneurs to raise a limited about of seed or growth capital via crowdfunding platforms is.
That is what the Startup Exemption is all about. We have developed a framework that will allow entrepreneurs to raise up to $1 million from their community. The Pabst campaign while worthy would not be allowed under our framework because of the size. Our goal is to help fund the ideas that will lead to great companies and use the collaborative know-how of the crowd to not only provide financial support but critical knowledge and experience.
It is important to note that the SEC was able to easily stop this campaign because of the transparency of the media and the internet. The more information (aka transparency) there is out there the less chance there is for fraud. By design, the internet is open for all to see. Fraud will never be eradicated but with transparency it will be greatly reduced. When the SEC puts our framework in place Crowd Fund Investing platforms will have safeguards to ensure the danger of fraud is kept on par with similar classes of investment.
With the interest from the masses, the time is ripe for the SEC to implement our suggested framework.