The following framework is the foundation of HR2930, the Entrepreneur Access to Capital Act that passed the US House of Representatives 407-17 on November 3, 2011. It is also the foundation for S1791, the Democratization of Capital Act submitted in the Senate soon after. President Obama also made reference to this framework in the American Jobs Act.
This framework is the suggested rule under which the law should be made. At the bottom are the shared components EACH CFI site must have in order to register to offer crowdfunded securities to the public. If you wish to add additional components that you believe will increase transparency and reduce fraud, please email those suggestions to us.
Any entrepreneur/business that does not meet the criteria outlined below or “graduates” from the framework would have to comply with existing SEC rules. As with all security-related instruments US anti-fraud provisions prevail.
Last Update: October 27, 2011
- Amount & Class of Shares: A “funding window of up to $1M” for entrepreneurs and small businesses. “Small Business” is defined as one with average annual gross revenue of less than $5M during each of the last three years or since incorporation if the business has existed for less than three years. This definition is consistent with definitions utilized by the Small Business Administration. Straight common shares along with their standard rights as well as Revenue Based Financing (RBF) could be used. Common stock is on par with similarly used shares in early stage rounds of family and friends financing and RBF is a new form of financing where investors own a percent of future revenue for a certain period of time.
- Limit: Investments from unaccredited investors will be capped at $10,000 or 10% of their prior years Adjusted Gross Income (AGI). The $10,000 limit is in line with other established financial disclosure limits like those on banking transfer reporting requirements. Accredited investors will not be subject to any limits. (Note: The vast majority of individuals who choose to make Crowdfund Investments will most likely invest below $500. The current average is approximately $80 on existing crowd funding platforms).
- Risk Disclosure: Given that 60% of Americans now own stocks or mutual funds, there is a certain level of investor sophistication that is greater today than ever before (in the 1930s, only 5% of the population invested their money). In addition, unlike investing in the public markets where individuals rely upon the experience/advice of advisors, people choosing to invest via crowd funding will often be investing in their social networks with people they know and trust. Hence, accreditation should be attached to investors understanding of the risks inherent in this type of investment. Prior to using these platforms, investors will have to agree using current standard verification technology 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.
- 500-Investor Rule: Eliminate the 500-investor limit for Crowdfund Investing via this window.
- State Law: Exempt these offerings from state law registration requirements based on the limited size of the amount that can be raised, but leave intact a simplified and modified state law notice filing requirements, similar to the way SEC Rule 506 currently works but less cumbersome.
- General Solicitation: Allow for general solicitation on registered platforms where individuals, companies and investors can meet virtually, ideas can be vetted by the community as a sort of peer review and individuals can make informed decisions regarding whether or not to invest their money.
- Filing & Reporting: Standardized forms (generic term sheets & subscription agreements) based on industry best practices will be used to maintain transparency and reduce time and expense for all parties. They will be electronically maintained using standardized procedures. Post funding standardized and automated reporting for use of proceeds will be required on a quarterly basis by entrepreneurs. Platforms will provide the SEC monthly 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.
- Platform broker/dealer exemption: Due the small nature of the dollar amount, and the high volume of automated activity, allow facilitation of funding for securities without need for a (FINRA) broker/dealer license by the facilitator, where deals facilitated fall within the constraints of this framework.
- Availability: This exemption shall not be available to foreign issuers, investment companies, and public companies.
- Shared Components: THIS IS A LIVE LIST AND WILL BE UPDATED DAILY. If you have suggestions for tools to be included in ALL CFI sites then please email them to both email@example.com & firstname.lastname@example.org
|Item||Process||Why it Reduces Fraud||Who it Protects|
|SS#, Date of Birth & Address, Phone, email and facebook contact||Registration for an entrepreneur includes these fields. No foreign residents are able to post projects to US citizens. Let entrepreneurs know that their name, city, state, email and facebook contact information will be PUBLIC information. Using internet technology both email addresses and cell phone numbers will have to be confirmed valid.||Entrepreneur will have to agree to a background/address verification (AVS)/credit check. If you’ve committed fraud you cannot post a project. A large percent of fraud originates outside the USA so do not allow foreign entrepreneurs. By providing a way for investors to directly connect to entrepreneurs it reduces fraud.||Investors|
|Credit Card||Every entrepreneur must pay a minimum fee to list their project. Fee should cover cost of background check and address on card must match address on background report||AVS checks to ensure the address entered on the form matches the address to where the cardholder’s billing statements are mailed to. People ordering products and/or services using a stolen card number will never use the real cardholder’s billing address, so this is the CFI platform’s chance to stop the fraud before it’s too late. AVS only works with orders conducted in the US.||Investors|
|Facebook Login||Entrepreneurs and Investors must log in with a Facebook Login||Investors|
|Post a warning message to potential fraudsters||Every Create a Profile page on CFI sites must post a warning message to those who may attempt to make a fraudulent offer. Be sure to mention that IP (Internet Protocol) addresses are being logged. IP addresses can come in handy when locating people about fraudulent orders.||This will greatly deter the number of instances of fraud.||Investors|
|Investor Quiz||Have investors take a quiz or answer the following questions in the affirmative:|
|1) Do you understand that most startups fail?|
|2) Do you understand that you might never see a return on your money?|
|3) Do you understand that these are “restricted shares” and any return will be limited to dividends, stock buy-back, sale, merger or IPO?|
|4) Do you understand that CFI is a high risk investment and like most investments the way to reduce exposure is to diversify (eg: invest in stocks that are not as risky)|
|5) Do you understand that the reason CFI will work is because it is presumed that you have a 1st or 2nd degree relation to the entrepreneur. Do you know him, his idea and business model and trust him?|
|6) Do you understand that it is your responsibility to understand the business idea and how it makes money to decide if it is worthy of your investment?|
|7) Do you understand the that investment offering is an arbitrary amount determined by the entrepreneur and if you do not deem it worthy for the risk, that you shouldn’t invest?|