Tag Archives: Patrick McHenry

Crowdfunding Update.

David Drake of LDJ Capital and TheSohoLoft.com continues today with his sixth article on his series regarding CrowdFunding for equity solutions, reprinted here with his permission.

Perhaps it was no surprise when Mary Schapiro, Chair of the Securities and Exchange Commission, told a House subcommittee that the Securities and Exchange Commission will not meet the July 4, 2012 deadline imposed under the JOBS Act to implement rules for lifting the general solicitation ban under Regulation 506, Section D (advertising rules).

Ms. Schapiro explained to the House Committee on Oversight and Government Reform on June 28, 2012 that the JOBS Act mandates that the SEC create rules that will require issuers to verify that they are accepting investments only from accredited investors who are responding to a general advertisement. Creating such rules are difficult and will require more time. “We want to create something that is workable and usable,” she said. The SEC Chair expects that general solicitation rules will be issued “this summer.”

The SEC’s commitment to provide general solicitation rules this summer is encouraging and badly needed. Representative Patrick McHenry probably summed up the urgency for the rules the best by advising Ms. Schapiro: “Entrepreneurs are waiting and we urge you to move forward with that.”

As the SEC develops rules for general solicitations, issuers must understand that they will need to move cautiously if the plan to use general advertisement to solicit offerings. The JOBS Acts require that issuers verify that they are accepting investments only from accredited investors under the SEC Act. The SEC rules ultimately will determine what verification process is needed and whether any safe harbors are available. We suggest that issuers looking forward to make general solicitations stay apprised of developments as the SEC formulates its rules, so that issuers are prepared to move forward when the rules go public.

The Securities & Exchange Act in 1933 required that only accredited investors could be solicited for investments and non-accredited investors could not be unless they had an exemption through Reg A, Reg D, a Direct Public Offering or a registered security being traded on an exchange.

Under the 1933 Act, the accredited investor was considered someone who made $200,000 per year the previous 2 years and expected to make $200,000 the following year or a couple making $300,000.  Under a later amendment adopted in 1982, another criteria that would allow you to qualify as an accredited and sophisticated investor would be that you had a net worth of $1,000,000.

While the Dodd Frank Act was under consideration, the SEC pushed for a high net worth amount for an accredited investor. This was highly opposed and removed. What was accomplished out of the Dodd Frank Act was:

a) The equity of your primary home would not count towards your net worth.

b) Debt surpassing your equity would count against your net worth.

c) The equity in your summer / vacation / secondary home would count towards your net worth.

The Dodd Frank Act also prohibited the SEC from adjusting the net-worth threshold for a natural person for four years.

If you take inflation into consideration, the $200,000 per year salary in 1982 would be the equivalent of approximately $1,000,000 today, and the net worth requirement set in 1982 would represent a net worth of approximately $10,000,000 today. Wow, that would not leave many people to invest. Another argument would be that are only rich people entitled to invest in private and exciting deals? Are the select few that made money on Facebook the only ones to ‘give it’ to the less rich?

Granted, $200,000 makes you rich today but I was alluding to the rich just like their counter parts in 1933. Remember, the SEC 1933 & 1934 Act was created to protect the non-accredited investors from fleecing but also to assure that they did not leverage their home 99% and spend all their money on stocks that would not only be worthless but put them jobless and homeless. The 1929 crash that led to the great depression was extreme.

While the status quo remains for determining the financial threshold of an accredited investor, a fundamental change is approaching on solicitation. Currently, any issuer intending to rely on Rule 506 of Regulation D cannot engage in any general solicitation or advertising to attract investors. The Jumpstart Our Business Startups Act (JOBS Act) directs the SEC to remove this prohibition, which the SEC expects to implement during the summer of 2012.

Here is a little history on the non-solicitation rule. Be reminded that there was no TV or internet in 1933. The ban on solicitation to non-accredited investors forced brokers and companies to only talk to ‘rich’ people for investments, that is, the accredited investors. The JOBS Act asked the SEC change the writing in 90 days – that is July 4th, 2012 – Independence day – at which point advertising online, via email to millions or on TV would allow you to advertise you wanted capital for your stock to the general public.

Note, you still could only take money from accredited investors but the monumental change is that you can freely advertise wildly. Yet again, you would lose your exemption status under Reg D 506 if you took one single non-accredited investor and they decided to sue you later for loss of capital — a rare occasion but a legal premise that may hold true. So, will this amendment be implemented by July 4th and we will see media go bananas with everyone with their mother advertising stocks of private companies you can buy?

No, the SEC will not allow such madness as they will implement a safe harbor to assure that the ‘accreditation” of an investor through this means is verifiable and not necessarily just self-monitored by the issuer.

David Drake is a founding board member of CFIRA. Crowdfund Intermediary Regulatory Advocates, or CFIRA, was established following the signing of the Jumpstart Our Business Startups (JOBS) Act. CFIRA is an organization formed by the CrowdFunding industry’s leading platforms and experts. The group will work with the Securities & Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other affected governmental and quasi-governmental entities to help establish industry standards and best practices. For more information, visit http://www.CFIRA.org. Connect with TheSohoLoft at facebook.com/TheSohoLoft and sign up for newsletters at www.thesoholoft.com, or contact Donna Smith, Communications Manager, for more information at 212.845.9652 or via email at donna@LDJCapital.com.


Congressman McHenry Promotes His Crowdfunding Bill And Trashes Competing Senate Legislation.

Congressman McHenry promotes his crowdfunding bill, trashes competing Senate legislation

© Image: Eric Blattberg / Crowdsourcing.org

Representative Patrick McHenry (R-NC), the driving force behind the H.R. 2930 crowdfund investing bill currently under consideration in the U.S. Senate, discovered crowdfunding the same way many of America’s college frat houses sate their thirst: through Pabst Blue Ribbon.

Scrolling through his twitter feed, McHenry stumbled upon a tweet by advertising executive Michael Migliozzi II asking people to invest in Pabst Brewing Company for as little as $5 dollars. By the end of February 2010, roughly five million Americans had pledged over $200 million dollars to own a stake the ailing brewing company. Of course, the five million funders ever-so-slightly surpassed the U.S. Securities and Exchange Commission’s 35 unaccredited investor limit, so the SEC put a stop to the purchase — but for McHenry, the PBR experiment demonstrated the massive potential of crowdfund investing.

In an economic environment where the dollar faces increasing pressure, where bank lending is scarce and expensive, where 25 million Americans are out of work, we cannot afford to “operate under the same rules and regulations … we used in the era of the rotary telephone,” said Representative McHenry Monday at the SoHo Loft Capital Creation and Crowdfunding Conference in Manhattan.

Representative Patrick McHenry, left, chats with event attendees (Photo: Eric Blattberg)

Onerous regulation is holding back businesses seeking to raise capital, argued McHenry, and nowhere is that more apparent than in state regulation. Under current state regulations on securities registrations, for example, “If you raise [capital] from 30 individuals in the state of Connecticut, you’re limited to only five in the state of Colorado,” scoffed McHenry.

After listening to testimony from the folks at Startup Exemption, McHenry drafted H.R. 2930, “The Entrepreneur Access to Capital Act.” Based largely on Startup Exemption’s proposed  crowdfund investing framework, the bill creates crowdfunding exemptions for firms and businesses seeking to raise up to $2 million dollars through online platforms — or “portals,” as McHenry calls them. It also includes a threshold of $10,000 or 10% of income as the individual investment cap, removes the ban on general solicitation by preempting the Blue Sky Laws, and overrides state regulatory authority. McHenry feels that “light-touch regulation” from the SEC is sufficient, though he failed to specify precisely what actual mandates the organization plans to enact.

McHenry’s original H.R. 2930 proposal changed as it continued its journey to become law — he originally proposed a $5 million investment cap, compared to the modified $1 million limit (or $2 million if a company audits its financials) — but such is the nature of lawmaking. House Republicans and Democrats worked together to amend the bill, originally one and a half pages, to its the current dozen-page format. A result of rare bipartisan cooperation and compromise, the bill sailed through the House with an overwhelming 407–17 majority vote. It even garnered a statement of support from the Obama administration. “To get a bipartisan bill through the House of Representatives — and to get President Obama to sign on — is kind of the equivalent of getting [JPMorgan Chase CEO] Jamie Dimon down to Zuccotti Park to play in the drum circle,” joked McHenry.

Some senators weren’t satisfied with H.R. 2930, however, opting to introduce their own competing legislation. Jeff Merkley (D-OR) proposed S. 1970, and Scott Brown (R-MA) put forward S. 1971 (more details here). Even if H.R. 2930 flounders and dies in the senate — as McHenry worries it might — he would not support either of the senators’ proposals in their current forms. “They don’t open the space up enough,” said McHenry of the senators’ crowdfunding legislation. “They don’t preempt Blue Skies, they don’t allow enough dollar raising … and the Merkley bill still demands state regulation.”

As previously mentioned, H.R. 2930 is currently awaiting review in the Senate. “Most good things go to the Senate to die,” declared McHenry. “We have to make sure this legislation does not die so we can free this space up and actually get capital flowing. That’s what it’s all about.”


Legislation To Help Startups Raise Funds.

It seems a bit odd that a background in lobbying could be a key strategy in launching a technology startup.

Former lobbyist and current start-up founder Candace Klein is garnering political support for a newly-proposed U.S. House of Representatives bill (HR2930) that would allow any business in the United States to use crowdfunding to raise funds. The Republican-sponsored bill, called the Entrepreneur Access to Capital Act, passed the House 407-17 a few weeks ago. It also has the endorsement of President Barack Obama.

If passed in the Senate and signed into law by President Obama, the bill would help Klein take her new startup company, SoMoLend, and several others, including iSellerFINANCE.com, nationwide.

The online platform, launched this week, allows any small business to use social media sites like Twitter, Facebook and Linked In to raise small amounts of money for their business. Those could range from restaurants and jewelry stores to landscapers and accountancies.

But current laws require that borrowers be licensed with the U.S. Securities and Exchange Commission (a $20,000 filing fee per state, aka $1,000,000) in order to accept funds from sources other than traditional banks, accredited lenders or friends and family. That adds significant cost to any of  the P2P lending site borrowers who’d like to accept funds from strangers.

“The law was meant for businesses raising millions in capital, and for wealthy investment banks like Goldman-Sachs” says Klein, also founder of Bad Girl Ventures. “It doesn’t make sense if the business is raising $1,000 or $50,000.”

For Klein, the bill’s passage is the difference between SoMoLend completing 10,000 loans in a year and a million.

“We could still operate, but it would be so cumbersome and expensive that very few people will ever utilize the technology,” she says.

Klein met with Ohio Congresswoman Jean Schmidt in recent weeks and asked her to sponsor the bill. Next week, Klein visits Washington D.C. to appear before the U.S. Senate’s banking and finance committee, where the bill lands next. Ohio Congressman Sherrod Brown is a member. She’s also scheduled meetings with Ohio Congressman Rob Portman and Congressman Patrick McHenry of North Carolina, who introduced the House bill.

“For one Cincinnati business, this is the difference between success and failure,” Klein says.


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