Tag Archives: House

Crowdfunding Bill Passes Senate!

Senate passes small business investment bill.

I have posted 6 blogs about this topic since January. Thank you all for your letters to your Senators and Congressmen. I am sure your voices helped make this happen. This post is a little wonky, so if you don’t care about the grisly history of getting controversial legislation passed, just read the first few paragraphs.

President Barack Obama supports the measure, which stands to be one of the few bipartisan bills to pass Congress during this politically contentious election year.

Legislation to help startup companies raise capital by reducing some federal regulations won easy passage in the Senate last Thursday despite warnings from some Democrats that less government oversight would mean more abuse and scams.

Sen. Pat Toomey, R-Pa., a leading sponsor of the legislation, said it “might be the most pro-growth measure that this body will consider, perhaps this whole year.”

Democrats did manage to pass one amendment to increase investor protections, so the legislation will still require another House vote. The House passed the measure two weeks ago on a 390-23 vote. The Senate vote was 73-26, with all the “no” votes coming from Democrats.

House Majority Leader Eric Cantor, R-Va., said he would schedule a House vote next week “so we can get this bipartisan jobs bill to the president’s desk for his signature without delay.” That would be THIS week!

The legislation combines six smaller bills that change Securities and Exchange Commission rules so small businesses can attract investors and go public with less red tape and cost. It eases rules on advertising and permits startups to use the Internet and other social media to solicit a large number of small-scale investors.

The measure sailed through the House with almost no opposition but met resistance in the Senate after SEC Chairman Mary Schapiro and numerous consumer and investor groups expressed concerns that it dismantles some of the protections put in place after the Enron scandal and the excesses of the dot-com era. Senate Democrats demanded that investor protections be added to the bill.

On Tuesday, the future of the bill seemed in doubt when Senate Republicans rejected Democratic attempts to add protections to the bill and link it to reauthorization of the Export-Import Bank, an agency that helps U.S. companies finance their sales abroad. The Democratic leadership decided to move ahead after deciding on two amendments that addressed some, but not all, of the investor protection concerns.

That wasn’t enough for some Democrats. The Senate’s no. 2 Democrat, Dick Durbin of Illinois, said the bill would “allow companies to use billboards and cold calls to lure unsophisticated investors with the promise of making a quick buck investing in new companies.” Absolute NONSENSE.

“We are about to embark upon the most sweeping deregulatory effort and assault on investor protection in decades,” Sen. Carl Levin, D-Mich., said.

The centerpiece of the bill is a measure to reduce costs for companies seeking to go public by phasing in over five years SEC regulations that apply to “emerging growth companies.” That status would be in effect for companies with annual gross revenue of less than $1 billion.

The measure would remove SEC regulations preventing small businesses from using advertisements to solicit investors, raise from 500 to 2,000 the number of shareholders a company or community bank can have before it must register with the SEC, and allow smaller companies to sell up to $50 million in shares, compared with $5 million now, without filing some SEC paperwork.

It also encourages the practice of “crowdfunding,” in which the Internet is used to raise capital from a large number of smaller investors. The measure as it passed the House limits individual contributions to $10,000 or 10 percent of the investor’s annual income.

Obama expressed his support for the original House legislation, but the White House also said it supported Senate Democratic efforts to add adequate safeguards for potential investors in light of any reduced government oversight of investment transactions.

The Senate passed, by 64-35, an amendment on crowdfunding that requires websites to register with the SEC, requires promoters who are paid by a company to reveal that fact and requires a company trying to raise money to provide information about its financial condition, business plan and shareholder risks. It limits investments to 5 percent of annual income for those earning under $100,000 a year, or 10 percent for those earning more than $100,000.

The less-regulated House version, said Sen. Jeff Merkley, D-Ore., one of the amendment sponsors with Sens. Michael Bennet, D-Col., and Scott Brown, R-Mass., is “simply a pathway to predatory scams.”

Crowdfunding is now banned because it is not legal to widely advertise and offer securities to the public without SEC registration.

A second amendment, promoted by Sen. Jack Reed, D-R.I., would have tightened the definition of “shareholder” so that large companies don’t undercount the number of their shareholders in order to stay within the shareholder limit, set to rise from 5,000 to 2,000, for SEC registration. It fell on a voice vote.

White House press secretary Jay Carney praised the addition of the crowdfunding protections and said, “We will be vigilant in monitoring this and other elements to ensure the overall bill achieves its goal of helping entrepreneurs while maintaining protections for investors.”

HUGE victory for many small, grass-roots groups without whose efforts, this bill probably would never have been written or come to the floor of either chamber. So, we owe everything to these guys on their relentless pursuit of doing the right thing. What follows is an abridged story of how it happened:

When the Senate moved to vote on the House version of the JOBS bill last Thursday, it included a highly anticipated crowdfunding provision, the origins of which, appropriately, came from “the crowd.”

While there were many groups, companies and individuals involved in shaping the legislation, one of the most focused and sustained efforts pushing for the legalization of large-scale, ownership-based crowdfunding has come from an eclectic collection of internet-connected grassroots influencers: A blogger who first posted his idea on BoingBoing in 2009; the actor Whoopi Goldberg; a group of small business lawyers in Oakland, California; a trio of determined entrepreneursa small business group in Washington, D.C.; and the White House Office of Science and Technology Policy.

This group of influencers have helped push through a big rule change that many entrepreneurs hope could unlock that first stage of seed financing that evaporated with the onset of the recession.

The result of the legislation is that entrepreneurs will be able to test the viability of their ideas in a way that’s currently not possible by raising limited amounts of equity capital from large numbers of people who don’t have to be “accredited” by the Securities and Exchange Commission. And they could spread the word about their business ideas and solicit investors from their social networks online, which under current law is illegal without registering the business with all 50 state regulators.

That current state of affairs struck many in the small business and entrepreneurial community as absurd, at a time when projects on platforms like IndieGoGo and Kickstarter were garnering huge amounts of donations.

“If you try to offer equity to more than 35 members of your friends and family on Facebook, then you could go to jail,” said Woodie Neiss, an entrepreneur based in Miami who’s been working with two of his friends and building a movement for the past year to change the law. “That’s what we’re trying to say: This is silly. Let’s come up with a framework to enable this to work.”

Along with his friends, Neiss has been working with a San Francisco editor, a Washington, D.C. lobbying group for small businesses, and a loose coalition of entrepreneurs, lawyers and academics and the internet to build a grassroots lobbying campaign to influence public opinion and to change decades-old securities law to allow for experimentation with the idea of crowdfunding investments in startups.

Paul Spinrad, executive editor of Make in San Francisco, has worked with Neiss to lead the movement. A software developer and former section editor at WIRED, Spinrad had experimented with a crowdfunding prototype platform in 2003 called Premises, Premises. His later and (current) work at MAKE magazine inspired other business ideas, but he hasn’t had the time or money to invest in them. That led to a series of conversations with friends, and a December 2009 blog post on BoingBoing that solicited ideas from readers about how securities laws could be changed to allow equity-based crowdfunded investments. Spinrad’s initial idea was to persuade the SEC to carve out a regulatory exemption for any capital raising efforts under $10,000, and limited investor involvement of $100 per person.

It turned out that there were a lot of people who were interested in Spinrad’s idea. One group was the The Sustainable Economies Law Center (SELC) in Oakland, a group dedicated to promoting local community-oriented economic growth . Spinrad convinced its co-director Jenny Kassan to help him after reading one of her business columns in a local newspaper. Kassan herself was interested in the concept because she had a background in securities law and consults for small businesses on financing strategies.

At first, Spinrad and the SELC collaborated to petition the SEC to relax its rules on small business fundraising practices. Spinrad, Kassan and their colleagues raised $1,321 from 53 friends and associates in April 2010 to pay a token fee for the legal legwork on the crowdfunding site IndieGoGo. Spinrad documented the campaign’s progress at his personal blog “Change Crowdfunding Law,” and maintained a mailing list of about 200 people who had expressed interest in their campaign.

Over on the East Coast, Neiss and his two friends Jason Best and Zak Cassady-Dorion founded their own initiative called Startup Exemption, through which they hammered out the principles of a crowdfunding framework based on data garnered from the existing range of crowdfunding sites. They suggested a total fundraising limit of one million dollars for each small business, which the Small Business Administration defines as companies with average annual gross revenue of less than $5 million during each of the last three years, or since a business’ incorporation. Investors who aren’t wealthy enough to meet the SEC’s “accredited investor” standard would be limited to investing $10,000 or 10 percent of their adjusted gross income. Under the framework, state securities registration requirements would be pre-empted and entrepreneurs would have to register on a platform with their social security information, their real online identities on social networks, undergo a background check, and expose their business plan and idea to the public, which would thoroughly vet and discuss the idea online, as well as the business’ progress.

The two met in January last year after attending a small business forum convened by the SEC. While Spinrad writes and thinks out aloud on his blog about the nuances and implications of changing the law and tracks the progress of the campaign, Neiss and his friends have been lobbying public opinion and legislators on the issues. The duo have also been in touch with the White House Office of Science and Technology policy, which reached out to them last June: A senior policy advisor working the administration’s StartUp America initiative and doing outreach to the business community had been following Spinrad’s blog and asked the duo to come up with a two-page brief on their crowdfunding exemption idea.

Meanwhile, Neiss had also been working Capitol Hill, his network of friends and generating publicity for the idea. Last January, Karen Kerrigan, president of the Small Business and Entrepreneurship Council, helped Neiss land meetings at the SEC and with Rep. Patrick McHenry, (R-N.C.,) a member of both the House Financial Services and the House Oversight and Government Reform Committees. Several hearings were held throughout the course of the year on a bill that McHenry introduced that would legalize crowdfund investing. The House eventually voted to approve it for the first time last November, with full White House support. (President Obama touted his Startup America initiative in his State of the Union speech this year and reiterated his previous support to legalize crowdfunding.) Shortly after that, Neiss used IndieGoGo to raise money to organize a rally on Capitol Hill to publicize the issue and to urge the Senate to move the legislation, where it faced stuff opposition from state securities regulators and consumer groups.

Then, on December 9th, Whoopi Goldberg weighed in on her Facebook page on the issue, and asked her followers to sign Startup Exemption’s online petition to members of the senate to move the legislation.

“I was at a friend’s dinner in NYC,” Neiss explained in an e-mail. “I was talking about how hard it is to get capital for startups. One of the guys turned out to be President of Whoop Inc. He asked if there was anything they could do to spread the word. I met with them and they started to help spread the word.”

In the Senate, up until Tuesday, two versions of a crowdfund investing bill have been competing for legislators’ support: S. 1791, Sen. Scott Brown, (R-Mass.)’s Democratizing Access to Capital Act, and Sen. Jeff Merkley, (D-Oregon)’s Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (CROWDFUND). Both were introduced in December. Brown’s was supported by crowdfunding boosters, while Merkley’s was supported by state securities regulators.

The political climate is on the crowdfunding supporters’ side. Both the administration and Congress want to be seen doing something to boost the economy in an election year.

Tim Rowe, founder and CEO of the Cambridge Innovation Center, testified in front of the senate banking committee last week generally in support of the idea, with his own suggestions on how to improve on the current proposals. Wefunder.com, a crowd investing platform for startups, which is a startup itself at the innovation center, has launched an online petition in support of Brown’s legislation. More than 2,800 people have signed it since it was launched at the end of January.

Both Spinrad and Neiss are excited.

“We don’t understand why everyone isn’t talking about this,” said Spinrad in an interview. “This is an amazing, fundamental change, and it’s something everyone can relate to. Everyone knows Kickstarter, and everyone knows of a local restaurant that needs to get funded.” :)

He hasn’t sat back on his laurels even though the legislative momentum appears to have been on his camp’s side. So what did he do? Launch another crowdfunded effort to fund another campaign, of course.

In mid-February, he and the American Sustainable Business Council launched a new campaign on a new crowdfunded media-buying platform called Loudsauce to raise $13,530 for a full-page POLITICO ad about crowdfunding legislation.

It’s happening, kids!


We’re Getting Close!

The Senate appears ready to follow the House’s lead and pass legislation that would make it easier for small companies to obtain capital from investors.

Senate Majority Leader Harry Reid, a Democrat from Nevada, announced early last week that the Senate would move forward on bills “to spur small-business growth” by streamlining rules on capital-raising while still protecting investors.

The House overwhelmingly passed legislation in November that would allow businesses to use “crowdfunding”—soliciting small equity investments from large numbers of people via the Internet—as long as the total raised is $2 million or less. The bill limits individual investments in crowdfunded securities to $10,000 or 10 percent of the investor’s income.

In addition, the House raised the threshold for stock offerings under the Securities and Exchange Commission’s Regulation A from $5 million to $50 million. This would allow more companies to raise capital without registering the stock with the SEC.

The Senate Banking Committee has held two hearings on these proposals and are planning more in the next couple of weeks.

“This is something we should agree on,” Reid said. “These companies need the ability to get cash to innovate, grow, and build.

Karen Kerrigan, president and chief executive officer of the Small Business & Entrepreneurship Council, was optimistic about the passage.

“Access to capital continues to be a major struggle for small businesses and entrepreneurs. It is a no-brainer for the Senate to move forward with this package of capital formation bills,” she said. “Based on my positive interactions with Senate offices on both sides of the aisle, I believe we are on track for getting the package of capital formation bills through the chamber.

President Barack Obama has endorsed these bills and also has proposed phasing in securities regulations for smaller companies in their first few years after going public.


Crowdfunding Bill Stuck in the Senate. We Need Your Help!

In early November, the U.S. House of Representatives overwhelmingly passed the Entrepreneur Access to Capital Act, a crowdfunding bill which permits startups to offer and sell securities via crowdfunding sites like Kickstarter or social networking sites like Facebook.  As I discuss below, this is a game-changer for startups and lifts certain securities law prohibitions that have been on the books since the 1930’s.

The Obama Administration supports the House bill and noted in its Statement of Administrative Policy that: “This bill will make it easier for entrepreneurs to raise capital and create jobs.”  Unfortunately, two very different crowdfunding bills have been introduced in the U.S. Senate, and committee hearings have been surprisingly focused on fraud concerns and other potential problems.  Indeed, it is unclear whether the Senate will even pass a crowdfunding bill (and, if so, in what form).

Background

As the term suggests, “crowdfunding” is funding from a crowd of people — that is, many people provide small amounts of money to finance something.  Crowdfunding has its roots in charitable causes (including the advent of microfinancing to provide financial services to poor people), but has progressed to the online funding of creative and other projects via sites like Kickstarter and RocketHub.

Under current federal and state securities laws, startups are prohibited from selling stock or other securities via crowdfunding sites or social networking sites.  Such laws include:

  • A prohibition against “general solicitation” – which means that a company may not offer or sell securities unless there is a substantive, pre-existing relationship between the company (or a person acting on its behalf) and the prospective investor (see “Can I Raise Money For My Startup Via Twitter?”);
  • Disclosure and state law compliance requirements if the investors are not “accredited investors” — which usually makes the offering of securities too costly and onerous for a startup (see “Ask the Attorney – Securities Laws”);
  • A requirement that any intermediaries (including websites) must be registered with the SEC and applicable state securities commissions as a “broker-dealer” in order to legally accept any transaction-based compensation in connection with the sale of securities (see “Ask the Attorney – Beware of Finders”); and
  • A requirement that any company that has 500 or more shareholders and total assets exceeding $10 million must register with the SEC and file periodic reports.

The House Bill

The crowdfunding bill passed by the House lifts all of the foregoing prohibitions and requirements and allows a company to sell securities via crowdfunding sites and/or social networking sites so long as the company (and its intermediary, if applicable) comply with the following key restrictions:

  • The company may only raise a maximum of $1 million (or $2 million if the company provides potential investors with audited financial statements);
  • Each investor is limited to investing an amount equal to the lesser of (i) $10,000 or (ii) 10% of his or her annual income; and
  • The issuer or the intermediary, if applicable, must take a number of steps to limit the risk to investors, including (i) warning them of the speculative nature of the investment and the limitations on resale, (ii) requiring them to answer questions demonstrating their understanding of the risks, and (iii) providing notice to the SEC of the offering, including certain prescribed information.

The First Senate Bill (the “Brown bill”)

On November 2, 2011, Senator Scott Brown of Massachusetts introduced the Democratizing Access to Capital Act of 2011, a crowdfunding bill which has four significant differences with the House bill:

  • The Brown bill only permits the issuance of securities through a “crowdfunding intermediary”; accordingly, startups would not be permitted to raise funds via social media sites like Facebook, Twitter or LinkedIn (as permitted under the House bill);
  • Under the Brown bill, each investor is limited to investing up to $1,000 per  company for each 12-month period;
  • Similar to the House bill, the Brown bill caps the total amount of capital that may be raised during any twelve-month period at $1 million, but does not raise the cap to $2 million if the issuer provides potential investors with audited financial statements; and
  • Finally, the Brown bill permits some form of registration by the State in which the company is organized and/or “any State in which purchasers of 50 percent or greater of the aggregate amount of the issue are…residents.”  (The House bill preempts State law and, accordingly, there is no State registration requirement.)

The Brown bill was referred to the Committee on Banking, Housing, and Urban Affairs, and a hearing was held by such Committee on December 1, 2011, with respect to several pieces of capital formation legislation, including crowdfunding.  As noted above, the hearing focused on fraud concerns, including testimony from Professor John C. Coffee of Columbia University Law School that:

“[Early stage] issuers are in effect flying on a ‘wing and a prayer,’ selling hope more than substance.  Precisely because of this profile, however, such offerings are uniquely subject to fraud, and some issuers will simply be phantom companies without any assets, business model, or real world existence.”

The hearing also included this testimony from Jack Herstein, President of the North American Securities Administrators Association (NASAA):

“Main Street investors should not be treated as the easiest source of funds for the most speculative business ventures.  The law should not provide lesser protections to the investors who can least afford to lose their money.”

Indeed, the NASAA, a trade group for state regulators, has been lobbying very hard against the House Bill to prevent the preemption of State law and to reduce the maximum investment amount per investor.  As President Herstein wrote in a letter to House members:

“Any effort to remove or weaken the up-front registration and disclosure process should not happen without adequate alternative safeguards….[The House bill] will create an exemption that will expose many more American families to potentially catastrophic financial harm.”

The Second Senate Bill (the “Merkley bill”)

A second crowdfunding bill, called the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2011 (or the “CROWDFUND Act”), was introduced on December 8, 2011, by Senator Merkley.  This bill veers even further from the House bill and differs in the following material respects:

  • The Merkley bill only permits the issuance of securities through a registered broker-dealer or “funding portal” (which is a new term generally defined as any individual or entity engaged in the business of effecting securities transactions that does not offer advice or recommendations or solicit sales);
  • Under the Merkley bill, each investor is limited to investing up to the greater of (i) $500 or (ii) 1% or 2% of his or her annual income (depending upon the amount of such income), per company for each 12-month period;
  • The Merkley Bill also creates an aggregate annual cap on the amount of all crowdfunding investments by an investor of (i) $2,000 or (ii) 4% of the investor’s annual income if such income is above $50,000 or (iii) 8% of the investor’s annual income if such income is above $50,000;
  • Similar to the House and the Brown bills, the Merkley bill caps the total amount of capital that may be raised during any twelve-month period at $1 million; however, it requires the delivery of audited financial statements to the SEC and investors if the company seeks to raise more than $500,000; and
  • Finally, the Merkley bill grants investors a new cause of action against the issuer’s directors or officers personally in the event of fraud.

At a hearing held on December 14, 2011 by the Securities, Insurance, and Investment subcommittee of the Banking Committee, attorney Mark T. Hiraide testified in favor of the Merkley bill and noted that:

I share Professor Coffee’s concerns that unregistered salespersons may abuse the broker-dealer registration exemption set forth in [the Brown bill].

Conclusion

The crowdfunding bill that passed in the House by a 407-17 vote (and is enthusiastically supported by the Obama Administration) is stuck in the Senate.  Why?  Because of effective lobbying by the NASAA and two hearings designed to highlight the potential of fraud.  The Senate needs to take a step back and focus on (i) the plight of entrepreneurs and their difficulty in raising capital and (ii) the need for job creation in our country. 

Indeed, as uber-entrepreneur and investor Steve Case so aptly pointed out in a recent interview:

“It seems a little crazy to me that you have to be an accredited investor to invest in a company, but you can go to Las Vegas and lose $10,000 at the table in an hour and you don’t have to be an accredited gambler to do that.”

Please write your Senators and beg them to support HR2930, or something close to it. This is indeed CRAZY!!!!


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