CFIRA DC Symposium / NLCFA Departures / CFPA Survey

Last Friday, July 13th, CFIRA held their Development of Crowdfunding Regulations Symposium in Washington DC. I couldn't be there, but by all accounts it was a landmark gathering, and DC is thirsty for knowledge and guidance on this nascent revolution.  Speakers and panelists included Capitol Hill crowdfunding pioneers Rep. Patrick McHenry, Sen. Scott Brown, and Sen. Jeff Merkley's legislative counsel Andy Green; Kickstarter-funded tiltpod designer Eric Strasser; representatives from the SEC and FINRA, representatives from leading investment portals and funding networks; securities lawyers; small-business advocates; and others. Dara Albright of NowStreet Media wrote a great recap of the event.  It really seems like the regulators in DC want to get equity crowdfunding right, want to make it work, want this very American experiment to succeed in sparking innovation and economic vitality.

Perhaps (I'm speculating here) in part triggered by the primacy demonstrated by last Friday's CFIRA symposium, Sara Hanks, Maurice Lopes, and two other members of the NLCFA board have left the NLCFA to direct their efforts to the CFPA, CFIRA's sister organization, as reported by Lopes explains that "the CFPA is so much more engaged in the politics" than the NLCFA, and that the breakaway group advocated joining forces to create a single organization.

Lopes (who sent two letters to the SEC last year in support of the original SELC crowdfunding petition) also expressed his feeling that the NLCFA is "driven towards membership, and less towards actual things that needed to be done for the industry." I found this interesting.  As previously reported here, NLCFA membership costs $200 for individuals and $750 from portals, brokers, and technology providers (CFPA individual membership is free for the org's first year). If the NLCFA has collected these dues from a large membership base, then as with a successful crowdfunding raise, the NLCFA should certainly have ample resources for doing constructive work supporting the crowdfunding industry.

Meanwhile, the CFPA recently posted a simple questionnaire for a survey that, as Brian Dengler explains, will help it understand what businesses and individuals know and think about crowdfunding, and how they plan to take advantage of equity-based crowdfunding once the SEC implements the rules.

Please take a minute to fill it out right now.  Yes, now -- before you forget.  It's all multiple choice, no essay questions, and it will only take a minute.  Not only is it for a good cause, but also if you're one of the first 500 people to complete the questionnaire, you could win a new iPad 3.  Why are you still reading this?  Take the survey, dammit!  Thank you.

McHenry Hearings / Associations Updates / ASBC / Articles etc.

McHenry JOBS Act Hearings  

Last week, the House Subcommittee on TARP held two hearings on JOBS Act implementation, much focused on crowdfunding. The topic is not directly related to the subcommittee's mission of overseeing TARP (Troubled Asset Relief Program, 2008) and other government bailouts, but its chair is crowdfunding advocate/hero Rep. Patrick McHenry (R-NC), who introduced the first crowdfunding bill (HR2930).  

Kristine Gloria of PolitiHacks wrote a good summary of both hearings geared towards the Silicon Valley crowd (see below), and CFIRA posted a nice summary of the first three testimonies from the first hearing.  

The June 26th hearing, "The JOBS Act in Action: Overseeing Effective Implementation That Can Grow Jobs," included testimony from Brian Cartwright, a B-school professor at USC and former SEC General Counsel; Alon Hillel-Tuch from RocketHub; Prof. Steven Bradford from University of Nebraska; and Prof. John Coffee, Jr. from Columbia.  

McHenry started the hearing by expressing displeasure that "a few senators, who I think misinterpreted the spirit and promise of crowdfunding" made "11th hour changes" that rendered the crowdfunding legislation in the JOBS Act "ambiguous and inconsistent."  

3-to-1: The first three witnesses clearly favored "light touch" implementation of crowdfunding by the SEC, but Prof. Coffee was more skeptical, as previously, arguing that "the greatest enemy of job creation today is not overregulation, but the loss of investor confidence." Coffee raised the possibility that new SEC rulemaking might be overturned by the DC Circuit Court of Appeals. Subcommittee vice chair Frank Guinta (R-NH) later asked whether the SEC's new requirement to provide cost/benefit analysis for all of its rulemaking might prevent such legal battles (video 45:52), and Coffee answered that he hopes so.  

Liability: Coffee also said that most securities lawyers would recommend that small businesses raise money via the existing private placement exemptions rather than the "still novel and still very esoteric crowdfunding exemption" (1:08:40). One reason for this, Coffee explained, is that as drafted (in Senate revisions), the crowdfunding exemption could actually place a higher liability burden on investors than private exemptions for larger offerings. But then he helpfully pointed out the possible solution of generalizing to crowdfunding the existing "innocent and immaterial" exemption for private placements that's already under Reg D Rule 508 (1:11:15).  

The wrong model: Cartwright nicely summed up the problems that some lawmakers and regulators have had with crowdfunding: "The original idea behind crowdfunding was to have a quite different mode, now that the internet among other things makes communication so easy, to raise quite modest sums for entrepreneurial purposes. And what's happened is, we've overlain on that original idea the model of a big offering. So you need lawyers and accountants and financial intermediaries, and they all need compliance infrastructures. And you need financials that are in accordance with [garbled] -- I mean, all these additional requirements which are the model of a big dollar offering. But it doesn't work if you're raising $40,000 for a company that's going to make cases for iPads."  

Beer: McHenry told the story of how he was initially inspired to file HR 2930 by the Pabst Blue Ribbon "Buy a Beer Company" campaign (59:10), and ranking member Mike Quigley (D-IL) later remarked, "In regards to your earlier point about Pabst Blue Ribbon, I want you to know that we are in perfect agreement regarding purchasing beer. I've served here for three years now, and the longer I serve, the more I support purchasing beer." (1:04:30)  

The June 28th hearing, "The JOBS Act in Action Part II: Overseeing Effective Implementation of the JOBS Act at the SEC" featured SEC chair Mary Schapiro as the sole witness. The Supreme Court's decision on the Affordable Health Act came out on the same day, and McHenry got some laughs at the beginning by saying, "We're going to hear from the chairman of the Securities Exchange Commission, and as we know from all the headlines in the newspapers today, this is the largest news in the world." (There is a roar from outside the room as the decision is announced, at 45:35, and Schapiro remarks, "I don't think that was for crowdfunding.")  

McHenry explained that he reached across the aisle and worked closely with Carolyn Maloney (D-NY) to carefully revise his original crowdfunding bill, HR2930.  The resulting changes succeeding in giving the bill bipartisan appeal, resulting in an endorsement from the White House and a 407-17 vote in the House-- but that the Senate's hasty, last minute revisions basically screwed it up. (15:18)  

SEC Timeline: Schapiro said that the SEC will be a bit late in their rulemaking for lifting the ban on general solicitation, originally due out this week, but that it will happen this summer, and they will publish a timeline in the next two days (24:25). She also said that she does not anticipate delays in the rulemaking on crowdfunding, which is due by the end of the year. (27:27) The SEC is crazy busy with still-pending rulemaking for Dodd-Frank (2010) plus the JOBS Act, both of which are major reforms, but she said that the SEC has benefited enormously from all the public comment letters that they have received, and the meetings they have had with funding portals, industry associations, and others. "We're building up a base of knowledge very quickly at the SEC for handling this. (28:30)  

Schapiro seemed more sympathetic to crowdfunding than she was in March, when the Senate was considering the JOBS Act, and she wrote a letter criticizing the bill to the Senate Banking Committee's chair and ranking GOP member. McHenry asked Schapiro whether she was committed to telling the committee if it seemed that the SEC rulemaking around crowdfunding would price out small issuances, for example due to lawyer, accountant, intermediary costs. (29:35) Schapiro said that she absolutely would, and that the requirement of an intermediary, which HR 2930 did not include, would not only help with investor confidence, but also routinize requirements in a way that would lowers cost. (30:05) "We will be very sensitive to these issues about cost." 

On Schapiro's March 13th letter specifically, McHenry asked why, if she had these concerns, didn't she bring them up when the original crowdfunding bill was in the House: "Do you have my address? [...] At the time, if you had raised these objections to me or to Carolyn Maloney, we would have addressed these provisions, and I think the President would have liked to have heard that before he issued his statement of policy advocating HR 2930. You sent this letter right as the Senate was taking this up, and [...] I view that as being sideswiped by a regulatory body at the 11th hour [...] I don't think that was the most responsible thing." (36:45) Schapiro answered: "I appreciate that and with future bills, I will talk to you or sponsors of those bills. I did testify about concerns we had with respect to capital raising for small businesses, but I hear your point." (40:15)

McHenry asked Schapiro to confirm the SEC's commitment to enabling crowdfunding, to regulating funding portals differently from broker-dealers, and that they understood how it differed from other investments: "The nature of somebody investing $20 in a local coffee shop that they go to every day, they want to own a piece of it, is structurally and motivationally different [from] somebody investing $10,000 in the Facebook IPO... Is that structural difference something you see the SEC incorporating?" (43:20) Schapiro answered positively on all points.

McHenry also asked Schapiro about Prof. Coffee's suggestion that the "innocent and immaterial" exemption from Reg D Rule 508 be extended to crowdfunded issuances. Schapiro answered that she can't predict how the rulemaking will turn out, but the "innocent and immaterial" liability exemption makes sense. "We're not looking to catch people with foot faults, insignificant deviations shouldn't blow the exemption up, and it has worked in other contexts."

Quigley asked if Schapiro was concerned about JOBS Act rulemaking leapfrogging overdue Dodd-Frank implementation. Schapiro answered that the SEC is making good progress on both. The biggest remaining pieces for Dodd-Frank are the OTC derivatives rules, and with the JOBS Act, it's general solicitation, crowdfunding, and Reg A. (51:30)

Associations Updates

As previously discussed, I favor there being just one crowdfunding industry association, but three now seem to exist. Here's an update on some of their activities (full disclosure: I have a position with the CFPA):

SEC Meetings

CFIRA staff have met with the SEC on three occasions: April 20, May 24, andJune 18. To follow up on the ongoing discussion and open it up to lawmakers and others, CFIRA will hold a symposium in DC on July 13th. Among the attendees will be the SEC's heads of the SEC's departments of Compliance, Corporate Finance, and Trading and Markets.

Additional upcoming events from CFIRA/CFPA and related organizations include:
July 30, NYC - NowStreet Media "The JOBS Act - Transforming the Capital Markets"
August 8-9, Boulder CO - VIM Events "Simply Crowdfunding"

October 9-11, Lake Las Vegas, NV - CFPA and Crowdfunding Roadmap "Crowdfunding Bootcamp"

Public comment letters sent to the SEC by CFIRA leadership include:

May 15 - Jason Best, Candace Klein, and Vince Molinari propose types of communications permitted as "crowdfunding notices" to the general public.

May 30 - Candace Klein and Vince Molinari offer many suggestions, including: requiring that each issuer give a live (and subsequently archived) video presentation via their funding portal; an exemption from the auditing requirement for companies less 1 year old; and exempting institutional and accredited investors from the individual investor caps, which would enable crowdfunding investment funds and possibly decrease investor counts for some issuances.

June 5 - Candace Klein and Vince Molinari argue that funding portals should not be deemed investment advisers, even if they only post selected offerings, include automated "matching" tools, and enable peer-to-peer lending. Also, they should host discussion forums.

Membership dues. During the first year, general (individual) membership in CFPA is free. Higher level (sponsor, founder, board) memberships are also available for $100 and up.


Recorded Conference Call Follow-up

My last post reported that NLCFA director David Marlett recorded the conference call that he conducted before his announcement, "Crowdfunding Industry Launches National Association," during which no one voiced any objections to his plan. A couple of readers asked me whether people on the call knew that they were being recorded, and if so, whether Marlett would release the recording. I asked Marlett, and he replied, "I said it at the beginning of the call, but because others got on later and I forgot to ask them, I erased it."

SEC Meeting

The SEC met with representatives of the NLCFA on May 14.

A public comment letter sent to the SEC by NLCFA leadership was sent on April 30 by Sara Hanks. In it, she argues that crowdfunding service companies such as CrowdCheck (discussed here previously) are neither advertisers for CF-exempt offerings, nor funding portals themselves.

Events, Programs, Partnerships

As of last week, the NLCFA has no major events planned in the coming weeks, but Marlett reports that, "a lot of activity going on, and work with specific groups, etc."  Announcements about their veterans program and education partnership, described here previously, should be coming soon.

Membership dues. The NLCFA had restructured its membership pricing. Now it's $200 for individuals, and $750 for portals, brokers, and technology providers. There is also a free, non-voting membership available to faculty and students with proof of employment or enrollment.


I have no news on this organization since May 24, when they announced that "Over Compliance Has Arrived." No website has yet been built at their domain

Bylaws and Elections

In talking with others who have experience starting industry associations (thanks Berkeley and St. Clair!), I've become convinced that any such org needs two things to continue having credibility: published bylaws and an elected leadership. Industry associations typically adopt their bylaws and conduct elections at their first annual convention. To my knowledge, none of the crowdfunding industry associations has scheduled either of these actions.

ASBC, Massachusetts Securities Division
The American Sustainable Business Council, the first lobbying organization to advocate a crowdfunding exemption, met with the SEC to discuss crowdfunding on June 13. They visited the White House around the same time and met with senior staff there, as reported by Doug Rand, the White House's crowdfunding guy. Doug's great write-up recalls the socially positive effectiveness of donation-based crowdfunding, and ties it to the promise of equity-based crowdfunding for revitalizing underserved communities and offering opportunities for investors who consider social and environmental impact in addition to economic return (i.e. the "triple bottom line").

On May 2, the Securities Division of the State of Massachusetts sent a public comment letter to the SEC expressing an interest in crowdfunding rulemaking, and offering to help. Presumably as a result of their offer, they met with the SEC on June 27th.

Recent Articles

"JOBS Act Tangled in Red Tape, Coming 2014 at the Earliest" by Trevor Gilbert (PandoDaily, June 29) cites unnamed sources to argue that SEC rulemaking on the JOBS Act will be delayed significantly, SEC Chair Mary Schapiro's previous day testimony notwithstanding. I wonder about this article, which also cites one source claiming that "SEC and FINRA have held exactly zero official meetings to discuss the JOBS act," which is easily proven incorrect. The article also says, "there are reports that FINRA is delaying the implementation of the bill for direct financial gain" -- any such rumors are irresponsible if false, but certainly demand investigation if true.

"The JOBS Act: How To Ensure It Pays Off For Entrepreneurs" by Google VP for Corporate Development David Lawee, (Forbes, June 25) argues that if equity crowdfunding is going to work, the SEC must listen to the needs of entrepreneurs and write rules that encourage internet-based systems of trust and cooperation. (I'm the "one entrepreneur" who first blogged the idea in 2009.)

"Hail Crowdfunding! The Wicked VC is Dead" by Eric T. Wagner (Forbes, June 25) is a nice "fasten your seat belts" editorial: "So, wow — this crowdfunding thing really looks like a potential game-changer."

"The Kickstarter Recession" by Matthew Yglesias (Slate, June 17) is interesting in that the author seems to have never heard of the crowdfunding portion of the JOBS Act, or else hasn't made the connection that it will support what he calls "Profit-driven traditional finance."

Click here to download:
Politihacks_Oversight_CmteHearing_070312.pdf (95 KB)

Good Info from David Marlett

My last post described my feeling that NLCFA executive director David Marlett entered the field in a "scheming, detached, and adversarial" way, based on his organization's first press release, but it turns out that I didn't have the full story, and I apologize for not talking with him and including his perspective about those early days.

I phoned Marlett this past weekend as he drove back home (to Texas) from the Clinton Global Initiative America conference (in Chicago).  He told me that in the weeks before his April 2nd announcement, he reached out to key people in the crowdfunding reform movement, and that on Friday, March 30th, three days before the Monday announcement, he held a conference call with about 30 of them to discuss his plan to start the NLCFA.  He started the call by honoring key people who had worked to get the legislation passed, and acknowledging that he had not been involved. Toward the end of the call, he asked whether anyone had any objections to his starting up a crowdfunding industry organization and to him being its interim Executive Director. In response, there was only silence. Marlett recorded the entire call.  Afterwards, Marlett says he received numerous supportive emails.

Regarding the characterization that the NLCFA is largely a sole effort, Marlett invited me to contact any of the dozens of people listed on the association's website as holding Board of Director or Nationwide Leadership positions, to confirm that he often tells them "this is not the Marlett show!" -- to remind them of how important their opinions are.

More importantly, Marlett said that people at the CGI America conference were very interested in crowdfunding and in the NLCFA -- including Bill Clinton himself, who answered Marlett that he had written about crowdfunding in his book. (I just did an "Look Inside" with Clinton's Back to Work, and indeed on page 177 he advocates crowdfunding "to help small businesses raise needed capital."  He also cites the 2010 petition from the Sustainable Economies Law Center to the SEC, which longtime readers of this blog have known about from the very beginning.)

Marlett also told me about some great-sounding efforts and ideas that the NLCFA and his consulting firm have cooking:

  • Veterans program. A program for veterans, designed to educate and empower the veteran population regarding crowdfunding opportunities. This will be announced soon via press release.
  • Education partnership. An alliance with major corporations to run a program for educating the public about crowdfunding.  This will also be announced soon.
  • Continuing Professional Education. The NLCFA is educating attorneys, CPAs, and other professionals about how crowdfunding will change their practices, and hopes to develop a curriculum that qualifies for fulfilling Continuing Professional Education credits.
  • Franchise contracts. In franchise-based businesses, the parent company typically wants one person to own and operate each franchise. David's consulting firm is looking at how a potential franchisee might use crowdfunding via a holding company to fund the purchase of a franchise, thereby turning what would otherwise be a franchisor's nightmare (500 shareholders for a single location) into a mechanism for greater expansion.

Marlett also clarified something that had confused me regarding the May 23rd press release from the International Crowd Funding Association (ICFA), which I linked to in my previous post. The announcement bore the title "The International Crowd Funding Association (ICFA) has announced a merger with the National Crowd Funding Board" but there is no "National Crowd Funding Board."  Marlett told me that the announcement came out after ICFA founder Mark Jones tried unsuccessfully to convince Marlett to join the board of the ICFA and to bring the NLCFA into the ICFA. The release seems to be referring to that non-event, calling the NLCFA by the wrong name. Marlett had the press released pulled by PRWeb, and the ICFA replaced it on May 24 with another announcement sporting a baffling title, "The International Crowd Funding Association ('ICFA') has Announced that Over Compliance has Arrived."

Epic Battle for the Soul of Crowdfunding

Donation-based crowdfunding has already shown the ability to amass millions in short amounts of time for small groups of people.  Soon its more materialistic counterpart, equity crowdfunding, will become legal, and as Locavesting author Amy Cortese has noted (as reported by Tim Rowe and based on the Flow of Funds Matrix totals for Households and Nonprofits), if Americans diverted just one percent of their long-term savings to this kind of investment, it would total 10 times the amount that VCs invest in U.S. companies.

The new law defines the commercial entities ("funding portals") through which crowdfunded securities must be sold. These companies will be overseen and regulated by the SEC and FINRA, and it seems natural that they should also have an industry association, as do other billion-dollar industries, to help the industry grow and stay out of trouble, to lobby lawmakers (hopefully in a good way), and to run conferences and road shows, publish reports, and do other things to foster education and interaction around crowdfunding.

Whoever leads such an association will be in a powerful position, guiding an industry that has a new, federally-mandated foothold to challenge Wall Street for the first time in generations.  If all goes as planned, crowdfunding will enable innovative small businesses and communities to bootstrap themselves up in a way that keeps all the funds local or within a connected community of interest, bypassing the established investments-industrial complex entirely.

If, come January 2013, the SEC has implemented the crowdfunding exemption in a way that's usable and attractive to small-scale entrepreneurs, I would expect Wall Street to counter the threat by spreading FUD (fear, uncertainty, and doubt) around crowdfunding. This should fail, because most people will believe what they see in their own communities with their own eyes before they believe any horror stories placed in the media. (Note: the leading crowdfunding sites RockethubCrowdcube,, Funding Circle, and AngelList all report zero fraud throughout their entire histories, and no CF sites that I know of have reported any cases of successful fraud, although I'm sure it will happen.)

But an established equity crowdfunding industry will be constantly susceptible to corruption and influence from the Wall Street-based retail investments industry that it competes with. That's why I believe that if the crowdfunding industry is going to succeed, it needs a leadership that's ethically untouchable. Otherwise, powerful forces will be able to buy it out and render the industry ineffective.

Unfortunately (but not surprisingly), I have also noticed what I perceive as some opportunistic and unsavory elements drawn to crowdfunding.

Three Groups Vie for Mindshare and Membership

I know of three groups that are claiming legitimacy as the professional organization dedicated to the young crowdfunding industry.  It's an entertaining situation, seeing all the jockeying for position, but I believe that what happens is also very important to our future. BusinessWeek recently covered the rivalry between two of these org's, the NLCFA and the CFPA. I was glad to see this article, and the story got picked up by other pub's, but honestly, I think the reporting was on the superficial side. (NLCFA Executive Director David Marlett has posted his list of inaccuracies at the bottom of this page.)

This is interesting stuff-- everyone loves a battle-for-leadership story-- and it needs to get out there and be processed by (yes) the crowd. My current take on the situation and the main players is below, but it's been changing with each new person I talk to. I would love it if journalists, bloggers, or anyone else out there wanted to dig deeper, and help us all explore who's credible, what each group's plans are, and even whether it matters that there are multiple competing organizations claiming to represent the CF industry (I believe it's bad, as blogged here before). In my experience, the people in this field are pretty accessible-- you can just call them up or email them, and they'll probably be happy to communicate.

Crowdfunding Professional Association (CFPA)
This is the group that I have the most allegiance to, and (full disclosure) I've been talking with them and may soon hold an official position there. It started as a sister organization to the "leadership group" (now CFIRA) that was cited by the White House when the JOBS Act (which legalized equity crowdfunding) was signed. The group, many of whom had advised the White House on crowdfunding previously, wrote a letter to President Obama outlining how it wanted to help the SEC with its CF exemption rulemaking.

The CFPA's strong history with crowdfunding and position in DC make it automatically credible, but it's also been a largely volunteer effort, with limited time and resources thus far to do things like build up membership, forge alliances, build a credible website for itself, put out press releases, and do other things that would help it help the industry. I see it as a chicken-and-egg problem, but I also know that the CFPA has some interesting plans afoot that will help.

National Crowdfunding Association (NLCFA)
This is the group founded by former securities attorney, filmmaker, and immigration law enforcement activist David Marlett.  As I explained in my last blog post, this entity put out a press release three days before the JOBS Act was signed, announcing the organization, announcing Marlett as its executive director, and describing it as "the professional organization of all companies and individuals with an interest in crowdfunding." This was a discussion topic among several people who were at the White House with me for the JOBS Act signing, since they had never heard of Marlett or the NLCFA before, and they saw that the NLCFA site linked to pages that sported their logos without their knowledge or consent, in a way that they felt implied their membership. In response comments to my post, Marlett clarified that it was his consulting firm's website that included these logos, as a service for people wanting to know what portals were out there, and the pages were removed because he is no longer pursuing his consulting firm.

I did some cyber-stalking and came across a blog on film finance that Marlett had written for MovieMaker through 2009. In his final post, he describes his vision for a film production cooperative that would both produce and distribute its films. It's a great idea, and it demonstrated to me that Marlett genuinely has been thinking about crowdfunding for a while, and is not just trying to jump in now because he heard about the JOBS Act and the Pebble and sees a new way to become an alpha male. Reading his MovieMaker columns, I really like his attitude and candor, and I can't help but think, sadly, why did he have to come to our attention in such a scheming, detached, and adversarial way?

The NLCFA has been putting out press releases, attracting partners, and establishing Marlett as the crowdfunding industry authority in the press. Marlett says that the NLCFA also expects to offer health insurance by the end of this year, which would be a great service. As he also states in his comments here, he wants his organization to be judged by its actual work, rather than what it says about itself, which is a great point.

Marlett took issue with an earlier version of this post (which I sent to my mailing list two days ago) and I hope to talk with him soon to gather more current information on the NLCFA's activities. I look forward to reporting it here.

International Crowdfunding Association (ICFA)
I also mentioned this group in my last post, and noted their 8pm kickoff meeting at a hotel near Las Vegas on May 24th. The organization is backed by Sprowtt, a company that formed in 2008 to enable small companies to go public and was listed in the Crunchbase deadpool in 2010 as no longer active, and CEOSpace, a "CEO on line Collaboration" website run by Berny Dohrmann, whose unconventional career has included being convicted for securities fraud in 1995. Former SEC Commissioner Roel Campos is also helping the ICFA, and ICFA founder Mark R. Jones emailed me that the organization has 4 attorneys on its board who used to work at the SEC.

Jones, who is also the founder of eCinema Networks and has nearly 5,000 Facebook friends, told me that 500 people attended the ICFA launch, and I heard second-hand that David Marlett was seen storming out of the event (but according to Marlett, he wasn't there).

That's what I know at this point, but I would love to find out more. My feeling is that the CFPA is the most credible organization, with the right people, the right values, and an established history with crowdfunding.  But if in a couple of months they seem to be behind in the battle for credibility and substance, then I wouldn't blame anyone for joining the NLCFA or any other organization that inspires more confidence.

I will leave with a quote from a recent interview with Clay Shirky on

[T]he thing I’m most bullish about regarding the JOBS Act [...] is that this method of aggregating demand isn’t a new way to do the old stuff; it is a new model of the business ecosystem, full stop.

SEC Comments / Capital-C / CFIRA/CFPA / CrowdCheck

The SEC Wants Your Comments

The SEC is soliciting comments on all parts of the JOBS Act, including crowdfunding exemption. Comment forms and submitted comments are linked at

The text of JOBS Act as enacted is at (PDF): 

The best public comment I've seen so far is Rockethub's white paper. Alon Hillel-Tuch did a stellar job reviewing the legislation clause-by-clause. An even deeper and quite critical analysis is in C. Steven Bradford's upcoming article, The New Federal Crowdfunding Exemption: Promise Unfulfilled, which will be published in the Securities Regulation Law Journal, Vol. 40, No. 3 (Fall 2012).  Bradford argues that the new legislation, among other things:

1. Is poorly drafted, with "ambiguities, internal inconsistences, and outright drafting errors" that "introduce unnecessary complexity" and "will increase the cost to small business issuers."

2. Is too complicated and expensive with its disclosure and reporting requirements. Other small business exemptions don't require annual reporting, and "issuers will be liable even if their failure to disclose properly was merely negligent, not intentional," which results in "a liability trap for unwary, unsophisticated entrepreneurs."

3. Has individual investment caps that are too high. The lowest cap is $2000 per year, and "It is doubtful that most people, especially those in the lower income categories, have sufficient free cash flow or savings to afford to lose five or ten percent of their net income." [I agree.]

4. Needs a “Substantial Compliance” rule, as is included in the Reg A and Reg D exemptions, so that (for example) an entire exemption isn't lost retroactively when it turns out that out that a single investor didn't click his own way through an online investor education exam.

5. Has problematic requirements for funding portals. One example is how it "omits a crucial element of crowdfunding—- an open, public communications channel allowing potential investors to communicate with the issuer and each other." [This is something I've also harped on, and I just don't get why it wasn't included.]

Bradford concludes that ironically, the portion of the JOBS Act legislation that may turn out to help small business the most, might be its lifting of the general solicitation ban, rather than the all of the crowdfunding legislation.

Click here to download:
bradford-cf-promise-unfulfilled.pdf (421 KB)

7 Days Left To Fund Documentary Capital-C!

Filmmaker Timon Birkhofer is working on a documentary about crowdfunding, Capital-C, that needs your support on Kickstarter-- it's nearly met its funding goal and just needs a nudge this week to put it over the top.  Timon has lined up a terrific group of interviewees for the project.

If you donate, you'll be listed in the credits, and if you don't, when you watch the film and see everyone else's name, you will feel like a dummy.

CFIRA/CFPA - Beware of Imitations

I believe that crowdfunding will be best served by a single professional association rather than multiple competing orgs. Competition is often healthy, so this may change, but while we are in the early stages and still figuring out how crowdfunded investing will work, I would hate to see the investing public have to navigate multiple competing "Trust Me" logos on different funding portals. This would create confusion, damage credibility, and invite shady schemes right from the get-go.

So I think it's unfortunate that multiple organizations are already creating an alphabet soup of confusion as they work to represent the crowdfunding industry. Bloomberg Businessweek ran an article about this yesterday, Lobbying to Become Lobbyists for Crowdfunding which describes dueling claims over becoming the voice of the crowdfunding industry by two organizations, the NLCFA and the CFPA.

For background, on April 2, three days before the JOBS Act was signed, a press release was published announcing the establishment of National Crowdfunding Association (NCFA) and its election of "David Marlett JD, CPA and filmmaker as its first Executive Director, as well as filling other initial officer/director positions."  A couple of people in the crowdfunding field have reported that at launch, the NCFA website displayed the logos of their organizations, which were not members at the time, without their consent-- but that the logos were removed from the website after they complained.

Now called the NLCFA and described by Marlett as "the association of almost every crowdfunding portal in the United States,"  the organization's recently redesigned website lists six sponsor members. The previous "Members" page at (now removed) boasted 439 members and stated for several weeks that a complete roster would be published "soon."

Meantime, many of the founders of the industry are allied with Crowdfund Intermediary Regulatory Advocates (CFIRA), which has an admittedly less "for real" looking website that lists no members at all.  The group was announced on April 5th (back then, the "A" stood for Association), and on May 7th, a sister organization was announced: the Crowdfunding Professional Association (CFPA), whose membership is also unfortunately not public (but you can see some of its associations on its "Leadership" page). The idea is, CFIRA works with the government regulators and CFPA interfaces with the funding portals and the public. This makes sense as a functional division, but I'd rather see the two combined under a single name that's simple and doesn't change.

CFIRA/CFPA members met with the SEC on April 20th.  As one attendee characterized the meeting, the SEC people under the age of 50 were excited about the new exemption, and the ones over 50 were leery. Attorney Douglas Ellenoff has posted his notes on the meeting. Yesterday, others working with CFIRA met with the SEC's Trading and Markets division, and more meetings are planned.

David Marlett and other representatives of the NLCFA met with a smaller group at the SEC on Monday, May 14, bringing an agenda seeking repeated clarification and guidance on 24 aspects of the new crowdfunding legislation.  Before this meeting, the NLCFA representatives participated in a conference entitled "The Wisdom of the Crowd" at the Hotel George in DC.

Attorney Douglas Ellenoff has been at all of these SEC meetings.  I don't know him, but I hope that through working with both organizations, he might find a constructive and face-saving way to enable all parties involved to work together, and to honor the great contributions that they all have made to crowdfunding.

Meanwhile, a third organization is also seemingly competing for the mantle of crowdfunding authority.  The "International Crowd Funding Board" had a "Launch Summit" at 8pm last night, at a hotel in Henderson Nevada, near Las Vegas.  Among the listed guests were former SEC Commissioner Roel Campos.

CrowdCheck, The Crowdfunding Due Diligence Company

Sara Hanks, who has made helpful comments on this blog, is the CEO of CrowdCheck (an NLCFA member).  She's written a couple of editorials about crowdfunding that absolutely nail the issues, for The Hill and the Huffington Post-- the latter piece, "Now the Really Hard Work Begins," argues that, "Just as websites that will facilitate crowdfunding (known as "portals") build out their physical infrastructure to be prepared for when the rules are adopted, we must also work on building a moral infrastructure too. Yes, moral." Right on!

CrowdCheck sounds great, and I'm excited about it. "The Crowdfunding Due Diligence Company" is a good position for doing interesting and important work, vetting CF-exempt offerings and their offerors for the benefit of potential investors.

It's also a great business idea. Following the principle that during the California Gold Rush, few miners got rich, but it was a boon to those who served their needs for tools, denim pants, banking, etc., CrowdCheck offers something that every funding portal will want, whether they succeed or fail. Dozens of funding portals are starting up-- I seem to learn about a new one every day-- and undoubtedly most of them will not survive. But CrowdCheck has first-mover advantage in providing something that they will all value, and that will help crowdfunding succeed as a whole.

When Journalists Caught On

I followed coverage of the JOBS Act after its was introduced into the House in February, and it was interesting to see the change in how the crowdfunding component was reported on. At first, it was mentioned only minimally as one of the components of the package. A typical example is Feb 28 coverage from the NYT blog "The Caucus" by Jonathan Weisman, "The new package will not change the world, although House Republicans might disagree." Weisman's discussion of the crowdfunding provision is limited to one line: "One measure lifts restrictions on 'crowd funding' so entrepreneurs can raise capital from large pools of small investors." Other articles from late February and early March similarly overlooked the crowdfunding component.

But at some point, reporters clued in; the first time I saw this was when Rafe Needleman called crowdfunding "The sexiest component of the JOBS Act" on March 19th.  Around this date, it seemed like the journalists covering the topic did some background reading, and their characterization of the JOBS Act changed from a collection of unsurprising measures to something new and worthy of discussion.

"As the Commission may prescribe" - CROWDFUND Act Read-Through

I had low expectations for the CROWDFUND Act, but finally actually reading it, I think it's OK, depending on how the SEC implements it.  Yes, an issuer needs to fill out a lot of information and get a review done for offerings over $100K and an audit for over $500K [corrected from original email/post; thanks readers!].  But many companies are now starting up specifically to facilitate this, in the newly-mandated role of "Funding Portal" (that's the term that the legislation uses for crowdfunding platform or intermediary; get used to it). I expect and hope that these companies will streamline the process the way opening an internet storefront or filing taxes online has been streamlined.

I am not a lawyer, but it seems that Section 4A(f)(2) grants the SEC broad leeway regarding who's eligible for the exemption and what the ongoing compliance burden will need to be after the security has been issued. I think it's these things that will determine how useful and popular the new exemption is, and whether it works. I welcome corrections from anyone who knows more.  [UPDATE: Sara Hanks of CrowdCheck Inc., a securities lawyer who worked at the SEC, says: "The interplay between sections 13 and 15 of the Exchange Act, which determine whether a company has to register with the SEC, are complex and I could spend a long time giving you way more detail than you need. But in essence what the provision that you are looking at says is this: 'if you are already registered with the SEC you cannot do crowdfunding.'" Thank you Sara!]

With a heavy burden, you risk the brain drain that Kevin Lawton describes (which might be a state brain drain towards states that quickly pass their own crowdfunded investing legislation under the federal intra-state exemption). But hopefully the SEC will see that openly-questioned and discussed offerings operate very differently from one-on-one boiler-room scams, and will give more weight to the actual evidence that crowdfunding fraud has been negligible so far (as Kevin also cites) over people's speculations that it might be otherwise. If so, the SEC should give their rulemaking a lighter touch.'s report on the final Senate CROWDFUND Act gives a good point-by-point description, comparing it with the original House bill that was based on H.R. 2930. Here are some additional notes from my read-through.  Here's the text itself, and see below for links to sources it refers to, including the Securities Act of 1933.

4A(b)(1)(D)(i)(I) - The issuer of any CF-Exempt security must file their prior year's income tax returns with the SEC and also make them available to potential investors (i.e. make them public).  This seems unnecessary, and will definitely make the exemption less attractive to trust-funders.

4A(b)(1)(G) - Issuer must file and make available "the price to the public of the securities or the method for determining the price, provided that, prior to sale, each investor shall be provided in writing the final price." I would rather see an explicit requirement that prices must be all listed and static until offering closes.  The wording here looks like it would allow dynamic pricing, so long as the method for determining the price was explained. The problem with this is, you could program dynamic pricing to create pressure: "Shares available are now for $5, but will go up 50 cents for every hour you wait-- act now!"

4A(f)(2) - The exemption "shall not apply to [...] any issuer who is subject to the requirement to file reports pursuant to section 13 or section 15(d) of the Securities Exchange Act." These are the "Periodicals and other reports" and "Duty to file periodic reports" sections. These sections are long, and as far as I can tell from a quick look (tl;dr), they give the SEC authority to require whatever amount and frequency of periodic reports it thinks is necessary. "As the Commission may prescribe" is the phrase.  Section 15(d) suspends duty to file periodic reports when there are fewer than 300 shareholders of record, where "of record" is defined as deemed necessary. A limit of 300 doesn't make sense with crowdfunding-sized numbers of shareholders.  I'd love to get some more informed opinions on this provision. [See UPDATE above, second paragraph of post.]

Section 3(a)(80) - definition of "Funding Portal"
I don't understand why this section of the legislation didn't include the requirement of hosting an open discussion forum, since that's essential to the crowd's ability to root out questionable claims. Here's the wording on this from H.R.2930:

"(10) makes available on the issuer's website a method of communication that permits the issuer and investors to communicate with one another;"

The SEC can certainly require this in their rulemaking (it would be moronic if they didn't), but it would have been nice if this were actually written into the legislation. 

SEC. 305. [of bill, not Securities Act) RELATIONSHIP WITH STATE LAW. Exemption preempts state registration requirements (yay), but state has jurisdiction and enforcement authority over fraud conducted in state.  State cannot collect registration fees for CF-exempt offerings unless issuer and owners of over 50% of stock are state residents.


CROWDFUND Act of 2012 (compiled by Brad McGee)

Securities Act of 1933 
Section 4 - p. 19 - location of new crowdfunding exemption as Section 4(6)
Section 3(a)(80) - definition of "funding portal" - defined in bill itself, not currently in Act
Section 12(a)(2) - p. 40 - liability

Securities Exchange Act of 1934
Section 3(a)(26) - p. 16 - Self-Regulatory Organization
Section 13 - p. 120 - Periodicals and other reports
Section 15(d) - p. 167 - Duty to file periodic reports

Code of Federal Regulations (CFR) Title 17, 230.262 - Regulation A - Conditional Small Issues Exemption (Part 230)

Correction re: Senate CF Bill / Actual Text

Several readers have written to say that I got it wrong about the Senate crowdfunding bill, that the final legislation is more like Merkley's S.1970 than McHenry's H.R.2930, which became part of the JOBS act. Thank you for the correction! Brad McGee of iCrowd pieced together the actual text of the crowdfunding portion of the JOBS Act-- see below, and many thanks to Brad. I can't digest it now but look forward to doing so soon.

Click here to download:
McGee Crowdfunding Act.pdf (99 KB)

Signed Into Law Next Week

Many of you already know this, but a federal crowdfunding exemption is expected to be signed into law next week, probably next Tuesday. My mailing list and blog hasn't kept up with the rollercoaster of news around this over the past two weeks, but the upshot is:

1. The JOBS Act, which included legislation based on the original Patrick McHenry crowdfunding bill, HR2930, passed the Senate 73-26 on Thursday, along with two added amendments: S.1884 from Jeff Merkley (D-OR) and Scott P. Brown (R-MA), and S.1391 from Jack Reed (D-RI). These amendments do things that I like and have advocated for, so I'm pleased with how the legislation turned out.  I don't think Washington ruined the idea.  I think it benefited from collective wisdom and discussion, as crowdfunding legislation should. (The two crowdfunding proposals that emerged in the Senate after HR.2930 passed, S.1791 (Brown) and S.1970 (Merkley), turned out to be detours.)

2. Since the JOBS bill had amendments passed in the Senate (only regarding the crowdfunding component), the amended version needs to go back to the House for a vote. House Majority Leader Eric Cantor (R-VA) expects to schedule a vote early next week, and it's expected to pass as-is, because the GOP leadership doesn't want differences on the crowdfunding bill stop a big victory on the whole JOBS Act. The White House has said that the President will sign the JOBS Act into law without delay. After this, the legislation gives the SEC 270 days to make and enact the new rules.

I can't easily find the specific text of the amendments by themselves, although you can find their language mixed in with other proceedings via these two linksHere's an article from that runs down the changes from the two amendments.  Assuming that this article is accurate, here are the changes:


1. Mandatory financial disclosures and tiered levels of assurance on their accuracy: < $100K offering: CEO must vouch; $100K - $500K: CPA certification; > $500K: CPA audited financials made public.  Sounds smart to me.

2. Companies are responsible and liable for the accuracy of the information they transmit. Of course, sounds great.

3. Intermediaries (platforms) are required, and they need to be registered with the SEC, but need not be registered broker-dealers. They can't give investment advice.  Intermediaries can certainly help with investor protection, oversight, and damage control. But this requirement leaves out businesses that are not tech-savvy or are in low-income neighborhoods on the other side of the digital divide. Those entrepreneurs should not be left out of the party, so I think the requirement for an intermediary should be waived in cases where the business is location-based and all of the investors reside within a 100 mile radius. That way someone could just put out a sign, talk to their customers, and raise investments that way-- and those investors don't need the same protections because everyone's close by and can check the business out in person. 

4. Scaled cap on individual investment: 2% of income for individuals earning up to $40K a year; up to 5% for investors earning up to $100K; and a cap of 10% for those earning above $100,000. This is important and great; my main problem with HR2930 has always been that the individual investment cap is too high, too risky, and tiering makes sense.

5. A minimum 3-week listing to closure period, to let the collective “wisdom of the crowd” identify possible fraudulent activity. This is important, as previously discussed.

6. Anyone promoting an investment needs to disclose if they are earning fees for doing so. Good idea.

Clearly, my thinking has tended to be pretty mainstream on this issue.  Some other people who advocated for this exemption are angry about the two Senate amendments and think they'll ruin it, but I think we wound up with a good balance. Of course, no one really knows yet. Time will tell.

JOBS Act Passes House (Second Time for CF Exemption) / All Eyes on Senate Banking Committee

The JOBS Act, introduced by House majority leader Eric Cantor (R-VA) passed the House with a 390-23 vote last Thursday. The package includes H.R.2930, the original CF exemption bill from Patrick McHenry (R-NC) that sailed through the House last November.  This puts the Senate Banking Committee in an interesting position.  Here's what Woodie Neiss reports:

We have this small window of opportunity to make Crowdfund Investing law over the next several weeks  [...] The Senate has been sitting idly even though a few Senators have tried to push Crowdfunding forward [S.1719 from Scott Brown (R-MA) and S.1970 from Jeff Merkley (D-OR)].  However both Senate Majority Leader Reid (D-NV) and Banking Committee Chairman Johnson (D-SD) refuse to bring it to vote.  Until now. 

2 days ago, the House took 6 of the Capital Formation bills that passed with almost unanimous bipartisan support (including our Crowdfunding bill), packaged them together into one (called the JOBS Act) and passed it again with overwhelming bipartisan support.  The President came out and endorsed this Republican-led initiative and now they are calling the Senate's bluff.  Either sit and do nothing and come election-time Americans will know that the Senate is the cause of the gridlock in DC or bring the bill (or their own version of the bill) to the floor to vote and act on our country's behalf.

When the JOBS Act was introduced, Senate Majority Leader Harry Reid (D-NV) said, "I look forward to moving these measures and our economy forward with the help of my Republican colleagues." Among CF advocates, it is hoped but not necessarily assumed that Reid and Senate Banking Committee Chair Tim Johnson (D-SD) want meaningful and well-designed reform, as opposed to nominal and symbolic pseudo-reform. Some see a message in the fact that Johnson didn't show up to the committee's March 6th hearing on capital formation, which he was scheduled to open-- he reported a prior commitment with the Energy Committee, which he is a member of. Meanwhile, reports are that state regulators and others are spending a lot of time and money trying to scare Congress away from passing a crowdfunding exemption, or at least to have it watered down to ineffectiveness.

Here's a sneaky example: On March 5th, a couple of days before the House vote on JOBS Act, two organizations called the Consumer Federation of America and Americans for Financial Reform sent a letter to all members of the House strongly opposing the act. I'm including the letter below because I think it's worth parsing. At the top of the letter, it says, "We are writing on behalf of the Consumer Federation of America and Americans for Financial Reform (“AFR”) to express our strong opposition to this ill-conceived legislation."  Then, if you skip down to the end of the letter, there's a long list of what appear to be signatories, including Common Cause, Consumers Union, CREDO Mobile, Move On, and many of the big labor unions and PIRGs. It looks like everyone opposes the JOBS Act.

But read the fine print above the "signatures" and you see that they actually aren't signatures at all -- it's just a list of "partners of Americans for Financial Reform," but "Not all of these organizations work on all of the issues covered by the coalition or have signed on to every statement."  Meanwhile, the only two real signatures on the letter are the Consumer Federation of America and Americans for Financial Reform themselves.  These two organizations wrote this letter "on behalf of" themselves (and no one else), which seems like a strange way to word things, and then listed all of their partners, signature style, at the end of the letter.  The only explanation I can think of is that this letter was intentionally crafted to mislead people who might just read the first paragraph, and then skip down to the end to see who signed it.  Is this tactic common in DC?  Do the neutrality-defending lawyers at the Consumers Union (for example) know that their organization's name is being used in this way?

Click here to download:
CFA-AFR-JOBS-Act-Letter-3-5-12.pdf (113 KB)
Contrast this dishonest letter with this February 29th letter from the Small Business & Entrepreneurship Council (whom Woodie has been working with), which supports CF exemption legislation and has the following as actual signatories, no trickery:

Harry Alford, President & CEO, National Black Chamber of Commerce
Kristie Arslan, President & CEO, National Association for the Self-Employed
Roger Campos, President & CEO, Minority Business Roundtable
Allen Gutierrez, National Executive Director, The Latino Coalition
Barbara Kasoff, President & CEO, Women Impacting Public Policy (WIPP)
Karen Kerrigan, President & CEO, Small Business & Entrepreneurship Council
Todd McCracken, President, National Small Business Association

So now we're all wondering what's going to happen in the Senate. It no longer looks like the CF exemption and its JOBS Act kin will die there, and hopefully it will find a champion in the Senate-- ideally a Democrat, but Jeff Merkley's bill in its current form is brain-dead and embarrassing.  It doesn't require an open means of communication among investors and offerors, which is essential to crowdfunding, and it does not not preempt state law, so it would basically have no effect.  What it authorizes is already legal, the one exception being that it allows for the creation of web-based intermediaries.  The tables are seemingly turned on this issue, with the Senate Dems starting out by working to preserve the 1%'s monopoly on independent investment opportunities.

Fortunately there's work going on to improve the proposal from the Democratic side in the Senate.  Michael Bennet (D-CO) is now collaborating on a new or significantly revised crowdfunding bill -- see his tweet from yesterday: "Crowdfunding passed the House 390-23 & I’m pushing it in the Senate. RT if you think letting small biz raise start-up $ online is smart."  Woodie has been working with the Merkley and Bennet offices and says that they understand that Merkley's original bill is too restrictive for CF to flourish under.

We have a small window of opportunity now, as Woodie says. Here's how you can help:
  • Call Harry Reid and Tim Johnson's offices to express your support for a meaningful crowdfunding exemption:
    Harry Reid (D-NV), Senate Majority Leader: (202) 224-3542
    Tim Johnson (D-SD), Senate Banking Committee Chair: (202) 224-5842
  • Tell the Senate to Legalize Crowdfunded Securities with a Full-page Ad in Politico - this campaign is even more important now, after last week's news, and there's not much time left to reach the goal.  If you've read this far, you can at least cough up a measly $5.
  • Register yourself on
  • Retweet Bennet's tweet - hey, it can't hurt, but I'm reluctant to list this here since I think it's only marginally helpful. Please don't consider this by itself as "doing your part."