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 Amazon.com "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:
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."
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 Rockethub, Crowdcube, Prosper.com, 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.
[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.
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.]
UPDATE (June 2012): Here is an account I wrote for the MAKE blog about attending the JOBS Act signing, with photos aplenty: Seeing the Crowdfunding Exemption Become Legal.
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.