HR 2930 to House Vote This Week, WSJ Article

HR 2930, the " (the "Entrepreneur Access to Capital Act," aka Crowdfunding Exemption act) is expected to be voted on the House floor later this week, and DC folks have told me that they expect it to pass.  I can't stop saying "wow."  No word yet (that I have been privy to) on whether / who in the Senate might introduce anything similar, but it seems like a golden opportunity, and I hope it's someone from the other side.  I don't know where an official copy of the revised HR 2930 is, but see the markups below (PDF).

Also-- interesting article today on HR 2930 in today's Wall Street Journal, "When 'Friending' Becomes a Source of Start-Up Funds."  HR 2930 would preempt state regulations for the low-value offerings that it covers, so it's not surprising to see opposition from state securities regulators.  Arkansas securities commissioner Heath Abshure's model seems to be a scammer with no personal connection to his "marks" -- a scenario I believe the proper framework would discourage.  State regulation is very important, and I think there's a nice symmetry to what HR2930 proposes: very low-value and local offerings are unregulated; low-to-medium value and local to intrastate wide offerings are regulated by the states; and big-money, geographically unlimited offerings are regulated by the SEC.

Comments on the WSJ article are split, which is also interesting.  The collective brain will need time to process the whole idea, and I hope for a great discussion involving the nature of things like family, friends, community, trust, etc.

Click here to download:
hr2930amend1.pdf (36 KB)


Click here to download:
hr2930amend2.pdf (24 KB)


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hr2930amend3.pdf (37 KB)


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hr2930amend4.pdf (23 KB)

Revised (improved!) HR 2930 now before full Financial Services Committee with bipartisan support

Late background: on Sept 21, the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises held a hearing (agenda and testimonyvideo) on HR 2930 (the "Entrepreneur Access to Capital Act"), along with a few other bills aimed at encouraging entrepreneurship.  HR 2930 started as a very simple bill calling for a $5M/$10K crowdfunding exemption, not very different from the $1M/$10K exemption proposed by the White House.

Well, the big news now is that a revised version of HR 2930 is now before full House Financial Services Committee with bipartisan support!  Next step, the House floor!

Also great news, the revised version has a lower aggregate limit ($2M instead of $5M, consistent with Barney Frank's suggestion, see below) and some protections that I had wished were in the original bill: mandatory disclosures, warnings, avenues for issuer/investor communication, etc.  Hooray!  Here's an informed stab at what the revised bill will look like, from William Carleton:

I apologize for not reporting here earlier about the Sept 21 hearing. 
In his opening statement at this hearing, subcommittee chair Scott Garrett (R-NJ) explained, 
"A couple of weeks ago as part of his jobs plan that he outlined at his speech over at the joint session of Congress, the President outlined some ideas that, in the case of Congressman Schweikert's bill, Reg A, we have passed out of this committee already, and in some other cases are similar to proposals that we will be considering today. So I'm pleased that we have a bipartisan momentum, it would seem, behind efforts to tap into the potential for American entrepreneurs to build companies and to create jobs."

Committee member Barney Frank (D-MA) specifically addressed the crowdfunding proposal in his opening statement: 
"On some of these bills there's some debate about the level. A million is too low on the crowdfunding, but 5 million may be too high, maybe there are some intermediate things you can do."

Good recommendations from the Sept 21 hearing include the following from the testimony of Dana Mauriello, President of ProFounder: "Anyone who lives within 100 miles of the business (bricks and mortar location) should also be able to invest based on the premise that they can do appropriate due diligence by visiting the business, verifying that it exists, testing its product, and seeing its traffic."

In other month-old news, on Sept 26th, Amy Cortese, author of Locavesting, wrote an op-ed piece for the New York Times ("Pennies From Many") arguing for a crowdfunding exemption. The piece does a great job of explaining to those unfamiliar with the issue what such an exemption would mean and why it would help-- it's a good thing to send to people to introduce them to the topic.

In general, however, momentum behind a crowdfunding exemption, a macroeconomic change that would have major effects, has received little media attention-- perhaps because it runs counter to the established narratives of partisan gridlock in DC, and hopelessness against the monopoly of Wall Street.

Congressional Testimony and HR Bill 2930, the "Entrepreneur Access to Capital Act"

A lot has been going on that I haven't had a chance to report on here, but this post catches up. To me, it now seems like a crowdfunding exemption has suddenly become "cool" in DC, and Democrats and Republicans are engaged in a game of "I was a punk before you were a punk."

Since my last post, I reported on the bipartisan interest in a crowdfunding exemption for O'Reilly Radar, and the Atlantic blog also reported on it (9 Sep). On, Gary Weiss criticized the idea as "Obama Signals Green Light for Stock Fraud" (13 Sep).  Woodie Neiss appeared on MSNBC's The Dylan Ratigan Show to discuss the crowdfunding exemption idea in general and explain his Startup Exemption framework (14 Sep).  Ratigan called it "an intriguing proposal" and said, "I love it."

Then came September 15th. Here is a video of the full Congressional hearing (2:15:06), "Crowdfunding: Connecting Investors and Job Creators," before the House Committee on Oversight and Government Reform, Here is Woodie Neiss's written testimony, and here is a transcript of testimony from Meredith Cross, the Director of the SEC's Corporate Finance division.

That same day, Rep. Patrick McHenry (R-NC), who chaired the hearing, also introduced HR Bill 2930, the "Entrepreneur Access to Capital Act," which is proposed "To amend the securities laws to provide for registration exemptions for certain crowdfunded securities, and for other purposes."

HR Bill 2930 is very short; you can read it here:  It basically asks for a crowdfunding exemption capped at $5 million for total offering, and the lesser of $10K or 10% of income for individual investment.  That's it, and if I read it correctly, it supersedes state Blue Sky laws.  I think the 10K cap is dangerously high and would like to see additional provisions to prevent fraud, but of course it's nice to see the idea put out there.

Meanwhile, I assume that the White House is working as promised on recommendations for a regulatory framework for the SEC that would allow crowdfunded securities while preventing fraud  -- I would guess that this might include things like mandatory disclosures, dedicated discussion forums for each offering, and lightweight investor education.

So it's moving ahead very fast, and the lines that seem to be forming are that the White House is championing a careful regulatory approach (as has been discussed here, the SEC has the authority to write new exemptions without Congress), while Republicans in Congress (or at least Patrick McHenry and Darrell Issa) favor looser and simpler legislative-based deregulation.

Several outlets have reported on this, including Bloomberg and Reuters.

More recently (reported today), Meredith Cross recused herself from the SEC's discussions of crowdfunding because of her possible conflict of interest (or the perception of it) stemming from her having consulted for the peer-to-peer lending platform Lending Club.  This development does not surprise me, given my impressions from last year of the people at the SEC who are studying crowdfunding.  I have my doubts about the rest of the Commission, but the Small Business Policy people are very careful and thoughtful, and I believe they genuinely want to help small businesses in ways that are fair and beyond reproach.

White House to work for 10K/1M crowdfunding exemption

More wonderful news!  As part of the American Jobs Act introduced by President Obama earlier today, the White House announced that it will work with the SEC on a crowdfunding exemption.  Here's how the White House Office of Science and Technology explain it on their website (and link to IndieGoGo and Kickstarter projects as examples):

As part of the President’s Startup America initiative, the Administration will work to unlock this capital through smart regulatory changes that are consistent with investor protection.  This means reducing the disproportionately high costs that smaller companies face when going public, as well as raising the cap on “mini” public offerings (Regulation A) from $5 million to $50 million.  It also means responsibly allowing startups to raise money through “crowdfunding” – gathering many small-dollar investments that add up to as much as $1 million.  Right now, entrepreneurs like these bakers and these gadget-makers are already using crowdfunding platforms to raise hundreds of thousands of dollars in pure donations – imagine the possibilities if these small-dollar donors became investors with a stake in the venture.

In a conference call with the press immediately after Obama's address, U.S. Chief Technology Officer Aneesh Chopra and Office of Science and Technology Policy Deputy Director Tom Kalil explained that they advocate an exemption, or at least a streamlined and less-expensive registration process, for public securities offerings of $1 million or less, with individual investment capped at $10K.  They also said that they believe the SEC has the authority to make this regulatory change, no legislation required.  (Agreed-- IANAL, but the Securities Act seems pretty clear about the SEC's having the authority to write its own exemptions.)

W00t!  This is going to be great-- I hope it gets figured out and enacted soon!

[UPDATE June 2012: One thing I did not originally include in this post was that Woodie Neiss and wrote a 2-page brief on crowdfunding exemption proposals for the White House, at the request of Doug Rand from OSTP.  Woodie and I collaborated on it via Google Docs, and after we submitted it, Doug said that it caught the interest of lot of people over there. So in the run-up to Obama's September 8th speech, I had suspected that a crowdfunding exemption might be mentioned (and then thought-- naah, no way).  It turned out that the speech itself did not mention it, but as reported above, White House OSTP announced its support for a crowdfunding exemption immediately after the speech.

I figure it's fine now to publish this 2-page brief, and in the interest of clear chronology I'm putting it at the end of this summer 2011 blog post. I let Woodie be the main contact for Doug on this, so he's the one who actually sent it -- therefore I can't vouch for this version's being exactly the same as what was sent, but I'd be surprised if there were any substantive changes.

Click here to download:
OSTP-2-pager.pdf (74 KB)
Note the suggestion that a regulatory approach, just working with the SEC, would be easier than a legislative approach, because it would not "stir up partisan politics."  Little did we know...]

[UPDATE January 2013: When Woodie and I were working on this, I wondered about the claim that crowdfunded investing was already legal in "Denmark, Hong Kong, and India, and the Chinese company GrowVC now offers crowdfunded investments to US citizens via servers located in Hong Kong." At the time, I didn't know any sources that corroborated these assertions, but I trusted that Woodie knew more about the topic, and that he had good reason to include this list of countries.

Recently, still wondering about this, I asked someone who knows a lot about international crowdfunding law, and he said that, no, it has not been legal in either India or China.  So I feel sorry now that in my one chance to help out the White House with some research, I delivered information that was incorrect.

The earliest reference that I can find for the incorrect claim that crowd investing is legal in India and China is on the Startup Exemption blog from May 9, 2011, which closely pre-dates my and Woodie's working on our brief for OSTP:

"Even though Crowd Fund Investing (CFI) is taking place in the U.K., Holland, India & China, in the U.S. it is not permitted because it breaks the Security & Exchanges’ accreditation and solicitation rules."

I'm not sure where this "India & China" assertion came from, but now I'm wondering if it was just effective "disinformation" -- since those are the two countries that U.S. politicians are probably most afraid of falling behind economically. If so, I feel bad about participating in and having my name associated with such tactics.]

US Congressional Hearing on Crowdfunding, September 15th

Great news from Sherwood "Woodie" Neiss-- a Congressional hearing dedicated to crowdfunding has been scheduled for next Thursday, Sept 15th, by the House Committee on Oversight and Government Reform.  This is something he's been working on for a while, great to see it happening!  Details below.

Meanwhile, if you haven't already, check out Woodie's Startup Exemption petition, sign it, and feel free to send suggestions!  That's where the movement is moving.

Next Thursday's hearing isn't posted on Oversight's calendar yet, but it should be listed here soon:

Hearing Title: "Crowdfunding: Connecting Investors and Job Creators"
Oversight & Government Reform - Subcommittee TARP, Financial Services, & Bailouts of Public and Private Programs
Chairman: Rep. Patrick McHenry
September 15, 2011
Location: Rayburn House Office Building - Room 2154

Woodie will be testifying, and I understand that the guys who did might also testify.  If so, then honestly, I question this choice.  Of course the SEC should have shut them down -- and besides, what does this stunt to crowdfund the purchase of Pabst Brewing Company have to do with the wealth of grassroots entrepreneurship and innovation that you see today on the major crowdfunding sites?

Maybe I'm missing something, but I wonder why Congress is spending time on this story.  Did the perpetrators of this amusing prank work their way into the hearing to gain publicity for themselves?  Does someone on Oversight want to trivialize crowdfunding as an unserious hipster fad?

UPDATE (Aug 2012)

I'm updating old blog entries to include linked screenshots to relevant external documents from around the same time. Here's one:

9 Sep 2011
"Crowdfunding gets traction in D.C." by Paul Spinrad, O'Reilly Radar

This post reports that the White House Office of Science and Technology Policy (OSTP), immediately after President Obama's long-awaited speech on jobs, advocated for a crowdfunding exemption capped at $10K individual / $1M aggregate, as proposed by Woodie Neiss.  This was the crowdfunding exemption's "elbow of the hockey stick" moment, after which the issue moved very fast; Rep. McHenry (R-NC) introduced H.R. 2930 into Congress the following week (on Sept 15, the same day as the hearing mentioned in this post), and the rest is history.

I had hoped (but felt it was a long shot) that Obama would mention crowdfunding in his Sept 9 speech, because two months before that, Woodie Neiss and I wrote a brief about crowdfunding exemption proposals for the White House that we were told was well-received, and we knew that Doug Rand at OSTP had been deep-diving into crowdfunding, talking with many people involved, and seemed interested and excited about its potential. As it turned out, Obama's speech itself did not use the term "crowdfunding" (nor did his April 5, 2012 remarks at the JOBS Act signing), but OSTP's Sept 9 2011 announcement did use the term, and illustrated it well.

More academic scholarship supporting exemption

Here's another new paper supporting a small offering exemption.  This one even says so in the title!

Crowdfunding Microstartups: It's Time for the Securities and Exchange Commission to Approve a Small Offering Exemption
Nikki D. Pope
Santa Clara University School of Law
University of Pennsylvania Journal of Business Law, Vol. 13, No. 4, pp. 101-129, 2011

Add this to the Bradford / University of Tennessee paper and the Heminway/Hoffman / University of Nebraska paper.

"Each proposal has attributes common to others; and each proponent makes important arguments. We believe there is value in reading and considering each of these proposals in the regulatory process."
-- Heminway and Hoffman, p. 62.


Click here to download:
SSRN-id1916985.pdf (129 KB)

SELC Washington State exemption petition

Very exciting news!  The SELC recently sent a petition to the Securities Division of the Washington State Department of Financial Institutions advocating a state level securities exemption, along the lines of SEC exemption proposal File 4-605, but with a $1000 (not $100) cap on individual investment.  Since federal law leaves securities regulation up to the states in cases where an offeror and all investors live within the same state, an exemption like this would be fantastic for local investing and entrepreneurship.

The Sustainable Economies Law Center has decided to begin its efforts with the state of Washington for several reasons. First, Washington is known as having one of the most small-business friendly securities divisions in the country. Second, there are many community-based organizations throughout Washington state that have expressed interest in supporting a rule change that would make it easier for communities to invest locally.

This is an opportunity.  If you have any affiliation with any organization that seeks to do good things in Washington State, or even if you just reside in the state, you can help enormously by taking a few minutes to write a good, old-fashioned letter in support of this petition to Scott Jarvis or Bill Beatty at the address at the top.  This is not a well-known issue targeting one of the usual political offices; for something like this, every letter will make a difference.

Click here to download:
SELCWARulemakingrequest2.pdf (175 KB)

Two recent legal/academic exemption proposals

I was just clued into a couple of small-offering / crowdfunding exemption proposals published in academic Law Reviews (one of them forthcoming).  Both cite the SELC and Startup Exemption petitions as antecedents, and make alternative proposals along some of the same axes (size of cap on offering, size of cap on individual investment, offeror and investor qualifications, disclosure and transparency terms, etc.) while adding lots more legal discussion and academic rigor .

Crowdfunding and the Federal Securities Laws (Draft, 8/24/2011)
C. Steven Bradford
University of Nebraska College of Law

Proceed at Your Peril: Crowdfunding and the Securities Act of 1933
Joan MacLeod Heminway and Shelden Ryan Hoffman
Tennessee Law Review, Vol. 78, No. 4, 2011
University of Tennessee College of Law


Click here to download:
SSRN-id1916184.pdf (1.54 MB)


Click here to download:
SSRN-id1915677.pdf (442 KB)

The Bielsco-Biala Declaration

Check out "Realising the full Potential of Crowdfunding Initiatives: The Bielsco-Biala Declaration."  Subtitled like the manifesto that it is, this 4-page document will be presented this November at AGORADA, a conference on "Smart Regional Specialization" organized by Eurada, the European Association of Development Agencies.