The Cool Kids at the SEC

Before last Thursday's SEC Annual Forum on Small Business and Capital Formation, I suspected that the afternoon breakout sessions, the event's main avenue for public comment and discussion, might involve being corralled into a room to rant together without actually being heard by the SEC. Thankfully, I was completely wrong. SEC staff co-ran the open sessions with panelists from the morning presentations, and were deeply engaged and interested in the discussions. They actively made sure that recommendations from all attendees were heard and impartially transcribed into a master list. In the coming weeks, all attendees will be sent this list and asked to vote to prioritize it, with the results published on the SEC's website, along with video and transcripts of all the panels and presentations.

Against the recent backdrop of news stories detailing mind-boggling ineptitude and possible corruption at the SEC, it's easy to generalize about the place, but I was very impressed with the folks in the SEC Office of Small Business Policy. It's a small group, with only six full-time staff. But as SEC chair Mary Schapiro noted in her presentation, small businesses are responsible for 60% of all domestic jobs in and 90% of all U.S. patents. (It also generates over half of the country's private non-farm GDP.) So that means six people at the SEC are in charge of regulating securities for most of the U.S. economy and nearly all of its innovation (in terms of patents, at least). Presumably the SEC's other 3792 employees somehow divide up the rest.

Furthermore, as one person at the Small Business Forum quietly mentioned once, Office of Small Business Policy had no hand in any of the SEC's recent scandals.

But this characterization isn't entirely fair; the rest of the SEC has its own ongoing work: participating in the vast machine that has, in the name of investor protection, acquired the ability to harvest profits from the non-millionaire, unaccredited-investor public's bank accounts, investment accounts, retirement accounts, homes, and other assets by shutting down all shareholding options outside of their own managed menu of non-local, in-system big businesses.

Given these facts, I think of the Office of Small Business Policy as the cool kids at the SEC. And in a moment that I hope was understood as simple appreciation and enthusiasm, I shared this characterization with one of its staff. He responded that it wasn't true, explaining that they are sometimes listened to, but that the high-paying private-sector jobs that people take after working at the SEC are not open to people from their group. I took this to mean that in other SEC departments, people do their time in order to jump the fence to the easy green, but the Small Business Policy folks actually believe in what they're doing, and tend to continue working there.

OK, enough gushing. Here's a more specific trip report. The take-away is that Gerald Laporte, who heads the SEC's Office of Small Business Policy, now wants to figure out how the SEC should address the SELC's de minimis exemption petition, and crowdfunding in general. This is great news!

The blow by blow: On Wed eve Nov 17th, a bunch of us got together at the CommonWealth Gastropub in DC: me, Frank Knapp (South Carolina Small Business Chamber of Commerce), Atlee McFellin (American Sustainable Business Council - ASBC), Stacy Passeri (KiteTale LLC), Brian Parkinson (recent Law School grad with community development experience), and Doug Rand (White House Office of Science and Technology Policy - OSTP). Unfortunately my phone ringer was on too low, so I missed Ken Priore (SELC) -- but I hooked up with him the following day.

We had fun introducing ourselves and discussing the proposed exemption. Two ideas that bubbled up were, 1) the SEC would probably want to limit the specific contract between offeror and investor-- it's not enough to just say "that's up to the parties involved" because they're interested not just in whether the offeror fulfils the terms of the agreement, but whether the terms are fair in the first place, and 2) investment offerors need to earn the right to do a crowdfunding offering by being as transparent as possible, publish your checkbook etc.-- "radically transparent" is the only way to play if you want to crowdfund a securities offering.

Meanwhile, Doug Rand recommended that I discuss crowdfunding with Gerald Laporte at the SEC forum the following day, and keep in mind the SEC's inevitable question, "what about fraud?"

On Nov 18th, at the forum itself, the SEC Small Business folks seemed genuinely interested in considering our exemption petition. Kevin O'Neill assured me that they read and consider all of the public petitions and comments submitted to the SEC, and that their decisionmaking can take a while, but that we should continue pushing. Anthony Barone said that they've been discussing our exemption proposal and see its potential, but are leery of it due to bad memories of widespread "microcap" stock fraud that was widespread during the 1990's.

(So now I want to learn more details about that , and figure out the similarities and differences between 90's era microcap and crowdfunding today and under a possible exemption in terms of potential for fraud. For starters, crowdfunding probably has lower stakes, and 90's microcap investors weren't one click away from communicating with everyone else making the same investment, and one Google tab away from the ability to instantly search and verify any claims made by the offeror.)

Michael Sauvante of the CommonWealth Group, whom I had originally met a couple of weeks ago at the SELC launch party, also met with Gerald Laporte and learned that Gerald was going to look into crowdfunding issues for the SEC. Michael said that Gerald had said that he'd received some "pressure from the White House" regarding crowdfunding, so I'm wondering if the OSTP folks might have been the source-- if so, I'm sure that helped, and they are to be thanked! [OSTP did not do this; see Addendum below]

Michael also said that they'd heard about a very new book about crowdfunding that sounded interesting and was available on the Kindle. I recognized this as Kevin Lawton and Dan Marom's groundbreaking The Crowdfunding Revolution, which you should all read-- I'll post a review soon. So I called up Kevin (whom I know-- he's a great guy and he also lives in SF) and talked to him about how Michael and Gerald could see a sample and buy copies-- so that's cooking now.

By all accounts, the SEC will be up to their ears until at least mid-2011 dealing with Dodd-Frank legislation, which requires 90+ rule changes etc. But Michael Sauvante got an assurance from one of the Small Business folks that they should be able to start at least looking at crowdfunding-related rulemaking around February 2011.

Addendum, 29 Nov 2010: OSTP has no authority over the SEC, which is an independent agency, so they cannot "apply pressure" to the SEC-- and even if they had tried, this would not have been appropriate or good. (I was informed of this twice, and the second time it stuck...)  Also, I don't mean to diss all the people at the SEC who regulate big business; they're doing very important work and I believe that most of them are competent, dedicated, and trying to do what I would consider the right thing. (I would welcome a conversation with anyone who works there.)

 

DC action plan: Nov 17 eve meetup / Nov 18 SEC Small Business Forum

For people attending this week's  SEC Small Business Forum in person with an interest in the de minimis regulatory exemption proposal SEC File No. 4-605 by the Sustainable Economies Law Center (SELC), here's the plan:

Wednesday eve, Nov 17th

We'll be gathering Wednesday evening starting 7:30pm in the bar area of the CommonWealth Gastropub (1400 Irving St NW, 202-265-1400, commonwealthgastropub.com) to meet in person, coordinate for the SEC forum, and plot the revolution. All are welcome! To help you recognize us, I'll be wearing a leaf pinned to my shirt, ribbon style-- it'll be an actual leaf, like from a local, sustainable, green, growing, biodegradable tree out on the sidewalk.  If anyone else in our group wants to do the same, it will make our group easier to identify, and will also make me feel like less of a dork.

Among those I'm hoping may join us on Wednesday, besides the SELC and American Sustainable Business Council (ASBC) folks, are representatives from the Capital Formation Institute (CFI), Catalyst Capital Management, the Commonwealth Group (Lompoc, CA), KiteTale, the South Carolina Small Business Chamber, and Wall Street Without Walls.

For late updates, like if there are too many people at CommonWealth Gastropub watching football and we move elsewhere, I'll twitter @pspinrad.


Thursday, Nov 18th

The SEC's agenda has been posted for Thursday.  Unfortunately, it looks like it's pretty much sitting in an audience until after lunch, but then at 2pm we divide into breakout groups-- ours is in Room 6000, "Securities Regulation of Smaller Public Companies." I hope we can bring our lunches or otherwise get into Room 6000 early and find the good seats prior to 2pm.

If you can only make it for part of the day, these breakout groups, which run until 4:45, seem to be where attendees are actually granted the talking stick (although the agenda's footnotes indicate that no SEC staff are expected to attend these sessions).

Then at 4:45 there's a wrap-up in the auditorium, which also seems open-ended since it has a moderator, and at 5:30 is the "Networking Reception at Nearby Restaurant." It should be interesting, and I'm really looking forward meeting everyone in person and seeing what happens!

UPDATE (Aug 2012)

I'm updating old blog entries to include relevant external documents from around the same time. Here's one that I wrote for Boing Boing to catch people up on campaign progress and invite interested people in DC to come join our SEC Forum pre-party on Nov 17th.

12 Nov 2010
"Grassroots Securities Deregulation," Paul Spinrad, Boing Boing

 

 

Let's Go: SEC Small Business Forum, Nov 18

Every year, the SEC holds its Government-Business Forum on Small Business Capital Formation (a.k.a. Small Business Forum), to discuss small business policy. It's open to the public, and I've been told by people at both the SEC and at the White House that it's the place to be for promoting SEC rulemaking petition File No. 4-605.

So, I'm going! I'm attending as an affiliate of the Sustainable Economies Law Center (who wrote the petition), along with others who support the petition, including representatives from the American Sustainable Business Council. The forum takes place Thursday, November 18 from 9:00 am to 5:30 pm at SEC headquarters in Washington DC, and registrants can participate either in person or remotely.

You can find out more and register for the forum at http://www.sec.gov/info/smallbus/sbforum.shtml. It should be very interesting-- I'm looking forward to it!

I also want to get together Wednesday evening (Nov 17) with any other 4-605 supporters who are attending the forum, so that we can all meet in person and perhaps strategize a bit. Let's meet up somewhere in or near the Adams Morgan neighborhood, north of Dupont Circle, specific time and location TBD (unless the ASBC folks have another plan). Please let me know if you want to join us!

http://www.sec.gov/info/smallbus/sbforum.shtml

 

Change.org petition surpassing original goal

Last weekend, CREDO Action member Mimi Plevin-Foust posted a petition on change.org that does a terrific job of summarizing the issue and lets you submit a comment to the SEC by clicking a "Sign" button instead of sending an email. Mimi's original goal of 100 signers is close to being reached, so she raised it to 200. Yay!

As of this writing, these letters have not yet appeared on the SEC's comments page, but with past petitions the SEC has registered identical or near-identical comments online as a single "Letter Type A" and tallied them, rather than listing the individual signers.

http://credoaction.change.org/petitions/view/tell_the_sec_let_americans_inves...

CORRECTION, Nov 5, 2010: The letters generated by the CREDO/Change.org petition are sent to the office of SEC Chair Mary Schapiro, not rule-comments@sec.gov, so they will not appear on the SEC's website.

 

 

Jenny Kassan Radio Interview

Jenny Kassan, who authored SEC rulemaking petition File No. 4-605, did a great radio interview about it last Friday, Oct 29, on U Need 2 Know with Frank Knapp (tagline: Talk Radio for the Brain), WOIC 1230 AM, Columbia, SC. Knapp starts out by saying he's "fascinated" by our proposal, and among other things, Jenny mentions the support from the American Sustainable Business Council. The interview is about 12 minutes long-- check it out!

The Sustainable Economies Law Center focuses on small businesses seeking local community-based investment rather than artist types crowdfunding creative ventures online, so that's what the interview discusses-- but people in both camps want the same exemption.

 

American Sustainable Business Council to support SEC File No. 4-605

Great news: the American Sustainable Business Council (ASBC), a DC-based lobbying and advocacy group, has decided to support our SEC rulemaking petition as part of a new "Sustainable Economic Development" campaign, which will also encourage the SBA (Small Business Administration) to promote "TBL" accounting (Triple Bottom Line: financial, labor, and environmental)-- informed in part by the City of Cleveland's promising new efforts to "Empower a Green City on a Blue Lake."

The ASBC's new Sustainable Economic Development campaign will be on their back burner (and won't appear on their website) until January or so, because they're currently focused on other efforts targeting the current Congress during its remaining time in session.  But after the new Congress is sworn in, it's time for this baby to explode-- in a positive sense.

Emails help, but tweets do not (unless they generate emails)

Executive Summary:


Please email comments to SEC on Crowdfunding Exemption (File No. 4-605)!  If more people don't simply email the SEC (at rule-comments@sec.gov) about crowdfunded securities, it will continue to look like there's very little public interest in the issue.

Body:

Most political operations invite you to sign some semi-meaningless petition as a psychological trick to lead you to contribute money.  "Well, I've already taken the effort to sign my name," you're supposed to think, "so I might as well kick in a few bucks while I'm at it."

The Crowdfunding Campaign to Change Crowdfunding Law is in the opposite situation-- we don't need any more money.  We already raised the funds for supporting the Sustainable Economies Law Center to draft its mighty petition to the SEC, "Request for rulemaking to exempt securities offerings up to $100,000 with $100 maximum per investor from registration" (PDF).  That was the hard part, and it's done.

But the second phase of the campaign is to get people to email the SEC with comments on the petition, in order to demonstrate public interest and support for the idea of a "crowdsourcing exemption" for low-value securities.  And so far, this second part has failed.  From the relative lack of comments submitted over the past few months (20 have trickled in so far), the SEC could easily conclude that the public doesn't care about a crowdfunding exemption.

But I suspect that interest is out there; it just hasn't shown up to the demonstration site yet.  Soon after the SEC posted the petition to its website (July 1) I wrote a blog post to spread the word and encourage comment submissions. During the following two weeks, hundreds of people tweeted and retweeted the campaign, saying things like "This is cool."  This showed interest, but meanwhile, only a few people actually sent emails to rule-comments@sec.gov, so almost all of that interest went nowhere.  I know it sounds cranky to say this, but if a fraction of the people who tweeted the campaign had instead sent one-line emails to the SEC, it would have been a powerful demonstration!

I haven't had much spare time since then to shake the trees on this, but now I'm getting back to it.  I want all the great work so far to go somewhere, rather than fizzle away to nothing!  That's why last week I finally submitted my own comment on the petition, and now I'm writing this to harass you to do the same!

So, please send in a comment, even a very short one ("I agree"), and/or get others to do so!  It's easy, and you can do it in less time than it took you to read this far.

Seth Elliott's Facebook page dedicated to this effort has full instructions-- but note that "liking" the campaign on FB does nothing; what matters is actually emailing the SEC.  Frederic Baud has wrapped the email specs up into a mailto: link that's one-click easy.  I'll also spell them out here:

1. Email the SEC at: rule-comments@sec.gov.

2. In the Subject line write: Re: File # 4-605

3. In the body of the email write "These are comments in regards to a petition for rulemaking change," or similar, and then say whatever you want.

That's it!

If you are currently involved with crowdfunding small business ventures, or ever expect to be in the future, I believe it is very much in your best interest to spend a small bit of time to fire off a quick email to the SEC.

As Peter J. Chepucavage, Executive Director of the CFAW and General Counsel for the Plexus Consulting Group in Washington DC said in his comment (PDF), "This independent proposal can be a focal point for encouraging the commission's attention to the need for small business flexibility and should be incorporated into a formal rulemaking procedure."  (Thanks, Peter!)

Kevin Lawton on Strategy

Entrepreneur and business writer Kevin Lawton has put together a great series of presentations about crowdfunding from an investment perspective. Here's the last one (Part 3), which mentions our SEC petition campaign at the end: http://ow.ly/2cb7X


Recently I had a great conversation with Kevin, who's excited about crowdfunded securities, but doesn't think this petition is the way to get there. Here are the highlights:

* This exemption may help small local businesses or individual creative projects, but it's too low to help 99% of the ventures that the business world would be interested in. The $100K cap "doesn't even move the needle" for people involved in business startups, except possibly for some mobile or web application development.

* Ironically, this initiative may actually harm the chances for legal crowdfunded securities at any economically meaningful level. The SEC may eventually green-light this exemption as a way to throw a bone to the crowdfunding crowd (and avoid significant change). And because government is slow, it will be even more years before those numbers would be revisited. Meantime, other countries (like India with GrowVC, http://growvc.com), will support crowdfunded securities at more significant levels. As a result, their economies and business climates will benefit, and the U.S. will suffer and be left behind.

* For a rulemaking petition to the SEC, a better approach would be to hammer out a more inclusive proposal with a small, smart group that includes experts on community-supported entrepreneurship, the heads of the big crowdfunding sites, and people in the business investment world. Come up with a proposal that appeals to all of these groups, and then rally everyone to support this new proposal, retracting the current one and transferring its momentum to the new one. The SEC would be more moved by an explicit, "Here's the one killer crowdfunding proposal that all of these diverse groups support," than any possible implicit, "A bunch of competing pro-crowdfunding petitions have been submitted for your review by different groups-- they all ask for slightly different things-- good luck figuring it out!"

* The business world needs to lead on this issue, collectively, fully transparently, and with good intent-- and then the SEC will catch up. One approach would be for securities offerors to start flouting the restriction on general solicitation, which the SEC has been fighting to maintain for over a decade already. Securities offerors could begin publishing and distributing investment solicitations to the public, while also registering them with a government-friendly database that's maintained by a dedicated non-profit, in the "Self-Regulatory Organization" (SRO) model-- see http://en.wikipedia.org/wiki/Self-regulatory_organization. The solicitations would remain retrievable in perpetuity, because sunlight is the best disinfectant. If just a few securities offerings did this, the SEC would nail them-- but if it became a mass effort, involving large numbers of legitimate investments, it would change the rules and the SEC would have to adapt.

* Such a disobedience scheme wouldn't address the separate issue of who could legally invest-- that would presumably still be subject to the SEC's existing framework of accredited / sophisticated / unaccredited investor classes (which likewise, sorely needs revisiting). But to move the "soul" of crowdfunding forward, to activate its ability to reach and leverage the greater talents and expertise of the many outsiders over the few insiders-- the wisdom of the crowd-- the prohibition against General Solicitation is the more important first target.

* A better way to set protective limits on crowdfunding investments, equally effective but more scalable than a simple, dumb cap (which resembles the current accredited/unaccredited distinction) is the following scheme: 1.) Let people put money into crowdfunding investment accounts, just as they can with other kinds of investment accounts, with the same restrictions, warnings, etc. 2.) From this account, allow them to keep only 1/N of the total invested in any one security, where N is probably some number like 5 or 6. In other words, mandate for diversification. That way, no one can lose all their eggs on one bogus crowdfunded security, but it gives people flexibility over the amounts they want to invest. (If you really just want to invest in one security, then the remainder of your account balance has to sit in some cash equivalent).

* A more profound point relating to this mandatory-diversification scheme is that failure is a greater threat than fraud. In early-phase investing, you expect 9 out of 10 investments to fail anyway, so if 1 in 100 is an actual, premeditated fraud, that just aliases as another failure and disappears in the wash. There is no clear distinction between failure and fraud anyway-- there's already plenty of shenanigans in the way startups spend their seed money, and if they fail (as most do), intent becomes hard to tease out.

Those were Kevin's main points (it was a long conversation), and I agree with him on almost all of this. I'd never met him before, but talking to him, I immediately liked him and appreciated his enthusiasm as a like-minded comrade. I also like his scalable, mandatory-diversification scheme, and his related thoughts on fraud vs. failure. Plus, of course, he has a real and successful background in business startups, which I lack.

The notion of the "Self-Regulatory Organization" would ordinarily make me want to reach for my revolver, with visions of accounting scandals, financial collapses, and oil-soaked marine life jangling through my head. Moreover, a centralized authority doesn't seem compatible with crowdfunding, which is inherently bottom-up and anarchic, not top-down. But I must agree that, to safeguard the future health of crowdfunding, some entity probably does need to set best practices for the sector, and work with / lobby government(s) on its behalf. And there should be only one such entity, rather than competing efforts-- and ideally, it should have a global reach, since the money will go wherever crowdfunding law is most hospitable.

Petition posted by SEC as File No. 4-605!

Great news: the SEC has posted the petition to their website, as File No. 4-605.  See http://www.sec.gov/rules/petitions.shtml to see it listed, and http://www.sec.gov/rules/petitions/2010/petn4-605.pdf for the petition itself.

So now it's time to spread the word and get those comments in!  Here's how to submit comments, which should appear on the SEC's website within a few business days:

1. Email the SEC at: rule-comments@sec.gov
2. In the subject line write "Re: File # 4-605"
3. In the body of the email write "These are comments in regards to a petition for rulemaking change."

If you look at the SEC's "How to Submit Comments" page (http://www.sec.gov/rules/submitcomments.htm), disregard the references there referring to an online form, or file numbers beginning with "S7-" or "SR-" -- these are for proposals issued by the SEC, not public petitions like ours.

(Thanks to Mitch Silverman and Seth Elliott for clarifying these instructions!)

If you like, you can also CC (or BCC) the message to comments at crowdfundinglaw dot com -- this is just for me to archive what's been sent, to see if anything isn't making it onto the SEC site.

Explain in your own words what you think of the idea and what your personal interest in it is. Fine with me whether you're for it, against it, or somewhere in between-- the main thing is just to encourage the SEC to consider this issue and open a dialog. Note that if you cut and paste, they will designate your letter as an example of a "Type" (e.g. http://www.sec.gov/comments/4-547/4547typea.htm) rather than an original contribution, which presumably carries less weight. I don't think burdening the SEC with copy-pasted activist spam will make any friends there or help the cause.

Here's a post I wrote for boingboing on Friday, which gives the instructions above, along with some background: http://www.boingboing.net/2010/07/03/sec-crowdfunding-exe.html

Since that boingboing post, scores of people have tweeted this campaign, which certainly helps to raise awareness-- but meanwhile only two have actually emailed comments to the SEC.  I find this disparity in numbers amusing.  But anyway, see http://www.sec.gov/comments/4-605/4-605.shtml -- and thanks to Mordicai Knode and Ben Schwartz for the good points and good discussion!

Petition-listing-screenshot

UPDATE (Aug 2012)

I'm updating old blog entries to include relevant external documents listed by date. Here's the one mentioned above:

3 Jul 2010
"SEC Crowdfunding Exemption action: File No. 4-605" by Paul Spinrad, Boing Boing

I wrote this to announce that the SELC proposal had been posted on the SEC site and was open for comments, hint, hint.  I assume that the first few commenters logged on the SEC's comments page were Boing Boing readers -- I don't know them. (But many of the later commenters on the SEC site are pals of mine whom I bugged to write in.)

IndieGoGo campaign pitch

I've moved the home page for this campaign from its fundraising page on IndieGoGo to here, so I think it makes sense to decant the original description into this new location.

Note that the fundraising ended, and the deliverable has been delivered. Check it out-- until this mighty document is posted to the SEC's own website (which should happen this week), you can read it here.

Here's the original pitch:

Crowdfunding sites like IndieGoGo offer VIP Perks but not shares-- because offering profit participation is illegal. Securities law lets you gamble your retirement on investments conveyed through the all-controlling financial system, but you can't invest $50 in someone you actually know personally, in order to help them start a small business, write a book, make a film, build an iPhone app or develop a new product that you believe has commercial potential.

The SEC can change this situation by introducing a regulatory exemption that caps individual investments at $100. I believe that doing this would change everything for crowdfunding, spark innovation, and help vitalize the economy from the bottom up.

The idea of an exemption based on very low cap on individual investment is not new; according to the SEC's Anthony Barone, it has been discussed and brought to the SEC's attention by academic economists. What has not yet been demonstrated is the extent of public interest in such an exemption.

This project offers a serious plan for essentially forcing the SEC to consider this possibility and respond to it publicly.

This issue is more complicated than can be explained on this short project page, but you can read the prospectus for the history and background on this project.

READ THE PROSPECTUS

SUMMARY

* The Sustainable Economies Law Center (SELC) has agreed to draft a Petition for Rulemaking for submission to the SEC that proposes legalizing crowdfunded securities, for payment of $1000 raised through crowdfunding. That's what this project is for.

* $1000 is a great deal, and the SELC is the perfect organization for this; highly regarded, and involved with these issues. See the prospectus for details).

* The SEC posts any Petitions for Rulemaking that it receives, along with all public comments. This area of the SEC website is surprisingly inactive.

* Once the SELC petition is posted, we mobilize crowd action to submit comments. If the SEC receives a large number of comments in support of legalizing crowdfunding, they will need to hire someone to process them all. This is an example of the ever-newsworthy Old Institution, Blindsided, Is Forced To Confront New Phenomenon.

Note that we originally thought the petition would be written under the auspices of the Katovich Law Group, but subsequently decided to have the work done by the SELC (which is affiliated with Katovich). This makes your contributions tax-deductible!