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.
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 http://www.nlcfa.org/NLCFA/Members.html (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.