[Originally published on crowdsourcing.org, 19 Sept 2012]
Remember the Internet boom in the 1990s? That was triggered when Congress allowed the National Science Foundation (NSF) to revise its Acceptable Use Policy to permit commercial traffic on its Internet backbone. During that expansive time, Cyberpundit John Perry Barlow argued that the newly unleashed Internet was the most transformative technology since the capture of fire. Others compared it to the invention of the printing press or the automobile. But whatever your preferred antecedent, a stroke of the federal regulatory pen fundamentally democratized the flow of information, and led to an era of grassroots innovation, empowerment, and economic vitality that we are still enjoying. (Well, maybe not-so-much with the economic vitality today.)
Now the SEC is formulating regulatory changes that I hope will have similarly positive and far-reaching effects — not over the flow of information, but over the allocation of human effort. The JOBS Act’s crowdfunding exemption, along with its legalization of general solicitation, is a deep-structure re-engineering of securities laws that, to quote internet guru Clay Shirky, “isn’t a new way to do the old stuff; it is a new model of the business ecosystem, full stop.” The SEC should implement the new exemption so that it’s useful to entrepreneurs, but if they don’t, efforts are underway for individual states to pass their own exemptions. Either way, the revolution is coming. Whose side are you on — the stifling past, or the glorious future?
The movement for a crowdfunding exemption was initially launched by my efforts. You’re welcome. And I continued contributing to it, as an ad-hoc network of co-conspirators snowballed around the issue via ever-growing email recipient lists. Last April at the White House, this crowd of fellow travelers and I had the honor of seeing the JOBS Act signed, and now many of us are working with the SEC and FINRA to make sure the new legislation works out nicely for everyone. We look forward to seeing the rules that the SEC comes up with, and our fingers will be crossed next year, as the new regulations and regulatory infrastructure have their first contact with reality.
This is an article in two parts. The first part tells my part of the story of how the crowdfunding exemption movement got started. In the second part, I’ll explain what I believe motivated the people involved in the surprisingly fast-acting movement, and why we sometimes say such far-out and cult-like things about crowdfunding.
Genesis of the Crowdfunding Exemption
Back in 2009, I was working as Projects Editor for MAKE magazine, caught up in the wave of grassroots inventiveness and empowerment known as the maker movement. I had always thought that ordinary people should be able to invest in each other’s projects. So I finally consulted some securities attorneys and learned that openly selling interests in projects was illegal– no matter how small the amount solicited– without prohibitively expensive compliance expenditures.
With all of the great ideas and initiative that I was seeing drawn to crowdfunding sites like Kickstarter, especially from Open Source Hardware geeks whom I knew via MAKE and Maker Faire, this seemed wrong. The original federal laws governing the sale of securities were written in the 1930s, when people had no way to fact-check a smooth telephone voice and some fancy letterhead mailed with a New York City postmark. But now, in a world of information ubiquity, these antiquated investor protections were stifling innovation, economic health, community, and the pursuit of happiness.
As a guest blogger on Boing Boing, I proposed a new crowdfunding exemption to securities laws, and pitched the idea of crowdfunding a political campaign to get it passed– both to raise the money for some lobbying and to self-referentially demonstrate the power of crowdfunding. Several readers showed interest, including Tim Kappel, the author of the seminal legal article on crowdfunding that my post cited. So I decided to test my sanity and see if pushing the idea might get somewhere.
Browsing the SEC website, I noticed the “Public Petitions” section, which seemed underutilized by the public. So I hit upon the strategy of submitting a public petition to get the idea out there, and hopefully draw support. I wanted the petition to be serious and credible, not just my own non-lawyer crackpottery, so I approached Jenny Kassan of the Sustainable Economies Law Center (SELC) to ask if she wanted to collaborate. I knew about Jenny from an article that she’d recently written on how small businesses can navigate securities laws.
Jenny liked the strategy, and we had a long, exciting phone conversation in which she told me that author and local economies guru Michael Shuman had already proposed (August 2010) what was basically a crowdfunding exemption capped at $100 individual investment, as a way of enabling local stock exchanges. Jenny offered the SELC’s services in writing the public petition for a mere $1000, and with help from Danae Ringelmann of IndieGoGo, I launched the Crowdfunding Campaign to Change Crowdfunding Law to raise these funds.
A week and a half later, the campaign was funded. I met with the SELC gang, and we hammered out our basic framework: an exemption capped at $100 individual and $100K aggregate investments, open to individuals only, and with disclaimers on all communications. Two summer law interns at the SELC, Kathleen Kenney and Aroma Sharma, did a fantastic job of researching and writing the petition (I pitched in on the introduction), and we were all proud of how it turned out. The donors who generously helped to fund the petition, which the SEC posted as File No. 4-605, are listed in its first footnote.
The SELC petition catalyzed the movement for a crowdfunding exemption; references available upon request (actually, I’ll list them later in this series). Since then, I’ve been chronicling the movement’s unusual progress on my blog Crowdfunding Law. I discussed the proposal at the SEC in Nov 2010 and collaborated with Woodie Neiss on a brief about exemption proposals for the White House in June 2011, but pursuing the crowdfunding exemption was always basically a hobby for me. Between working in perpetual crunch mode at MAKE, having two preschool-age kids, and not having a dishwasher, there’s no way I could do the massive amount of Washington DC face-time that is mandatory for any federal law change.
The Crowd Goes to Washington
Fortunately, Woodie Neiss and his Startup Exemption compatriots Jason Best and Zak Cassidy-Dorion stepped up in late 2010 and began leading the charge for their version of a crowdfunding exemption, capped at $10K individual / $1M aggregate. Woodie and Co. did a fantastic job of pounding the pavement in DC and seeing the exemption idea through, with guidance from the Small Business and Entrepreneurship Council, a DC lobby. Meanwhile, other entities also lobbied for a crowdfunding exemption, including the American Sustainable Business Council and the Cambridge Innovation Center.
But interestingly, the first crowdfunding bill, H.R. 2930 was originally inspired not by any lobbying, but by an online stunt. The website BuyaBeerCompany.com launched in Nov 2009 and gathered over 5 million pledges for a notional group purchase of the Pabst Brewing Company, which had just gone up for sale. The SEC shut the website down for merely suggesting the idea of buying Pabst and for collecting pledges — not even real money. The fact that people couldn’t legally buy their favorite brewing company, or even discuss it, seemed wrong to Congressman Patrick McHenry (R-NC), who introduced H.R. 2930 into the House almost a year ago. As McHenry explained in a hearing he held last June (59:00):
I don’t think these individuals were pledging money because they thought they were gonna make a million off of it. They wanted to support the brand that they liked. […] What I see on crowdfunding sites, as they exist now, is you have an idea that you like. Could be your local coffee shop, could be your favorite cupcake. And you invest in it because you believe in the product, not because you’re gonna make a million.
(It must be noted that Rep. McHenry is a hipster, as demonstrated by his interest in PBR, coffee, and cupcakes.)
The movement’s “hockey stick” moment was September 8, 2011, the day of President Obama’s long-awaited “American Jobs Act” speech, when the White House Office of Science and Technology Policy (OSTP) advocated for a $10K/$1M crowdfunding exemption, the limits proposed by Startup Exemption. The following week, Patrick McHenry introduced H.R. 2930, which the White House endorsed on Nov 2 and overwhelmingly passed the House (207-17) on Nov 3. Two alternative crowdfunding bills were introduced into the Senate, S.1791 on Nov 2 and S.1970 on Dec 8, and the exemption idea briefly languished in the Senate Banking Committee after winter recess until House Majority Leader Eric Cantor combined H.R.2930 into the revised JOBS Act, H.R. 3606. The JOBS Act passed the House and then went to the Senate, which swapped out the H.R.2930 language for something more similar to S.1970 before passing the bill in its final form and sending it on for the President’s signature.