Change Crowdfunding Law

From 2010 to 2012, I blogged my and others’ flabbergastingly successful efforts in changing federal securities laws to let people invest in each other’s small-scale projects and businesses without the expensive DPO registration that’s required of large companies. Long story short, this new “crowdfunding exemption” became federal law in 2012, and simplified intrastate versions have since been legalized (as of Jan 2014) in Georgia, Kansas, Michigan, and Wisconsin– with more states on the way.

Here’s what I saw of the crowd movement that began with my blogging a far-out idea on Boing Boing and wound up taking me to the White House. But don’t just take my word for it; the academic literature and other sources describe the same history.

The Change Crowdfunding Law blog’s subtitle was, “Campaign for an SEC regulatory exemption covering public securities offerings with individual investment capped at $100, and the people who love them.”

Obama to Appoint Pro-Crowdfunding SEC Chair (Prediction)

I heard from someone who’s close to the SEC that there’s “no doubt” that SEC chair Mary Schapiro will be leaving, as has previously been rumored — it may happen soon, but will certainly be after tomorrow’s Small Business Forum, which will have a breakout session devoted to crowdfunding. New SEC commissioners and chairs are appointed by the President, with the advice and consent of the Senate, and no more than 3 SEC commissioners can be from the same party. Without Schapiro, that leaves two each Democratic and Republican– so a new appointee could be from either party.

I’m sure that Obama will appoint a new commissioner and designate a chair who is friendly to investment crowdfunding, because the White House been behind the cause from the very beginning. Many people credit Rep. Patrick McHenry (R-NC) for introducing the $10K/$1M crowdfunding exemption idea to DC via H.R. 2930.  But that formula came out of the White House’s Startup America initiative much earlier; it was originally proposed by Woodie Neiss and his Startup Exemption pals, and it earned far more online votes than any other proposals (the second and third place Startup America ideas were also crowdfunding exemptions).

Informed by their Startup America outreach, and one week before McHenry introduced H.R.2930, the White House Office of Science and Technology Policy (OSTP) proposed a $10K/$1M exemption in on an on-the-record call with Aneesh Chopra and Tom Kalil immediately after Obama’s major address on Sept 8, 2011. This wasn’t reported on at the time, possibly because the idea was unfamiliar to most reporters on the call. Several weeks later, the day before the House voted on McHenry’s bill (and passed it overwhelmingly), the White House issued a statement declaring it consistent with their own proposal.

This is review is all just to say that, if the White House indeed needs to appoint a new SEC commissioner and chair soon, it will surely be someone who wants to make the crowdfunding exemption as workable as possible. Combine this with the fact that the new crowdfunding legislation gives the SEC broad authority over how it should be interpreted and implemented, and I think there’s reason to be optimistic.

UPDATE: One reader notes that crowdfunding is far from the SEC’s top priority right now. Several initiatives are currently more pressing for both the SEC and the White House, with money market reform probably at the top of the list.

Mobile App for Launch Event Investing
At next year’s LAUNCH festival, a startup unveiling event taking place next March 4-5 in San Francisco, the organizers will distribute a mobile app that will allow attendees to invest on the spot, as compliant with current law at that point in time. I predict great success for an app like this, not just at LAUNCH, but at countless other launch/funding events in the future.

Crowdfunding Casualties
The turn-based horror game Haunts: The Manse Macabre was funded back in July and had hoped for a Halloween release, but the presumed programmers needed to leave the project. Now the project is on hold (or dead), but hopefully it will be taken up by the small studio Blue Mammoth Games.

The alt band Animal Collective raised money back in 2009 to enable band member Deakin to play at a benefit music festival in Mali. As perks, they offered CDs and other documentation of the trip. But Deakin later decided that all of the money raised should go to the concert’s benefit charity (TEMEDT) rather than towards his own travel expenses, and that he feels that he doesn’t yet have any new music that’s good enough to send to his backers, which must be frustrating to both him and them.

Italy has passed its own crowdfunding exemption. It’s similar to what’s in the JOBS Act, but it targets high-tech ventures, and it is likewise now waiting for Italy’s SEC-analog (CONSOB) to write the specific rules.

DIY Platform Options
GrowVC recently announced Crowd Valley, “The Crowdfunding Infrastructure,” which lets you build your own crowdfunding platform. Add it to Selfstarter, the IgnitionDeck plugin for WordPress, Launcht, and as ways you can create your own crowdfunding site. Note that Selfstarter is free and open-source, unlike the others, and that it’s designed to support a single project rather than serve as a shared platform.

Wefunder – Cheap Offerings Open to CA, MA, NY
Like other platforms, Wefunder is waiting for the SEC rulemaking. Meantime, they’ve templated an inexpensive way for small businesses to legally offer private equity investments now (under Reg D, Rule 506) to residents of California, Massachusetts, and New York, with a maximum of 35 unaccredited investors.

Lessons of Insurance Regulation
Writing on Bill Carleton’s blog, finance and securities lawyer Robert Weiss proposes insurance regulation as model for crowdfunding regulation, rather than corporate law, because insurance regulations are designed to protect relatively unsophisticated consumers while permitting competition.

Early Christianity’s Crowdfunding Spirit
The Christ and Pop Culture blog discusses how crowdfunding today recalls the community spirit demonstrated by the 3000 new Christian believers touched by the first Pentecost. ???And all who believed were together and had all things in common. And they were selling their possessions and belongings and distributing the proceeds to all, as any had need??? (Acts 2:44-45, ESV).

Trendwatching proposes the term “Presumers” to refer to the growing numbers of consumers, such as crowdfunders, who engage with products and services pre-launch. I always get a kick out stuff like this, marketing consultants trying to create new buzzwords.

Brokerage Head-Start, National Character, Election, etc.

Brokers to Sell CF-Exempt Securities Before Funding Portals?
FINRA is the securities dealer trade organization that will presumably oversee funding portals under crowdfunding law. At a meeting on October 12, FINRA told CFIRA members that they haven’t started figuring out how they will register and oversee funding portals, but instead are waiting for the SEC to issue their final regulations regarding crowdfunding. This raises the possibility that registered broker-dealers might be able to sell CF-exempt securities right away, as soon as the SEC reg’s are out, but that the funding portals, the lightweight entities defined in the new law, will have to wait X number of months for FINRA to figure out its procedures for them.

I’m angered by this prospect, as are other crowdfunding advocates. FINRA’s passivity may just ensure that its existing members, the established brokerage houses, get a headstart in the new territory of crowdfunding before any of the upstart funding portals can enter and compete with them.  And since becoming a registered securities broker is expensive and time-consuming (comparable to becoming a lawyer), traditional brokerages will cost more than the funding portals.

National Character – US, UK, and Netherlands in Extraordinary Popular Delusions (1841)
On my friend Charles’s recommendation, I skim-read the 1841 classic Extraordinary Popular Delusions and The Madness of Crowds by Charles Mackay.  Unfortunately, I unwittingly bought a cheap used 1995 version that only includes the first 100 pages of the original, but CreateSpace has a better, complete edition. What my abridged version included was fascinating, and I couldn’t help but notice that the three countries involved in the scandals described (the Mississippi Company bubble, the South Sea Company bubble, and Tulip Mania) are all countries that are today leading the way in legalizing crowdfunded securities: the U.S., the U.K., and the Netherlands. I don’t want to provide rhetorical ammunition to skeptics, but it’s an interesting reflection of national character.

Presidential Election Crowdfunding Invisibility
Amid all the talk of “helping small business” and “new ideas” in the presidential campaign, it kills me that neither side has brought up the crowdfunding exemption, which experts consider the most significant change in securities laws since the 1930’s. Certainly it’s something that could be pointed to and either trumpeted or attacked. I’m not surprised at the silence, however– the public doesn’t know much about the issue, hasn’t digested it yet– so the public opinion workers have no idea what people think of it. And by extension, they don’t know what to say about it.

Rumored SEC Chair Resignation, Rulemaking Effects
There’s a rumor that SEC Chair Mary Schapiro will resign soon after the election. If so, this may affect the viability of the crowdfunding exemption– especially if Schapiro is succeeded by someone who doesn’t like it.  I’ve heard that Meredith Cross, who currently heads the SEC’s Division of Corporation Finance, is one such skeptic.

SEC Forum November 15th – Attend or Call In
This year’s SEC Government-Business Forum on Small Business Capital Formation should be super interesting and a great scene, in the wake of the JOBS Act. I’m very glad I went in 2010 to discuss crowdfunding, and this year all the cool kids will be there. One of the two afternoon breakout sessions will focus on JOBS Act provisions (including crowdfunding) and secondary trading platforms. I’m going to call in, but of course it’s better to be in the room. Register here to either attend in person or phone in. It’s free.

I’m The Guy invited me to write an article about “Crowdfunding True Believers” that drew from my own experiences pursuing a crowdfunding exemption. I went to town with the assignment, turning it into a 2-1/2 part series that I’m really glad I wrote and had gotten a great response. Read it here: How Crowdfunding and the JOBS Act Got Started, Told by the Guy Behind the Big Idea.

First Biotech Crowdfunding ROI
French startup ANTABIO raised investment from 200 small investors on WiSEED, and got subsequent funding from an angel investor and big pharma company. The original investors exited with a profit.

AFR JOBS Act opposition
Americans for Financial Reform (AFR) is a large coalition lobby that helped create the Dodd-Frank Wall Street Reform Act, which passed in July 2010. Although AFR purports to favor financial reform and oppose “rules of Wall Street… written by the bankers themselves,” they have been leading the fight against the JOBS Act. The SEC’s rulemaking for the JOBS Act (which passed this year) is leapfrogging the SEC’s late remaining rulemaking for Dodd-Frank. Dodd-Frank is definitely AFR’s baby, so maybe AFR is just jealous and resentful of the new kid.

NASAA opposition and SEC lawsuit threat
The association of state securities regulators (NASAA) has also continued to oppose the JOBS Act, along with AFR, in an axis that also includes the CFA, AFL-CIO, and AARP. NASAA president Heath Abshure threatened a lawsuit against the SEC, explaining, “It would be a very, very unique circumstance for NASAA to file a lawsuit against the SEC to somehow stop, slow down, throw a wrench into this rulemaking, [H]owever […] if I felt it was the necessary thing to do, I’d propose it to my board.”

Since the JOBS Act’s crowdfunding provision pre-empts state securities laws, maybe NASAA just resents having their power removed and usefulness denied regarding the regulation of very small securities. (But the legislation does give state regulators authority in the examination and enforcement of the federal crowdfunding reg’s.)

Real-World Data: Zero Fraud So Far
NASAA put “Crowdfunding and Internet Offers” at the top of their 2012 list of threats, but Jonny Sandlund compiled real-world data showing that in countries where crowdfunded securities are already available to the public in limited forms, specifically the UK, Netherlands, and Australia, fraud has not yet occurred.

Pseudo-Crowdfunding a Real Threat
At a recent NASAA meeting, however, one source reported that NASAA is sensibly more concerned with scams that will run under the name of crowdfunding, using it as a buzzword, but not complying with the law. It’s true
that education is key, and that until the general public understands (through education or experience) how crowdfunding works, that it is risky, demands suspicion, and includes open, transparent discussion and questioning, such pseudo-crowdfunding scams are unfortunately very possible.

CF Campaign Launch Events and “The Crowdfunding Channel”
There’s no higher-bandwidth communication medium than physical presence, and likewise no better way to take measure of someone’s character (at least until we’re all wearing body sensors that constantly publish to the cloud). That’s why I predict that the most successful crowdfunding campaign launches in the future will be event-based, where potential investors (and donors) can see the offeror and ask questions in person. This is also nice because it encourages local community investing.

Live remote coverage of these launches will be fun to watch, and of course you’ll be able to invest or donate from home. This will not be highbrow entertainment, however — think QVC meets Shark Tank (a reality show around business pitches) meets tastytrade. Events like Crowdstart-Vegas, which sounds like it was a blast, are runs for this new category.

This global crowdfund investments company exhibited at Crowdconf on Monday. Check them out, and I hesitate to say more.

Not A Store
It’s come out that some people come to crowdfunding pages, see things that they like, and assume that they’re operating within the familiar “online store” frame, where you can click on prices and buy things without having to read any “how it works.” It surprised me to learn this, but it makes sense. To prevent this, Kickstarter changed their policy and declared that they are not a store. Some people have criticized their ban on photorealistic / videorealistic renderings, but I think it’s a great idea.

Real Estate Crowdfunding = Scary
Contrary to my usual enthusiasm for CF investing limited by strict caps, looking at this website (for PropertyPeers) made me wonder if it’s a mistake, at least for this sector. Maybe it’s because real estate speculation doesn’t require making or doing anything new, or because there’s a longtime tradition of real-estate scams. Maybe I’m just being elitist. But some right-brained amalgamation of my impressions regarding real estate investing and the people who are attracted to it leads me to expect that things like PropertyPeers will not end well, unless they receive some special regulatory attention. I I welcome discussion with anyone who knows more.

IP Theft from Kickstarter Campaign
The Pen Type A is an elegant metal housing for the ultra-smooth Pilot Hi-Tec-C gel-ink pen refill. After the project was successfully funded on Kickstarter, the pen’s designers worked with someone named Allen Arseneau to have the pen housings manufactured in China. Arseneau reportedly stole the design and used it as the basis for launching his own pen company, Torr Pens. Last week, Arseneau published a press release announcing that the Torr Pens “present a solution to the gift-giving season.”

Rule Delay / VC / Platforms / ICFA / site update etc.

Lots to catch up on. First, if you want to meet and scheme with all the cool kids of crowdfunding, come to the Crowdfunding Bootcamp & First Annual CFPA Convention in Henderson NV (near Las Vegas) this October 9-11.  I’m really looking forward to it!  Lots of people doing diverse and interesting things with crowdfunding will all be there — it’s a great opportunity. Meanwhile, if you haven’t already, please fill out the CFPA survey.

After receiving pressure from state regulators and others, the SEC has delayed its lifting of the general solicitation ban (originally scheduled for July 4th) to allow for a full public comment period. This moves the general solicitation rulemaking more toward the timeline of the rest of the JOBS Act, and means that you won’t start seeing ads for securities that only accredited investors can buy. (“Ask your broker-dealer for more information about Cialis.”)

Chance Barnett of Crowdfunder has been writing a nice series for Forbes online called “Crowd Intelligence.” His latest post lists the “10 Most Influential People in Business Crowdfunding.”  Good idea– I’ve spoken with many people in the business world who have never heard of crowdfunding and certainly don’t know about the JOBS Act, but are very interested when I explain it. Since there will probably be no strong news peg on crowdfunding until the SEC publishes its regulations (or crowdfunding gets mentioned in the presidential campaign), there’s no reason to run an article, but columns like this flag the topic as worthy of attention nevertheless, and let a publication cover it in a way that doesn’t look like either old news or pure speculation.

Joe Wallin of Startup Law Blog proposes that Washington State needs its own crowdfunding law (for intrastate offerings) because of all the problems with the federal law. It would be great if Washington or any other state (California, Colorado, Vermont?) got something like this going. The SELC petitioned Washington State for a crowdfunding exemption last year, so hopefully the movement will continue.

Back in May, the Kauffmann Foundation came out with a report on the sorry state of Venture Capital, subtitled “We Have Met The Enemy And He Is Us.” Among the report’s findings: since the mid-1990s, only a small fraction of VC firms beat the public markets in return on investment (as would the top 5% of random-picking chimps, I would add). VC firms are essentially conning the huge institutional investors who manage endowments, pension funds, etc. to take nearly all the risk of the private investments they select, while paying the VC firms the same regardless of fund performance and not asking any questions. One reason the VCs can get away with this is that the big funds typically have diverse portfolios, and a dedicated manager oversees the VC slice of the pie — so if that person questions the value of investing in VC funds, they’d be out of a job.

Life Sciences investment consultancy S. Jordan Associates (Scott Jordan) wrote a white paper arguing that crowdfunding has great potential for startups in healthcare. He argues that healthcare attracts investors with philanthropic as well as financial goals, and that both of these can be answered through investment crowdfunding. “Investors at the lower end of the spectrum ($1,000 – $5,000) may see investments as glorified donations; a way to further a good cause. […] This will be important especially for those companies looking for effective treatments in fields where there are no therapies available (i.e., Alzheimer’s disease, Huntington’s disease).” The report cites both’s May 2012 “State Of The Industry” report (which this blog should have mentioned sooner) and the Kauffmann report on VC.

GATE Technologies is building out their GATE Global Impact network to be a trading platform for crowdfund investments. Their focus will be on global emerging markets, at least initially. This is hugely important news that I’ll discuss more later.

How many crowdfunding platforms will be operating in the U.S. next year? I’m often hearing about new donation- and perks-based crowdfunding platforms, as well as funding portals that plan to include unaccredited investors once the SEC’s rulemaking is complete. Triple Pundit has a list, as does Strategy Of Innovation. Here’s my list of nearly 90, which does not include accredited-only sites like AngelList. Any others? Any corrections? Which of these will still be around in 2015?

A Kickin Crowd, Appbackr, Appleseedz, Appsplit, Arctic Island, ArtistShare, BeFounders, Biracy, Buzzbank, Cielex, Cofundos, ConfidentCrowd, Conzortia, Crowdcube, Crowdfunder, Crowdfunding Offerings, Crowdnetic, Crowdrise, Crowdtilt, Digital Garage, Earlyshares, EquityNet, FeedTheMuse, FirstGiving, Fundable, FundaGeek, FundedByMe, Fundly, FundMyWish, FundRazr, FundRise, GetItDone, GoFundMe, GOOD Maker, GreenUnite, GrowVC, InitialCrowdOffering, inlu, ioby, Kapipal, HelpersUnite, iCrowd, Indiegogo,, Kickstarter, Kiva, Launcht, Localstake, MicroAngels, Microryza, Motaavi, MyMicroInvest, OnSetStart, Original Projects, Pearfunds, Peerbackers, PeoplesVC, Pitchstar, PleaseFund.Us, Pledgie, PledgeMusic, Popularise, Pozible, ProHatch, PropertyPeers, Rally, Razoo, Return On Change, Rockethub, RockThePost, Seedinvest, SellaBand, SoKap, SoMoLend, SonicAngel,, SymBid, Thrillcapital, Twask, Ulule, Wefunder, We The Trees, WhenYouWish, 33Needs, 40Billion, 8-Bit Funding

SEC comments and meetings. Public comments to the SEC on investment crowdfunding keep rolling in. The American Sustainable Business Council (ASBC) submitted a great one recommending a two-tier approach that specifically recognizes small local investments. I sent one in myself “seconding” the ASBC’s proposal and also offering a general approach and specific content for the online qualifying exam that CF investors will need to pass before investing.  The SEC
met with Mark Perlmutter of MicroAngels, who told them about the Australian Small Scale Offerings Board (ASSOB), which is AFAIK the first investment crowdfunding platform, and showed them prospectus examples from DPOs (direct public offerings) that he has worked on. The SEC also met with Andy Green, legislative counsel to Sen. Jeff Merkley, who put his comments on the legislation in a letter to President Obama. And the SEC talked with Jared Cohen, General Counsel and Vice President of Operations at Kickstarter.

The International Crowd Funding Association (ICFA) now has a website, and I learned what they mean by “over compliance,” which confused me before. According to ICFA Co-Chair Berny Dohrmann, who is also the Founder of CEO Space, over-compliance is “a standard […] where your appearance is as important as your legal compliance […] I don’t want you to comply with the law when you’re going through our programs — I want you to over-comply. You never take money from anyone without an investor questionnaire and a subscription agreement where you say, you understand, this is a startup company, stuff happens, it’s higher risk.” Furthermore, according to the ICFA, “The market is increasingly applauding the OVER COMPLIANCE standards ascribed to.”

Interestingly, CEO Space representative Dave Phillipson disagrees on the value of a crowdfunding industry association. In response to the CFPA survey’s posting on LinkedIn, Phillipson discouraged people from participating by writing, “It’s senseless to take the time. Crowdfunding isn’t legal yet. Such associations are likely to be shut down […] There is nothing that others will do for crowdfunding, by filling out the suggested survey. There is nothing that an avante garde ‘Association’ can do either.”

According to Dohrmann, “The ICFA [is] led by the law firm of former SEC Commissioner Roel Campos.” This law firm is Locke, Lord LLP, which has a DC office. The SEC logged a meeting with Campos and Sprowtt representative Mike Jones [an erroneous listing for Mark R. Jones?] on August 9th. I called Locke, Lord’s DC office to ask about the ICFA and was transferred to the voicemail of the office manager. I followed up with an email, but have not heard back yet.

In a March 16 article I first read just recently, Cydney Posner of Cooley LLP quotes Lynn Turner on regarding some of the sausage-making behind the JOBS Act’s Senate passage. My understanding is that the only part of the bill that changed in the Senate was the crowdfunding section (Title III), for which an adaptation of Merkley’s Senate bill S.1970 was swapped in for McHenry’s original H.R.2930. Turner however describes the changes in a different way:

[S]ome thought the Dems would introduce their own version of the bill, but Harry Reid in a nod of the cap to the venture capitalist and bio tech lobbyists (and their campaign contributions) decided that he would go with the House Republican’s bill. While an amendment would be offered making it look like investors protections requested by the state regulators, the SEC and many investor and consumer groups would be entertained, that is merely a facade – a token effort which was dead on arrival before it was even introduced.
Perhaps the funniest thing, is that only people in Congress are calling this a jobs bill. It has become widely referred to in the media as “The Bucket Shop Reauthorization Act of 2012.” Most of the people that the Dems did call to testify have said it will not create new jobs, (except perhaps among law enforcement agencies and prison guards)!!!” 

Business conference and webinar producer Infocast was planning to host a JOBS Act Investment Summit  in Santa Clara this past July 25-27, but the event was postponed until after the November election.  “rescheduling this Summit after the election will enable Infocast to provide attendees with greater clarity and the quality to which we strive.”

Finally, I’ve done a long-overdue website update on the framing content for, to be more current and less cryptic about myself:
  1. I changed the name from “Change Crowdfunding Law” to “Crowdfunding Law” — because the law got changed, as intended. Now this mailing list / blog is about what’s happening as a result.
  2. I changed the tagline. Until now, it was “Campaign for an SEC regulatory exemption covering public securities offerings with individual investment capped at $100, and the people who love them.”  That’s how the movement started back in 2010, but it’s ancient history now. New tagline: “Catalyzing and tracking the investment crowdfunding revolution, from idea (2009) to reality (2013).”
  3. Added to the “About This Blog” section: “Newcomers to this blog can read here, from the bottom up, the strange-but-true story of how I and a small group of others changed U.S. securities laws to democratize entrepreneurship, and how we plan to make it all work out nicely for everyone.”
  4. Added to the “About Me” section: “You may know me through MAKE magazine, Wired magazine, The VJ Book, The Re/Search Guide to Bodily Fluids, Boing Boing, Infobahn, ViewStar, Advanced Decision Systems, Joe Schmoe, The Mighty Vegetable Sled, Blue Larue, Columbia, Palo Alto HS, Paul Revere Jr. High, Brentwood Elementary, San Francisco, Oakland, Palo Alto, Pacific Palisades.”

CFIRA DC Symposium / NLCFA Departures / CFPA Survey

Last Friday, July 13th, CFIRA held their Development of Crowdfunding Regulations Symposium in Washington DC. I couldn’t be there, but by all accounts it was a landmark gathering, and DC is thirsty for knowledge and guidance on this nascent revolution.  Speakers and panelists included Capitol Hill crowdfunding pioneers Rep. Patrick McHenry, Sen. Scott Brown, and Sen. Jeff Merkley’s legislative counsel Andy Green; Kickstarter-funded tiltpod designer Eric Strasser; representatives from the SEC and FINRA, representatives from leading investment portals and funding networks; securities lawyers; small-business advocates; and others. Dara Albright of NowStreet Media wrote a great recap of the event.  It really seems like the regulators in DC want to get equity crowdfunding right, want to make it work, want this very American experiment to succeed in sparking innovation and economic vitality.

Perhaps (I’m speculating here) in part triggered by the primacy demonstrated by last Friday’s CFIRA symposium, Sara Hanks, Maurice Lopes, and two other members of the NLCFA board have left the NLCFA to direct their efforts to the CFPA, CFIRA’s sister organization, as reported by Lopes explains that “the CFPA is so much more engaged in the politics” than the NLCFA, and that the breakaway group advocated joining forces to create a single organization.

Lopes (who sent two letters to the SEC last year in support of the original SELC crowdfunding petition) also expressed his feeling that the NLCFA is “driven towards membership, and less towards actual things that needed to be done for the industry.” I found this interesting.  As previously reported here, NLCFA membership costs $200 for individuals and $750 from portals, brokers, and technology providers (CFPA individual membership is free for the org’s first year). If the NLCFA has collected these dues from a large membership base, then as with a successful crowdfunding raise, the NLCFA should certainly have ample resources for doing constructive work supporting the crowdfunding industry.

Meanwhile, the CFPA recently posted a simple questionnaire for a survey that, as Brian Dengler explains, will help it understand what businesses and individuals know and think about crowdfunding, and how they plan to take advantage of equity-based crowdfunding once the SEC implements the rules.

Please take a minute to fill it out right now.  Yes, now — before you forget.  It’s all multiple choice, no essay questions, and it will only take a minute.  Not only is it for a good cause, but also if you’re one of the first 500 people to complete the questionnaire, you could win a new iPad 3.  Why are you still reading this?  Take the survey, dammit!  Thank you.

McHenry Hearings / Associations Updates / ASBC / Articles etc.

McHenry JOBS Act Hearings  
Last week, the House Subcommittee on TARP held two hearings on JOBS Act implementation, much focused on crowdfunding. The topic is not directly related to the subcommittee’s mission of overseeing TARP (Troubled Asset Relief Program, 2008) and other government bailouts, but its chair is crowdfunding advocate/hero Rep. Patrick McHenry (R-NC), who introduced the first crowdfunding bill (HR2930).  
Kristine Gloria of PolitiHacks wrote a good summary of both hearings geared towards the Silicon Valley crowd (see below), and CFIRA posted a nice summary of the first three testimonies from the first hearing.  
The June 26th hearing, “The JOBS Act in Action: Overseeing Effective Implementation That Can Grow Jobs,” included testimony from Brian Cartwright, a B-school professor at USC and former SEC General Counsel; Alon Hillel-Tuch from RocketHub; Prof. Steven Bradford from University of Nebraska; and Prof. John Coffee, Jr. from Columbia.  
McHenry started the hearing by expressing displeasure that “a few senators, who I think misinterpreted the spirit and promise of crowdfunding” made “11th hour changes” that rendered the crowdfunding legislation in the JOBS Act “ambiguous and inconsistent.”  
3-to-1: The first three witnesses clearly favored “light touch” implementation of crowdfunding by the SEC, but Prof. Coffee was more skeptical, as previously, arguing that “the greatest enemy of job creation today is not overregulation, but the loss of investor confidence.” Coffee raised the possibility that new SEC rulemaking might be overturned by the DC Circuit Court of Appeals. Subcommittee vice chair Frank Guinta (R-NH) later asked whether the SEC’s new requirement to provide cost/benefit analysis for all of its rulemaking might prevent such legal battles (video 45:52), and Coffee answered that he hopes so.  
Liability: Coffee also said that most securities lawyers would recommend that small businesses raise money via the existing private placement exemptions rather than the “still novel and still very esoteric crowdfunding exemption” (1:08:40). One reason for this, Coffee explained, is that as drafted (in Senate revisions), the crowdfunding exemption could actually place a higher liability burden on investors than private exemptions for larger offerings. But then he helpfully pointed out the possible solution of generalizing to crowdfunding the existing “innocent and immaterial” exemption for private placements that’s already under Reg D Rule 508 (1:11:15).  
The wrong model: Cartwright nicely summed up the problems that some lawmakers and regulators have had with crowdfunding: “The original idea behind crowdfunding was to have a quite different mode, now that the internet among other things makes communication so easy, to raise quite modest sums for entrepreneurial purposes. And what’s happened is, we’ve overlain on that original idea the model of a big offering. So you need lawyers and accountants and financial intermediaries, and they all need compliance infrastructures. And you need financials that are in accordance with [garbled] — I mean, all these additional requirements which are the model of a big dollar offering. But it doesn’t work if you’re raising $40,000 for a company that’s going to make cases for iPads.”  
Beer: McHenry told the story of how he was initially inspired to file HR 2930 by the Pabst Blue Ribbon “Buy a Beer Company” campaign (59:10), and ranking member Mike Quigley (D-IL) later remarked, “In regards to your earlier point about Pabst Blue Ribbon, I want you to know that we are in perfect agreement regarding purchasing beer. I’ve served here for three years now, and the longer I serve, the more I support purchasing beer.” (1:04:30)  
The June 28th hearing, “The JOBS Act in Action Part II: Overseeing Effective Implementation of the JOBS Act at the SEC” featured SEC chair Mary Schapiro as the sole witness. The Supreme Court’s decision on the Affordable Health Act came out on the same day, and McHenry got some laughs at the beginning by saying, “We’re going to hear from the chairman of the Securities Exchange Commission, and as we know from all the headlines in the newspapers today, this is the largest news in the world.” (There is a roar from outside the room as the decision is announced, at 45:35, and Schapiro remarks, “I don’t think that was for crowdfunding.”)  
McHenry explained that he reached across the aisle and worked closely with Carolyn Maloney (D-NY) to carefully revise his original crowdfunding bill, HR2930.  The resulting changes succeeding in giving the bill bipartisan appeal, resulting in an endorsement from the White House and a 407-17 vote in the House– but that the Senate’s hasty, last minute revisions basically screwed it up. (15:18)  
SEC Timeline: Schapiro said that the SEC will be a bit late in their rulemaking for lifting the ban on general solicitation, originally due out this week, but that it will happen this summer, and they will publish a timeline in the next two days (24:25). She also said that she does not anticipate delays in the rulemaking on crowdfunding, which is due by the end of the year. (27:27) The SEC is crazy busy with still-pending rulemaking for Dodd-Frank (2010) plus the JOBS Act, both of which are major reforms, but she said that the SEC has benefited enormously from all the public comment letters that they have received, and the meetings they have had with funding portals, industry associations, and others. “We’re building up a base of knowledge very quickly at the SEC for handling this. (28:30)  
Schapiro seemed more sympathetic to crowdfunding than she was in March, when the Senate was considering the JOBS Act, and she wrote a letter criticizing the bill to the Senate Banking Committee’s chair and ranking GOP member. McHenry asked Schapiro whether she was committed to telling the committee if it seemed that the SEC rulemaking around crowdfunding would price out small issuances, for example due to lawyer, accountant, intermediary costs. (29:35) Schapiro said that she absolutely would, and that the requirement of an intermediary, which HR 2930 did not include, would not only help with investor confidence, but also routinize requirements in a way that would lowers cost. (30:05) “We will be very sensitive to these issues about cost.” 
On Schapiro’s March 13th letter specifically, McHenry asked why, if she had these concerns, didn’t she bring them up when the original crowdfunding bill was in the House: “Do you have my address? […] At the time, if you had raised these objections to me or to Carolyn Maloney, we would have addressed these provisions, and I think the President would have liked to have heard that before he issued his statement of policy advocating HR 2930. You sent this letter right as the Senate was taking this up, and […] I view that as being sideswiped by a regulatory body at the 11th hour […] I don’t think that was the most responsible thing.” (36:45) Schapiro answered: “I appreciate that and with future bills, I will talk to you or sponsors of those bills. I did testify about concerns we had with respect to capital raising for small businesses, but I hear your point.” (40:15)
McHenry asked Schapiro to confirm the SEC’s commitment to enabling crowdfunding, to regulating funding portals differently from broker-dealers, and that they understood how it differed from other investments: “The nature of somebody investing $20 in a local coffee shop that they go to every day, they want to own a piece of it, is structurally and motivationally different [from] somebody investing $10,000 in the Facebook IPO… Is that structural difference something you see the SEC incorporating?” (43:20) Schapiro answered positively on all points.
McHenry also asked Schapiro about Prof. Coffee’s suggestion that the “innocent and immaterial” exemption from Reg D Rule 508 be extended to crowdfunded issuances. Schapiro answered that she can’t predict how the rulemaking will turn out, but the “innocent and immaterial” liability exemption makes sense. “We’re not looking to catch people with foot faults, insignificant deviations shouldn’t blow the exemption up, and it has worked in other contexts.”
Quigley asked if Schapiro was concerned about JOBS Act rulemaking leapfrogging overdue Dodd-Frank implementation. Schapiro answered that the SEC is making good progress on both. The biggest remaining pieces for Dodd-Frank are the OTC derivatives rules, and with the JOBS Act, it’s general solicitation, crowdfunding, and Reg A. (51:30)
Associations Updates
As previously discussed, I favor there being just one crowdfunding industry association, but three now seem to exist. Here’s an update on some of their activities (full disclosure: I have a position with the CFPA):
SEC Meetings
CFIRA staff have met with the SEC on three occasions: April 20, May 24, and June 18. To follow up on the ongoing discussion and open it up to lawmakers and others, CFIRA will hold a symposium in DC on July 13th. Among the attendees will be the SEC’s heads of the SEC’s departments of Compliance, Corporate Finance, and Trading and Markets.
Additional upcoming events from CFIRA/CFPA and related organizations include:
July 30, NYC – NowStreet Media “The JOBS Act – Transforming the Capital Markets
August 8-9, Boulder CO – VIM Events “Simply Crowdfunding”
October 9-11, Lake Las Vegas, NV – CFPA and Crowdfunding Roadmap “Crowdfunding Bootcamp

Public comment letters sent to the SEC by CFIRA leadership include:

May 15 – Jason Best, Candace Klein, and Vince Molinari propose types of communications permitted as “crowdfunding notices” to the general public.

May 30 – Candace Klein and Vince Molinari offer many suggestions, including: requiring that each issuer give a live (and subsequently archived) video presentation via their funding portal; an exemption from the auditing requirement for companies less 1 year old; and exempting institutional and accredited investors from the individual investor caps, which would enable crowdfunding investment funds and possibly decrease investor counts for some issuances.
June 5 – Candace Klein and Vince Molinari argue that funding portals should not be deemed investment advisers, even if they only post selected offerings, include automated “matching” tools, and enable peer-to-peer lending. Also, they should host discussion forums.
Membership dues. During the first year, general (individual) membership in CFPA is free. Higher level (sponsor, founder, board) memberships are also available for $100 and up.


Recorded Conference Call Follow-up

My last post reported that NLCFA director David Marlett recorded the conference call that he conducted before his announcement, “Crowdfunding Industry Launches National Association,” during which no one voiced any objections to his plan. A couple of readers asked me whether people on the call knew that they were being recorded, and if so, whether Marlett would release the recording. I asked Marlett, and he replied, “I said it at the beginning of the call, but because others got on later and I forgot to ask them, I erased it.”

SEC Meeting

The SEC met with representatives of the NLCFA on May 14.

A public comment letter sent to the SEC by NLCFA leadership was sent on April 30 by Sara Hanks. In it, she argues that crowdfunding service companies such as CrowdCheck (discussed here previously) are neither advertisers for CF-exempt offerings, nor funding portals themselves.

Events, Programs, Partnerships

As of last week, the NLCFA has no major events planned in the coming weeks, but Marlett reports that, “a lot of activity going on, and work with specific groups, etc.”  Announcements about their veterans program and education partnership, described here previously, should be coming soon.

Membership dues. The NLCFA had restructured its membership pricing. Now it’s $200 for individuals, and $750 for portals, brokers, and technology providers. There is also a free, non-voting membership available to faculty and students with proof of employment or enrollment.


I have no news on this organization since May 24, when they announced that “Over Compliance Has Arrived.” No website has yet been built at their domain

Bylaws and Elections

In talking with others who have experience starting industry associations (thanks Berkeley and St. Clair!), I’ve become convinced that any such org needs two things to continue having credibility: published bylaws and an elected leadership. Industry associations typically adopt their bylaws and conduct elections at their first annual convention. To my knowledge, none of the crowdfunding industry associations has scheduled either of these actions.

ASBC, Massachusetts Securities

The American Sustainable Business Council, the first lobbying organization to advocate a crowdfunding exemption, met with the SEC to discuss crowdfunding on June 13. They visited the White House around the same time and met with senior staff there, as reported by Doug Rand, the White House’s crowdfunding guy. Doug’s great write-up recalls the socially positive effectiveness of donation-based crowdfunding, and ties it to the promise of equity-based crowdfunding for revitalizing underserved communities and offering opportunities for investors who consider social and environmental impact in addition to economic return (i.e. the “triple bottom line“).

On May 2, the Securities Division of the State of Massachusetts sent a public comment letter to the SEC expressing an interest in crowdfunding rulemaking, and offering to help. Presumably as a result of their offer, they met with the SEC on June 27th.

Recent Articles
JOBS Act Tangled in Red Tape, Coming 2014 at the Earliest” by Trevor Gilbert (PandoDaily, June 29) cites unnamed sources to argue that SEC rulemaking on the JOBS Act will be delayed significantly, SEC Chair Mary Schapiro’s previous day testimony notwithstanding. I wonder about this article, which also cites one source claiming that “SEC and FINRA have held exactly zero official meetings to discuss the JOBS act,” which is easily proven incorrect. The article also says, “there are reports that FINRA is delaying the implementation of the bill for direct financial gain” — any such rumors are irresponsible if false, but certainly demand investigation if true.

The JOBS Act: How To Ensure It Pays Off For Entrepreneurs” by Google VP for Corporate Development David Lawee, (Forbes, June 25) argues that if equity crowdfunding is going to work, the SEC must listen to the needs of entrepreneurs and write rules that encourage internet-based systems of trust and cooperation. (I’m the “one entrepreneur” who first blogged the idea in 2009.)

Hail Crowdfunding! The Wicked VC is Dead” by Eric T. Wagner (Forbes, June 25) is a nice “fasten your seat belts” editorial: “So, wow — this crowdfunding thing really looks like a potential game-changer.”

The Kickstarter Recession” by Matthew Yglesias (Slate, June 17) is interesting in that the author seems to have never heard of the crowdfunding portion of the JOBS Act, or else hasn’t made the connection that it will support what he calls “Profit-driven traditional finance.”

UPDATE (Aug 2012)

Here’s the Forbes

piece by David Lawee mentioned above:

25 Jun 2012

Good Info from David Marlett

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 “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:

  • Veterans program. A program for veterans, designed to educate and empower the veteran population regarding crowdfunding opportunities. This will be announced soon via press release.
  • Education partnership. An alliance with major corporations to run a program for educating the public about crowdfunding.  This will also be announced soon.
  • Continuing Professional Education. The NLCFA is educating attorneys, CPAs, and other professionals about how crowdfunding will change their practices, and hopes to develop a curriculum that qualifies for fulfilling Continuing Professional Education credits.
  • Franchise contracts. In franchise-based businesses, the parent company typically wants one person to own and operate each franchise. David’s consulting firm is looking at how a potential franchisee might use crowdfunding via a holding company to fund the purchase of a franchise, thereby turning what would otherwise be a franchisor’s nightmare (500 shareholders for a single location) into a mechanism for greater expansion.

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.”

Epic Battle for the Soul of Crowdfunding

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 RockethubCrowdcube,, 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.

Three Groups Vie for Mindshare and Membership

I know of three groups that are claiming legitimacy as the professional organization dedicated to the young crowdfunding industry.  It’s an entertaining situation, seeing all the jockeying for position, but I believe that what happens is also very important to our future. BusinessWeek recently covered the rivalry between two of these org’s, the NLCFA and the CFPA. I was glad to see this article, and the story got picked up by other pub’s, but honestly, I think the reporting was on the superficial side. (NLCFA Executive Director David Marlett has posted his list of inaccuracies at the bottom of this page.)

This is interesting stuff– everyone loves a battle-for-leadership story– and it needs to get out there and be processed by (yes) the crowd. My current take on the situation and the main players is below, but it’s been changing with each new person I talk to. I would love it if journalists, bloggers, or anyone else out there wanted to dig deeper, and help us all explore who’s credible, what each group’s plans are, and even whether it matters that there are multiple competing organizations claiming to represent the CF industry (I believe it’s bad, as blogged here before). In my experience, the people in this field are pretty accessible– you can just call them up or email them, and they’ll probably be happy to communicate.

Crowdfunding Professional Association (CFPA)
This is the group that I have the most allegiance to, and (full disclosure) I’ve been talking with them and may soon hold an official position there. It started as a sister organization to the “leadership group” (now CFIRA) that was cited by the White House when the JOBS Act (which legalized equity crowdfunding) was signed. The group, many of whom had advised the White House on crowdfunding previously, wrote a letter to President Obama outlining how it wanted to help the SEC with its CF exemption rulemaking.

The CFPA’s strong history with crowdfunding and position in DC make it automatically credible, but it’s also been a largely volunteer effort, with limited time and resources thus far to do things like build up membership, forge alliances, build a credible website for itself, put out press releases, and do other things that would help it help the industry. I see it as a chicken-and-egg problem, but I also know that the CFPA has some interesting plans afoot that will help.

National Crowdfunding Association (NLCFA)
This i
s the group founded by former securities attorney, filmmaker, and immigration law enforcement activist David Marlett.  As I explained in my last blog post, this entity put out a press release three days before the JOBS Act was signed, announcing the organization, announcing Marlett as its executive director, and describing it as “the professional organization of all companies and individuals with an interest in crowdfunding.” This was a discussion topic among several people who were at the White House with me for the JOBS Act signing, since they had never heard of Marlett or the NLCFA before, and they saw that the NLCFA site linked to pages that sported their logos without their knowledge or consent, in a way that they felt implied their membership. In response comments to my post, Marlett clarified that it was his consulting firm’s website that included these logos, as a service for people wanting to know what portals were out there, and the pages were removed because he is no longer pursuing his consulting firm.

I did some cyber-stalking and came across a blog on film finance that Marlett had written for MovieMaker through 2009. In his final post, he describes his vision for a film production cooperative that would both produce and distribute its films. It’s a great idea, and it demonstrated to me that Marlett genuinely has been thinking about crowdfunding for a while, and is not just trying to jump in now because he heard about the JOBS Act and the Pebble and sees a new way to become an alpha male. Reading his MovieMaker columns, I really like his attitude and candor, and I can’t help but think, sadly, why did he have to come to our attention in such a scheming, detached, and adversarial way?

The NLCFA has been putting out press releases, attracting partners, and establishing Marlett as the crowdfunding industry authority in the press. Marlett says that the NLCFA also expects to offer health insurance by the end of this year, which would be a great service. As he also states in his comments here, he wants his organization to be judged by its actual work, rather than what it says about itself, which is a great point.

Marlett took issue with an earlier version of this post (which I sent to my mailing list two days ago) and I hope to talk with him soon to gather more current information on the NLCFA’s activities. I look forward to reporting it here.
International Crowdfunding Association (ICFA)
I also mentioned this group in my last post, and noted their 8pm kickoff meeting at a hotel near Las Vegas on May 24th. The organization is backed by Sprowtt, a company that formed in 2008 to enable small companies to go public and was listed in the Crunchbase deadpool in 2010 as no longer active, and CEOSpace, a “CEO on line Collaboration” website run by Berny Dohrmann, whose unconventional career has included being convicted for securities fraud in 1995. Former SEC Commissioner Roel Campos is also helping the ICFA, and ICFA founder Mark R. Jones emailed me that the organization has 4 attorneys on its board who used to work at the SEC.

Jones, who is also the founder of eCinema Networks and has nearly 5,000 Facebook friends, told me that 500 people attended the ICFA launch, and I heard second-hand that David Marlett was seen storming out of the event (but according to Marlett, he wasn’t there).

That’s what I know at this point, but I would love to find out more. My feeling is that the CFPA is the most credible organization, with the right people, the right values, and an established history with crowdfunding.  But if in a couple of months they seem to be behind in the battle for credibility and substance, then I wouldn’t blame anyone for joining the NLCFA or any other organization that inspires more confidence.

I will leave with a quote from a recent interview with Clay Shirky on

[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.

SEC Comments / Capital-C / CFIRA/CFPA / CrowdCheck

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 (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.

“As the Commission may prescribe” – CROWDFUND Act Read-Through

I had low expectations for the CROWDFUND Act, but finally actually reading it, I think it’s OK, depending on how the SEC implements it.  Yes, an issuer needs to fill out a lot of information and get a review done for offerings over $100K and an audit for over $500K [corrected from original email/post; thanks readers!].  But many companies are now starting up specifically to facilitate this, in the newly-mandated role of “Funding Portal” (that’s the term that the legislation uses for crowdfunding platform or intermediary; get used to it). I expect and hope that these companies will streamline the process the way opening an internet storefront or filing taxes online has been streamlined.

I am not a lawyer, but it seems that Section 4A(f)(2) grants the SEC broad leeway regarding who’s eligible for the exemption and what the ongoing compliance burden will need to be after the security has been issued. I think it’s these things that will determine how useful and popular the new exemption is, and whether it works. I welcome corrections from anyone who knows more.  [UPDATE: Sara Hanks of CrowdCheck Inc., a securities lawyer who worked at the SEC, says: “The interplay between sections 13 and 15 of the Exchange Act, which determine whether a company has to register with the SEC, are complex and I could spend a long time giving you way more detail than you need. But in essence what the provision that you are looking at says is this: ‘if you are already registered with the SEC you cannot do crowdfunding.'” Thank you Sara!]

With a heavy burden, you risk the brain drain that Kevin Lawton describes (which might be a state brain drain towards states that quickly pass their own crowdfunded investing legislation under the federal intra-state exemption). But hopefully the SEC will see that openly-questioned and discussed offerings operate very differently from one-on-one boiler-room scams, and will give more weight to the actual evidence that crowdfunding fraud has been negligible so far (as Kevin also cites) over people’s speculations that it might be otherwise. If so, the SEC should give their rulemaking a lighter touch.’s report on the final Senate CROWDFUND Act gives a good point-by-point description, comparing it with the original House bill that was based on H.R. 2930. Here are some additional notes from my read-through.  Here’s the text itself, and see below for links to sources it refers to, including the Securities Act of 1933.

4A(b)(1)(D)(i)(I) – The issuer of any CF-Exempt security must file their prior year’s income tax returns with the SEC and also make them available to potential investors (i.e. make them public).  This seems unnecessary, and will definitely make the exemption less attractive to trust-funders.

4A(b)(1)(G) – Issuer must file and make available “the price to the public of the securities or the method for determining the price, provided that, prior to sale, each investor shall be provided in writing the final price.” I would rather see an explicit requirement that prices must be all listed and static until offering closes.  The wording here looks like it would allow dynamic pricing, so long as the method for determining the price was explained. The problem with this is, you could program dynamic pricing to create pressure: “Shares available are now for $5, but will go up 50 cents for every hour you wait– act now!”

4A(f)(2) – The exemption “shall not apply to […] any issuer who is subject to the requirement to file reports pursuant to section 13 or section 15(d) of the Securities Exchange Act.” These are the “Periodicals and other reports” and “Duty to file periodic reports” sections. These sections are long, and as far as I can tell from a quick look (tl;dr), they give the SEC authority to require whatever amount and frequency of periodic reports it thinks is necessary. “As the Commission may prescribe” is the phrase.  Section 15(d) suspends duty to file periodic reports when there are fewer than 300 shareholders of record, where “of record” is defined as deemed necessary. A limit of 300 doesn’t make sense with crowdfunding-sized numbers of shareholders.  I’d love to get some more informed opinions on this provision. [See UPDATE above, second paragraph of post.]

Section 3(a)(80) – definition of “Funding Portal
I don’t understand why this section of the legislation didn’t include the requirement of hosting an open discussion forum, since that’s essential to the crowd’s ability to root out questionable claims. Here’s the wording on this from H.R.2930:

“(10) makes available on the issuer’s website a method of communication that permits the issuer and investors to communicate with one another;”

The SEC can certainly require this in their rulemaking (it would be moronic if they didn’t), but it would have been nice if this were actually written into the legislation. 

SEC. 305. [of bill, not Securities Act) RELATIONSHIP WITH STATE LAW. Exemption preempts state registration requirements (yay), but state has jurisdiction and enforcement authority over fraud conducted in state.  State cannot collect registration fees for CF-exempt offerings unless issuer and owners of over 50% of stock are state residents.


CROWDFUND Act of 2012 (compiled by Brad McGee)

Securities Act of 1933 
Section 4 – p. 19 – location of new crowdfunding exemption as Section 4(6)
Section 3(a)(80) – definition of “funding portal” – defined in bill itself, not currently in Act
Section 12(a)(2) – p. 40 – liability

Securities Exchange Act of 1934
Section 3(a)(26) – p. 16 – Self-Regulatory Organization
Section 13 – p. 120 – Periodicals and other reports
Section 15(d) – p. 167 – Duty to file periodic reports

Code of Federal Regulations (CFR) Title 17, 230.262 – Regulation A – Conditional Small Issues Exemption (Part 230)