Entrepreneur and business writer Kevin Lawton has put together a great series of presentations about crowdfunding from an investment perspective. Here’s the last one (Part 3), which mentions our SEC petition campaign at the end: http://ow.ly/2cb7XRecently I had a great conversation with Kevin, who’s excited about crowdfunded securities, but doesn’t think this petition is the way to get there. Here are the highlights: * This exemption may help small local businesses or individual creative projects, but it’s too low to help 99% of the ventures that the business world would be interested in. The $100K cap “doesn’t even move the needle” for people involved in business startups, except possibly for some mobile or web application development. * Ironically, this initiative may actually harm the chances for legal crowdfunded securities at any economically meaningful level. The SEC may eventually green-light this exemption as a way to throw a bone to the crowdfunding crowd (and avoid significant change). And because government is slow, it will be even more years before those numbers would be revisited. Meantime, other countries (like India with GrowVC, http://growvc.com), will support crowdfunded securities at more significant levels. As a result, their economies and business climates will benefit, and the U.S. will suffer and be left behind. * For a rulemaking petition to the SEC, a better approach would be to hammer out a more inclusive proposal with a small, smart group that includes experts on community-supported entrepreneurship, the heads of the big crowdfunding sites, and people in the business investment world. Come up with a proposal that appeals to all of these groups, and then rally everyone to support this new proposal, retracting the current one and transferring its momentum to the new one. The SEC would be more moved by an explicit, “Here’s the one killer crowdfunding proposal that all of these diverse groups support,” than any possible implicit, “A bunch of competing pro-crowdfunding petitions have been submitted for your review by different groups– they all ask for slightly different things– good luck figuring it out!” * The business world needs to lead on this issue, collectively, fully transparently, and with good intent– and then the SEC will catch up. One approach would be for securities offerors to start flouting the restriction on general solicitation, which the SEC has been fighting to maintain for over a decade already. Securities offerors could begin publishing and distributing investment solicitations to the public, while also registering them with a government-friendly database that’s maintained by a dedicated non-profit, in the “Self-Regulatory Organization” (SRO) model– see http://en.wikipedia.org/wiki/Self-regulatory_organization. The solicitations would remain retrievable in perpetuity, because sunlight is the best disinfectant. If just a few securities offerings did this, the SEC would nail them– but if it became a mass effort, involving large numbers of legitimate investments, it would change the rules and the SEC would have to adapt. * Such a disobedience scheme wouldn’t address the separate issue of who could legally invest– that would presumably still be subject to the SEC’s existing framework of accredited / sophisticated / unaccredited investor classes (which likewise, sorely needs revisiting). But to move the “soul” of crowdfunding forward, to activate its ability to reach and leverage the greater talents and expertise of the many outsiders over the few insiders– the wisdom of the crowd– the prohibition against General Solicitation is the more important first target. * A better way to set protective limits on crowdfunding investments, equally effective but more scalable than a simple, dumb cap (which resembles the current accredited/unaccredited distinction) is the following scheme: 1.) Let people put money into crowdfunding investment accounts, just as they can with other kinds of investment accounts, with the same restrictions, warnings, etc. 2.) From this account, allow them to keep only 1/N of the total invested in any one security, where N is probably some number like 5 or 6. In other words, mandate for diversification. That way, no one can lose all their eggs on one bogus crowdfunded security, but it gives people flexibility over the amounts they want to invest. (If you really just want to invest in one security, then the remainder of your account balance has to sit in some cash equivalent). * A more profound point relating to this mandatory-diversification scheme is that failure is a greater threat than fraud. In early-phase investing, you expect 9 out of 10 investments to fail anyway, so if 1 in 100 is an actual, premeditated fraud, that just aliases as another failure and disappears in the wash. There is no clear distinction between failure and fraud anyway– there’s already plenty of shenanigans in the way startups spend their seed money, and if they fail (as most do), intent becomes hard to tease out. Those were Kevin’s main points (it was a long conversation), and I agree with him on almost all of this. I’d never met him before, but talking to him, I immediately liked him and appreciated his enthusiasm as a like-minded comrade. I also like his scalable, mandatory-diversification scheme, and his related thoughts on fraud vs. failure. Plus, of course, he has a real and successful background in business startups, which I lack. The notion of the “Self-Regulatory Organization” would ordinarily make me want to reach for my revolver, with visions of accounting scandals, financial collapses, and oil-soaked marine life jangling through my head. Moreover, a centralized authority doesn’t seem compatible with crowdfunding, which is inherently bottom-up and anarchic, not top-down. But I must agree that, to safeguard the future health of crowdfunding, some entity probably does need to set best practices for the sector, and work with / lobby government(s) on its behalf. And there should be only one such entity, rather than competing efforts– and ideally, it should have a global reach, since the money will go wherever crowdfunding law is most hospitable.
Great news: the SEC has posted the petition to their website, as File No. 4-605. See http://www.sec.gov/rules/petitions.shtml to see it listed, and http://www.sec.gov/rules/petitions/2010/petn4-605.pdf for the petition itself.So now it’s time to spread the word and get those comments in! Here’s how to submit comments, which should appear on the SEC’s website within a few business days: 1. Email the SEC at: email@example.com
2. In the subject line write “Re: File # 4-605”
3. In the body of the email write “These are comments in regards to a petition for rulemaking change.” If you look at the SEC’s “How to Submit Comments” page (http://www.sec.gov/rules/submitcomments.htm), disregard the references there referring to an online form, or file numbers beginning with “S7-” or “SR-” — these are for proposals issued by the SEC, not public petitions like ours. (Thanks to Mitch Silverman and Seth Elliott for clarifying these instructions!) If you like, you can also CC (or BCC) the message to comments at crowdfundinglaw dot com — this is just for me to archive what’s been sent, to see if anything isn’t making it onto the SEC site. Explain in your own words what you think of the idea and what your personal interest in it is. Fine with me whether you’re for it, against it, or somewhere in between– the main thing is just to encourage the SEC to consider this issue and open a dialog. Note that if you cut and paste, they will designate your letter as an example of a “Type” (e.g. http://www.sec.gov/comments/4-547/4547typea.htm) rather than an original contribution, which presumably carries less weight. I don’t think burdening the SEC with copy-pasted activist spam will make any friends there or help the cause. Here’s a post I wrote for boingboing on Friday, which gives the instructions above, along with some background: http://www.boingboing.net/2010/07/03/sec-crowdfunding-exe.html Since that boingboing post, scores of people have tweeted this campaign, which certainly helps to raise awareness– but meanwhile only two have actually emailed comments to the SEC. I find this disparity in numbers amusing. But anyway, see http://www.sec.gov/comments/4-605/4-605.shtml — and thanks to Mordicai Knode and Ben Schwartz for the good points and good discussion!
UPDATE (Aug 2012)
I’m updating old blog entries to include relevant external documents listed by date. Here’s the one mentioned above:
3 Jul 2010
“SEC Crowdfunding Exemption action: File No. 4-605” by Paul Spinrad, Boing Boing
I wrote this to announce that the SELC proposal had been posted on the SEC site and was open for comments, hint, hint. I assume that the first few commenters logged on the SEC’s comments page were Boing Boing readers — I don’t know them. (But many of the later commenters on the SEC site are pals of mine whom I bugged to write in.)
I’ve moved the home page for this campaign from its fundraising page on IndieGoGo to here, so I think it makes sense to decant the original description into this new location.Note that the fundraising ended, and the deliverable has been delivered. Check it out– until this mighty document is posted to the SEC’s own website (which should happen this week), you can read it here. Here’s the original pitch:
Crowdfunding sites like IndieGoGo offer VIP Perks but not shares– because offering profit participation is illegal. Securities law lets you gamble your retirement on investments conveyed through the all-controlling financial system, but you can’t invest $50 in someone you actually know personally, in order to help them start a small business, write a book, make a film, build an iPhone app or develop a new product that you believe has commercial potential. The SEC can change this situation by introducing a regulatory exemption that caps individual investments at $100. I believe that doing this would change everything for crowdfunding, spark innovation, and help vitalize the economy from the bottom up. The idea of an exemption based on very low cap on individual investment is not new; according to the SEC’s Anthony Barone, it has been discussed and brought to the SEC’s attention by academic economists. What has not yet been demonstrated is the extent of public interest in such an exemption. This project offers a serious plan for essentially forcing the SEC to consider this possibility and respond to it publicly. This issue is more complicated than can be explained on this short project page, but you can read the prospectus for the history and background on this project. READ THE PROSPECTUS SUMMARY * The Sustainable Economies Law Center (SELC) has agreed to draft a Petition for Rulemaking for submission to the SEC that proposes legalizing crowdfunded securities, for payment of $1000 raised through crowdfunding. That’s what this project is for. * $1000 is a great deal, and the SELC is the perfect organization for this; highly regarded, and involved with these issues. See the prospectus for details). * The SEC posts any Petitions for Rulemaking that it receives, along with all public comments. This area of the SEC website is surprisingly inactive. * Once the SELC petition is posted, we mobilize crowd action to submit comments. If the SEC receives a large number of comments in support of legalizing crowdfunding, they will need to hire someone to process them all. This is an example of the ever-newsworthy Old Institution, Blindsided, Is Forced To Confront New Phenomenon. Note that we originally thought the petition would be written under the auspices of the Katovich Law Group, but subsequently decided to have the work done by the SELC (which is affiliated with Katovich). This makes your contributions tax-deductible!
Justin Layne May
Not on this list? This is just the beginning, and it’s not too late to help with this. The important part now is to send (and encourage others to send) comments to the SEC regarding this petition, which you can do once they give it a File No. and post it, hopefully this coming week. Stay tuned!
Here’s an observation from my friend Liz, who’s the most politically experienced person I know: every real political movement is driven by the personal stories of the participants, and what got them involved.
Without these stories, a movement won’t move. It’s kind of like Alcoholics Anonymous: everyone in the room wants to know who everyone else is, what their lives are like, and why (and how) they came here to change something, rather than just doing their usual thing.
I know the phrase “The Personal Is Political,” but I’m a privacy freak who’s generally put off by identity politics. Still, this issue is interesting and important enough to me that I want to share how I got involved. There’s nothing dramatic here– it’s just a longtime interest that I’ve found time to pursue.
I am a flex-time, work-at-home (read: unshowered and unshaven) writer/editor and the father of two toddlers, with whom I frequent the playgrounds in and around the San Francisco neighborhood of Cole Valley.
Like many people, I have more ideas than I follow through on, and I believe many of them have commercial potential. But I work best under the expectations of others. So I’ve long wondered: how can someone like me get buy-in to pursue something that I think is a good bet?
In 2003, I built the website Premises, Premises as an experiment, to sell and support investment in inexpensive ideas. It didn’t catch on, and I now know that one of the main activities I was aiming to support (selling shares of future profit, i.e. securities, unregulated over the web) would be illegal anyway. But I had a great time making the site, and I added material to it for about year before letting it fall onto the dustheap of dead websites.
In 2006 I was very interested to learn about Fundable, which was the first crowdfunding platform I’d heard of. In 2008 I learned about the community-supported journalism site Spot.Us and was similarly excited, writing a brain-dump fan letter to Spot.Us founder David Cohn, who posted most of it to his blog.
Later that year, inspired by Spot.Us, I pitched the idea of an “E-vite for Makers” site to some of the folks I work for at MAKE, as a kind of online resource to help DIY’ers through a combination of external expectation, peer support, crowdfunding, curated how-to resources, and even dedicated pestering (for premium level subscribers) fromGetFriday-like offshore-assistant whipcrackers. The scheme didn’t gain support, and I didn’t find the time to build it myself on spec.
But meanwhile, sites like Kickstarter and IndieGoGo were starting up, I wasn’t surprised at how active and exciting they quickly became. They got the recipe right, and are now the magnets for interesting projects that Premises, Premises never was! I also felt that they were just one step away from something even more important. If they could offer return on investment instead of just nice prizes for donations, it would really change the game. It could be a big win for innovation, culture, and our economy as a whole. Doing this wouldn’t be a big deal technically, so I wondered why it hadn’t been done yet.
I talked to some lawyers and found out why such Idea Futures type platforms hadn’t been launched: it’s illegal, unless you register each offering with the SEC, which is prohibitively expensive. Any investment you make where the return doesn’t depend on your own work is considered a security, and there is no de minimis dollar limit on securities offerings or individual investments below which the SEC does not regulate. In other words, investing in a lemonade stand is subject to SEC regulation, unless it falls under some existing exemption (which it almost certainly wouldn’t).
I reported this in a post on the peerless Boing Boing blog last year, where I was enjoying a stint as a guestblogger. In the post, I said that I wanted to make crowdfunded securities legal by introducing a low value de minimis regulatory exemption, and perhaps use crowdfunding itself to secure the funds needed for the legal work. I also invited people to contact me for updates. My post elicited many nice comments and emails from interested people– including Tim Kappel, a lawyer whose article I had cited
Encouraged, I called the SEC to discuss the topic and wound up talking with Anthony Barone in their Office of Small Business Policy. He told me that the SEC can change its own regulations, without congressional review (which sounds like a recipe for corruption, but I won’t go there). He also said that the idea of an exemption based on the low value of individual investment had been brought up at the SEC’s last annual Government-Business Forum on Small Business Capital Formation, which took place November 2009. So the idea was already on their radar!
I soon found the Petitions for Rulemaking page on the SEC’s website and was delighted to see that anyone can submit a public petition for rulemaking to the SEC’s Office of the Secretary, as well as comments on any such petition (during its commenting period, which is 90 days I think).
From an online-activism viewpoint, I thought this process seemed too good to be true– the SEC really posts any and all rulemaking petitions and relevant comments it receives on its own website?
Most of the petitions are very technical and few have received much comment from the public– but what if I could get a serious, well-argued “crowdfunding exemption” petition drafted and submitted to the SEC– and then, once it was posted, encourage the crowdfunding crowd to bombard the SEC with positive comments. I wondered whose job it was at the SEC to scan and post every comment that anyone submits scribbled on notebook paper.
I started looking for a lawyer who might be interested in this scheme, and came to Jenny Kassan, whose great article “How to Raise Money But Not Break the Bank” my friend Peter had clipped and sent to me. As managing director of Katovich Law Group and co-director of the Sustainable Economies Law Center (SELC), Jenny is very knowledgeable about small enterprise investment and how it is affected by securities law. I queried her about the SEC petition idea, and we wound up having a great conversation. She explained that others had also been advocating for a de minimis investment exemption, and said yes, why not submit a public petition on it, to help bring the issue out into the open? We agreed that it was a common cause that united the hardworking, local community-focused entrepreneurs that she knows and the aspiring artist types that I saw funding their hopeful fame-bombs on Kickstarter.
Jenny would charge a token $1000 for the legal work, so on the fundraising side, I met with Danae Ringelmann of IndieGoGo, who lives near me
. She helped concoct the plan for the Crowdfunding Campaign to Change Crowdfunding Law, which launched on April 26th and reached its funding goal eight days later.
At the SELC, the summer legal interns were due to start in a few weeks, so Jenny figured they would be great for drafting the SEC petition, under her supervision. And since the project would then be done under the auspices of the SELC, which is a nonprofit, everyone’s donations would be tax-deductible. Bonus!
After the summer interns were settled working at the SELC, we all met at The Hub in Berkeley (a.k.a. Hub Berkeley) to discuss the petition: me, Jenny, and SELC interns Aroma Sharma, Erin Byers, Chris Curran, and Kathleen Kenney. SELC co-director Janelle Orsi also stopped by to say Hi. Over the next few weeks, Aroma and Kathleen did a fantastic job researching and writing the petition, and on June 24th, they sent it to the SEC.
The SEC’s autoresponder said they typically post what they receive within 2-3 business days– and once that happens, it will be time to spread the word about this campaign and encourage people to send in those comments. I’m excited– more soon!
UPDATE – (Aug 2012)
I’m updating old blog entries to include more relevant external documents listed by date. Here are four that predate the entry above:
8 Oct 2008
“Evite For Projects” proposal by Paul Spinrad, – emailed internally at MAKE magazine while I was Projects Editor there.
This was a proposal for MAKE to create what we would now call a crowdfunding platform, a website designed “to help aspiring makers follow through on their project ideas.” It’s interesting to read this now — the “Free version” is what happened, but not the “Premium features.” The idea was rejected at MAKE, and Kickstarter launched in the Spring of 2009.
13 Dec 2009
“Adventures in Ex Ante Crowdfunded Securities Law” by Paul Spinrad, Boing Boing
This is the post that I wrote as a guestblogger for Boing Boing which first proposed the idea of a crowdfunding exemption to securities law, and gauged interest in launching a crowdfunding campaign to support lobbying for such a law.
This campaign funded the SELC petition that was sent to the SEC on June 27, 2010. IndieGoGo limits the word count of pitch pages, so I offloaded a longer explanation onto my own “Prospectus” page hosted elsewhere.