SEC Comment: Addition to Proposed Investor Qualification Exam

[Reprinted from Public Comments on SEC Regulatory Initiatives Under the JOBS Act: Title III — Crowdfunding, 2 Jan 2013]

Subject: SEC Regulatory Initiatives Under the JOBS Act: Title III — Crowdfunding

January 2, 2013

In my comment letter incorrectly dated July 26, 2010 (it should have read “July 26, 2012” – sorry!) I rough-drafted a suggested investor education and qualification exam for crowdfunding that includes 16 multiple-choice questions, each addressing a different possible red flag (or “Risk Factor”) for registration-exempt online investing. Here is another, 17th question that I neglected to include:


Online identities can be stolen or hacked by criminals, who then use them to impersonate friends, family, and other people you know. If you receive or see an online investment solicitation that lists people you know as offerers, investors, recommenders, or otherwise involved, understand that it may be a scam that has nothing to do with them. Telephone them or discuss in person before investing, so you can hear their voice and verify that they are not being impersonated. Don’t rely solely on online communication, since it may already be compromised. Be especially suspicious of online comments or conversations that somehow “ring false” — are attributed to people you know, but don’t seem like the way they normally communicate.

Choose the statement below that makes the most sense.

  • Wow, here’s an investment that my entire first-degree network highly recommends. And in this discussion, many of them call it a “great opportunity.” I’m in!
  • I haven’t heard from Brad in a while, but he just contacted me to invest in his can’t-fail new business. Hmm, this doesn’t seem relevant to his interests, and the wording here doesn’t even really sound like him– but hey– good for him, and I’m glad to know about this! Sure, I’ll invest!
  • This solicitation lists my friend Carol as an investor, but she never said anything about it when we had lunch last week, and it’s something she would have mentioned. I’ll call her up to check that it’s true, and if it isn’t, I’ll forward the solicitation to the SEC’s Crowdfunding Fraud email address and call their 24-Hour Crowdfunding Fraud Hotline to alert them.

Respecfully submitted,
Paul Spinrad

Is Kickstarter a Social Minefield?


[Originally published on, 7 Dec 2012]

Noreen Malone, a writer for The New Republic, doesn’t like what Kickstarter is doing. In her recent essay “The False Promise of Kickstarter,” she starts off by raising the case that donation crowdfunding is a “bright spot” in the current economic landscape and a more democratic way of supporting creative work. Then she attacks it by noting that crowdfunding favors projects that have strong online appeal, that some of the projects are silly, and that some projects fail to deliver. I don’t think Kickstarter fans disagree with any of these points. But should people be prevented from spending money on silly things, on Kickstarter or elsewhere?

Finally, Malone arrives at and develops what seems to be her deeper point: that the demand for donating to Kickstarter projects is not “real,” but is instead due to “peer pressure or idle boredom.” She problematizes the fact that Kickstarter “creates a relationship between consumer and merchant that is more like that of the one between donor and nonprofit.” And what’s worse, she concludes, other sites that resemble Kickstarter are sprouting up like weeds, not just for gadgets and films, but for things like funding local municipal improvements.

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Crowdfunding is Gamification Solving Real Problems

This post originally appeared on

In her popular TED talk and resulting book from 2010, game designer Jane McGonigal argues that gaming can make a better world. She posits that if we, as humans, approached real-world problems with the same sense of control and collaboration that we bring to multiplayer role-playing games, we could solve them. So, we should do it. We should make solving big real-life problems more like playing games.

McGonigal’s daring proposition comes from research that she did years ago, after having observed the different way that people react to challenges in games and in real life. When we confront obstacles in real life, we often feel overwhelmed, frustrated, or cynical, but when we play games, she found, we never have those feelings. She wanted to identify what it was about multiplayer games that inspired such a positive attitude, and concluded through her research that it came down to four things that the gamers experience:

1) an urgent and reasonable hope of success;
2) a fabric of trust created through interacting with other players;
3) a feeling of flow; and
4) the feeling of making a difference in an important quest.

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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.”

The $1,000 Indiegogo Campaign and Petition that Led to Legal Crowdfunding and the JOBS Act

[Originally published on, 23 Sept 2012]

On June 24, 2010, the Sustainable Economies Law Center (SELC) in Oakland, CA submitted to the SEC the first public petition for a crowdfunding exemption, which the SEC posted as File No. 4-605, “Request for rulemaking to exempt securities offerings up to $100,000 with $100 maximum per investor from registration.” The legal work for researching and writing the petition was itself crowdfunded on IndieGoGo as “The Crowdfunding Campaign to Change Crowdfunding Law,” and the donors are all listed in the petition’s first footnote.

The SELC petition subsequently inspired more public comments than any previous SEC rulemaking petition, and catalyzed a movement that resulted in the signing of the CROWDFUND Act, as Title III of the JOBS Act of 2012. At a recent Milken Institute roundtable on crowdfunding, one participant described this legislation as one of the most momentous and rare exemptions in U.S. securities laws since the Securities Act of 1933. Here are some citations that reference the SELC’s influential petition.

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A Crowdfunding Pioneer Psychoanalyzes Crowdfunding’s True Believers

[This is Part 2 of a series originally published on, 21 Sep 2012]

II. Inside the Cult

It was satisfying and fun collaborating with others on efforts to push the crowdfunding exemption from idea to reality. I’ve always had an idealistic view of the exemption, and I saw that my compatriots felt the same way. We were (and are) excited about it, but ultimately, it’s just the creation of a new asset class. Others might see our beloved chunk of legislation as just another tweak of the financial system, too complicated and boring to understand. Or, worse, a suspicious-sounding new loophole that, as always, lets the conspiracy of scum in high places skim more money away those of us who do our nation’s real work.

It probably doesn’t surprise anyone that the people who worked as unpaid volunteers for a piece of new legislation hold high hopes for it. But for me, as someone who’s never been much of a joiner or a zealot, had never spent much time on political issues before, and is generally skeptical of any purported “magic bullets,” these group feelings were a new experience. I’ve processed them, and here are the results, ten reasons why I believe the crowdfunding exemption gained something like a cult following:

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How Crowdfunding and the JOBS Act Got Started, Told by the Guy Behind the Big Idea


[Originally published on, 19 Sept 2012]

Remember the Internet boom in the 1990s? That was triggered when Congress allowed the National Science Foundation (NSF) to revise its Acceptable Use Policy to permit commercial traffic on its Internet backbone. During that expansive time, Cyberpundit John Perry Barlow argued that the newly unleashed Internet was the most transformative technology since the capture of fire. Others compared it to the invention of the printing press or the automobile. But whatever your preferred antecedent, a stroke of the federal regulatory pen fundamentally democratized the flow of information, and led to an era of grassroots innovation, empowerment, and economic vitality that we are still enjoying. (Well, maybe not-so-much with the economic vitality today.)

Now the SEC is formulating regulatory changes that I hope will have similarly positive and far-reaching effects — not over the flow of information, but over the allocation of human effort. The JOBS Act’s crowdfunding exemption, along with its legalization of general solicitation, is a deep-structure re-engineering of securities laws that, to quote internet guru Clay Shirky, “isn’t a new way to do the old stuff; it is a new model of the business ecosystem, full stop.” The SEC should implement the new exemption so that it’s useful to entrepreneurs, but if they don’t, efforts are underway for individual states to pass their own exemptions. Either way, the revolution is coming. Whose side are you on — the stifling past, or the glorious future?

The movement for a crowdfunding exemption was initially launched by my efforts. You’re welcome. And I continued contributing to it, as an ad-hoc network of co-conspirators snowballed around the issue via ever-growing email recipient lists. Last April at the White House, this crowd of fellow travelers and I had the honor of seeing the JOBS Act signed, and now many of us are working with the SEC and FINRA to make sure the new legislation works out nicely for everyone. We look forward to seeing the rules that the SEC comes up with, and our fingers will be crossed next year, as the new regulations and regulatory infrastructure have their first contact with reality.

This is an article in two parts. The first part tells my part of the story of how the crowdfunding exemption movement got started. In the second part, I’ll explain what I believe motivated the people involved in the surprisingly fast-acting movement, and why we sometimes say such far-out and cult-like things about crowdfunding.

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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.”

SEC Comment: Proposed Investor Qualification Exam

[Reprinted from Public Comments on SEC Regulatory Initiatives Under the JOBS Act: Title III — Crowdfunding, 26 July 2012]

July 26, 2012

Elizabeth M. Murphy, Secretary
U.S. Securities and Exchange Commission
100 F Street N.E.
Washington, DC 20549

Dear Ms. Murphy:

I am pleased at the opportunity to comment on Title III of the JOBS Act, because I have long believed in the positive potential of equity crowdfunding. I first proposed a “crowdfunding exemption” to securities laws in late 2009, and collaborated with the Sustainable Economies Law Center (SELC) to crowdfund and write their July 1, 2010 petition to the SEC advocating such an exemption, “Request for rulemaking to exempt securities offerings up to $100 from registration under Section 5 of the Securities Act of 1933.” I discussed the SELC’s petition with SEC staff and guests at the 2010 SEC Government-Business Forum on Small Business Capital Formation. Meanwhile, I have also been working with many others to refine and promote the idea, and covering our progress on my blog, Change Crowdfunding Law.

I respectfully submit the following contributions to the discussion of the new crowdfunding legislation, and I thank the Commission for the interest and care that they are clearly bringing to the rulemaking process.

Small local investments. Among the more recent other public comments on Title III of the JOBS Act, I especially want to “second” the letter from the American Sustainable Business Council (July 16, 2012) proposing a two-tier approach that specifically recognizes small local investments. I believe this would bring communities together and foster their economic vitality and resilience.

Prohibit dynamic pricing. Section 4A(b)(1)(G) requires that issuers make available to potential investors “the price to the public of the securities or the method for determining the price.” I favor requiring offerings to include fixed prices, and prohibiting any dynamic pricing schemes, because they might be constructed to apply time pressure: “Shares are available right now for $5, but will go up 50 cents for every hour you wait– act now!”

Centralized database. In my August 26, 2010 comment letter on the SELC petition, I suggest that the SEC might itself operate the back-end of the sole legal crowdfunding market, and publish an API that allows front-end “crowdfunding platforms” (“intermediaries” and “funding portals” in the legislation) to create and manipulate the underlying database objects representing users, offerings, transactions, and other elements of the market. I believe such an approach deserves additional consideration given that under section 4A(a)(8) of the new legislation, investors can’t be allowed to purchase CF-exempt securities beyond the annual limits, even from multiple issuers via multiple intermediaries. A centralized database approach would make such aggregate checks very simple. As also noted in the letter, such an approach could be self-funding (“a ‘cash cow,'” in the original letter’s wording), through the SEC’s taking a small fee from each transaction.

Investor education and qualification exam. Sec. 302(a) of the JOBS Act requires crowdfunding intermediaries to ensure that each investor reviews educational material about the risks of investing, answers questions demonstrating that they understand the material, and affirm that they may lose their entire investment and can bear the loss. The rest of this comment letter addresses these requirements.

As a general approach, crowdfunding intermediaries can publish the required information online, and operate an automated, multiple-choice qualifying examination that “educationally accredits” potential investors who answer all questions correctly and make the required affirmations. I suggest the following four general strategies for this examination’s content and presentation:

1. Randomized multiple-choice order and wordings

To discourage easy cheats via shared answer keys, require servers to randomize the order of the choices presented (keeping track, of course, when scoring the answers). If needed, the traditional “None of the above” and “All of the above” may be reworded with “…the other choices.”

As a further deterrent to would-be cheats, write all multiple-choice answers using multiple interchangeable terms for grammatical parts of each sentence. Require servers to then randomly generate different choices using these parts for different users. For example, the template:

If I am {smart, intelligent, wise} about {investing, how I invest}, I {will, am sure to} make money.

…will generate twelve functionally equivalent choices, starting with, “If I am smart about investing, I will make money.”

On the software side, this randomized string substitution scheme would be extremely simple to implement. A bad actor could write corresponding software to “outwit” this scheme and auto-fill correct answers nevertheless, but doing so would demand more effort and leave a more traceable trail than simply distributing text-based answer keys.

2. Accessible language

To maximize understanding of the text, use clear, non-legalistic language, while retaining an appropriately authoritative tone. To maximize retention, employ language that is vivid, but avoid the possibility of its sounding dated or unfamiliar.

3. “Socratic” multiple-choice

Use the multiple-choice medium to express how and how not to think about the risks described, rather than making the incorrect choices tricky or subtle for the sake of exam difficulty. As incorrect choices, list thoughts and feelings that are common and appealing but nevertheless reflect the risk being described. Judicious use of parody can help underscore the incorrectness of such choices, reinforcing the lesson.

4. Time delay for resubmission

Users should be required to answer 100% of the questions correctly before being allowed to invest. If they do not, the server should give them the opportunity to try again. To encourage users to engage with the content rather than their (or their automated agents’) simply trying different checkbox combinations and clicking “Submit” until they get through, the server should time out for 5 minutes or so after each submission.


Listed below are some ideas for the examination’s content, example questions and multiple-choice answers, organized around the investment prospectus concept of “Risk Factors.” I like this term here, but “Red Flags” might be more accurate, because the advice is not tailored to specific offerings.

Some of these examples (noted and grouped at the end) are lifted from the SEC publication “Investor Alert: Social Media and Investing – Avoiding Fraud” (January, 2012). For consistency, the correct answers are always listed last, but in real life the multiple-choice ordering should be randomized by the server, as described above. I haven’t written the answers in the randomizable-wording format also described above, but could go ahead if the Commission so desires.

Risk Factors / Red Flags

Honest Financial Loss

Most new businesses fail, no matter how hardworking or capable the people behind it are, or how good their plan is. According to the US Bureau of Labor Statistics, about 1/3 of new businesses don’t last more than 3 years, and most don’t survive past 6 years. Similarly, creative arts agents tell of piles of unsold manuscripts, screenplays, demo recordings, independent films, and other efforts, in contrast to the few that yield business contracts or otherwise become profitable. If you invest in a new business or other project, you will probably lose your money. The success rate may be higher if you invest in an expansion by an already healthy, existing business, but there are no guarantees.

Choose the statement below that makes the most sense.

  • If someone works hard, they are sure to succeed, especially if they are starting a new business — that’s the American way.
  • I know that most new businesses fail, but this one won’t. The people behind it are too smart.
  • I want to invest in this venture and help it succeed because I believe in it. But I recognize that statistically, it probably won’t. I understand that I may lose my entire investment.


Even if your investment does increase in value (it may decrease or disappear entirely), you probably won’t be able to cash it in at a time of your choosing. Expect it to be locked away for a while. You should not invest any money that you may need in the foreseeable future. Unlike stock in exchange-traded companies, crowdfunding stock cannot be readily converted into cash.

Choose the statement below that makes the most sense.

  • I’ll invest in this offering now, watch closely to see how it goes, and pull my money out if things seem to be going south.
  • I’ll need this money for tuition in September, but until then I’ll try to make it work for me by investing in this.
  • I’d like to invest in this because I’m interested in it. If it goes well, I might be able to cash out in a few years, but I’d rather just continue being a part of it.

Technical Complexity

Some offers are based on technology. The most trustworthy of these demonstrate a working prototype in a way it would be more difficult to fake than to create legitimately. With others, where an issuer promises a device or system not yet developed, they should be able to explain clearly how they will proceed, and answer relevant technical questions.

Beware any offering from someone who points to their purported credentials or past experience rather than answering technical questions directly, and beware of “technical explanations” that rely on comparisons or metaphor rather than describing the actual components of the proposed solution. Don’t invest in any offering that you do not fully understand yourself, or that someone you know with relevant expertise hasn’t reviewed and judged as trustworthy.

Choose the statement below that makes the most sense.

  • It says that this cutting-edge research will discover a limitless source of energy by poking a tiny hole in the fabric of the universe. This should pay back big!
  • The offeror can’t divulge exactly how this wonder device will work because he’s applied for several patents, but it says here that has a PhD from MIT and he used to work at NASA.
  • This project combines all of the latest hot technologies to do something super cool. I don’t understand it, but I want one — and I certainly can’t be the only one!
  • This offering is described using lots of technical jargon, but I still don’t get how it works. I’ll ask my electrical engineer cousin Kim to check it out.

Photo and Video Manipulation

Today, photos and video can be manipulated and simulated in ways that our brains may not have caught up with. We know that verbal descriptions may sometimes be lies, but with our visual perception, “seeing is believing.” Note that any photo or video that you see in a crowdfunding pitch (or elsewhere online) may have been faked. Fully trust only in what you can see in real life with your own eyes, and any offeror should be willing to demonstrate live anything that they have published photos or videos of.

Choose the statement below that makes the most sense.

  • I wouldn’t have believed it was possible if I hadn’t seen the video — wow, this is going to make millions!
  • As soon as I saw the photo of it, I wanted to invest. I got it instantly, and that’s all I needed.
  • The offeror lives in Syracuse and has a public demo scheduled for next Thursday eve — I’m going to see if my friend Pat can go to that.


Exercise caution with investment offerings that are purely virtual, in that they don’t have any identifiable people or verifiable physical locations associated with them. It helps to see a real person behind an offering, but some issuers may legitimately want to protect their privacy by not publishing their photo or video likeness. In either case, they should provide ways of verifying their identity through standard channels, not just through online profiles: passport numbers to check with the U.S. State Dep’t, Driver License or State ID numbers to check with a state DMV, bank account numbers to check with a known bank. Similarly, the issuer should have a physical location in the U.S. where you can verify that they do business or are otherwise physically present and reachable. A good crowdfunding portal will check on these things themselves, but it’s best not to rely on this.

Choose the statement below that makes the most sense.

  • This solicitation video doesn’t show any actual human beings, but that soundtrack sure is exciting, and those slick-looking graphs go up, up, up! I’m going to invest!
  • This company doesn’t seem to have any location, but there’s a link to its owner John Smith’s social network profile page. That gives me confidence– there are probably a lot of John Smiths out there, but now I can see who it actually is.
  • This business has no address, verifiable people, or other connection to physical reality. I don’t trust it.

Personal Obligation

Be careful about investing in a friend or family member if you feel personal obligation around it. If you have doubts about the investment itself but want to help them out financially, it’s clearer to just give or lend them some money directly, and write a simple contract that describes your agreement. Personal obligations around crowdfunding may be difficult to navigate, but you can do what you want with your own money, and you can express your thoughts and feelings for someone close to you more personally through your words, and through actions that don’t require your money.

Choose the statement below that makes the most sense.

  • I’m her grandmother; I need to write her the biggest check of all, or else people won’t think I love her.
  • I really don’t think his singing voice is very good, but if I don’t invest at least $1000 in this recording project, the whole gang will hate me and make my life miserable.
  • I love the guy, but he never follows through on anything. I’m going to talk with him about how I really can’t afford this. Hopefully, the conversation will bring us closer.


People will often have a higher opinion of something because it is popular with others, but “mass hysteria” is real, and crowds do stupid things together. Some of the most successful investors look for opportunities based on doing the opposite of what everyone else does.

Choose the statement below that makes the most sense.

  • If everyone else jumps off of a bridge, I should too.
  • No one has ever lost money following an investment fad.
  • Participating in the excitement of a like-minded group is thrilling, because in means I don’t have to ask questions or think critically.
  • Sometimes it’s wise to be suspicious of things that are too popular.


Some people use their persuasive personalities to convince others to “invest” in questionable schemes. They emphasize the story they tell about themselves and the personal impression they make to steer people away from doing the harder and more tedious work of reviewing their work and checking their math. A charismatic personality can help enormously in entrepreneurship, but be careful of any offering that focuses on the person to the exclusion of thorough and specific detail.

Choose the statement below that makes the most sense.

  • I’m not sure how this all adds up, but I will invest because after all that this person has revealed to me, I don’t want to let them down.
  • I am a good judge of character, and that’s all that a successful investor needs.
  • This person has such a compelling personal story that I want to give them my money. I mean, invest in them.
  • Many successful ventures benefit from charismatic people behind them, but investors must know how to question and say “no” to such people.


The people that you interact with in your daily life are people that you hopefully know and trust. But there are also people you only recognize and know about through media, and who don’t know you. It may feel like you genuinely “know” these people, but you don’t, no matter how much their public personas may speak to you. If they solicit investments, they need to make their case just like anyone else who is a stranger to you.

Choose the statement below that makes the most sense.

  • I’m her number one fan, so I want to be her number one investor.
  • I trust him with my money because he always plays trustworthy characters on television.
  • He’s super-famous among model railroad enthusiasts, so his model railroad venture has to be a good investment.
  • I like her in movies, but I really don’t know those came to be made or how good of a businessperson she is; I need to find out more before I invest.

Physical Distance (and Other Hindrances to Visitation)

People can misrepresent themselves more easily online than they can in person. If you live close to an offeror’s residence, you can check them out more effectively by meeting in person or visiting their workplace, in addition to any phone or online investigation you do. Investing in people far away may be a great way to broaden your connections, but it demands extra caution.

Choose the statement below that makes the most sense.

  • This business is far from where I live, in a place I’ve never heard of, and I don’t know anyone who lives nearby — but it needs my money, so I’m going to invest in it.
  • This business is close to where I live, but they’re too busy to schedule an investor open house or even open the door. That’s good, because they need to focus on running their business rather than spending time with people like me.
  • This business is located in another city, and on this online map, it looks like their “Suite 120” address is just at a mailboxes and packaging store. That seems suspicious, so I won’t invest in them.

Contests or Lotteries

If an issuer promises to redistribute most or all of the collected investments to one or more of the investors, based on chance or any other factors, then it’s likely that they are illegally running a private lottery or contest. Do not “invest” in any such offerings.

Choose the statement below that makes the most sense.

  • Bernie is running a massive Super Bowl pool on this crowdfunding site, and the prize money’s over $5K already– this will be fun!
  • The local animal shelter is holding a sweepstakes on this funding portal. They’re just taking 5% and the winner gets the rest. Aww– look at those cute kitties! How can I say no?
  • This looks like an illegal lottery; I will ask them about it, and possibly report it.

Unsolicited Offers [from SEC Investor Alert]

Investment fraud criminals look for victims on social media sites, chat rooms, and bulletin boards. If you see a new post on your wall, a tweet mentioning you, a direct message, an e-mail, or any other unsolicited – meaning you didn’t ask for it and don’t know the sender – communication regarding a so-called investment opportunity, you should exercise extreme caution. An unsolicited sales pitch may be part of a fraudulent investment scheme. If you receive an unsolicited message from someone you don’t know containing a “can’t miss” investment, your best move is to pass up the “opportunity” and report it to the SEC Complaint Center. Investor Assistance (800) 732-0330

Choose the statement below that makes the most sense.

[Example multiple-choice based on SEC warning language available upon request.)

“Can’t Miss” Claims [from SEC Investor Alert]

Any investment that sounds too good to be true probably is. Be extremely wary of claims on a website that an investment will make “INCREDIBLE GAINS” or is a “BREAKOUT STOCK PICK” or has “HUGE UPSIDE AND ALMOST NO RISK!” Claims like these are hallmarks of extreme risk or outright fraud. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or that the investment “can’t miss.” Don’t believe it.

Choose the statement below that makes the most sense.

[Example multiple-choice based on SEC warning language available upon request.)

Time Pressure [from SEC Investor Alert]

Don’t be pressured or rushed into buying an investment before you have a chance to think about – and investigate – the “opportunity.” Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information.

Choose the statement below that makes the most sense.

[Example multiple-choice based on SEC warning language available upon request.)

Affinity Group Mentions [from SEC Investor Alert]

Never make an investment based solely on the recommendation of a member of an organization or group to which you belong, especially if the pitch is made online. An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catered to an interest you have, may be an affinity fraud. Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. Even if you do know the person making the investment offer, be sure to check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.

Choose the statement below that makes the most sense.

[Example multiple-choice based on SEC warning language available upon request.)

Biased “Research Opinions,” Newsletters, and Spam Blasts [from SEC Investor Alert]

While legitimate online newsletters may contain useful information about investing, others are merely tools for fraud. Some companies pay online newsletters to “tout” or recommend their stocks. Touting isn’t illegal as long as the newsletters disclose who paid them, how much they’re getting paid, and the form of the payment, usually cash or stock. But fraudsters often lie about the payments they receive and their track records in recommending stocks. Fraudulent promoters may claim to offer independent, unbiased recommendations in newsletters when they stand to profit from convincing others to buy or sell certain stocks – often, but not always, penny stocks. The fact that these so-called “newsletters” may be advertised on legitimate websites, including on the online financial pages of news organizations, does not mean that they are not fraudulent. To learn more, read our tips for checking out newsletters.

[Example multiple-choice based on SEC warning language available upon request.)

I would be delighted to discuss any of this.

Respectfully submitted,

Paul Spinrad