Improving the landscape for organic startups


A congressional committee will hear a “crowdfunding exemption” proposal next week.

[Reprinted from O’Reilly Radar, 6 May 2011]

Next Tuesday, May 10, entrepreneur Sherwood Neiss will be testifying before U.S. Congressman Darrell Issa and the House Committee on Oversight and Government Reform to advocate a regulatory change that I have been working to support: a small offering exemption, aka “crowdfunding exemption.” It’s a simple change that the SEC has the authority to make, and which I believe would spur grassroots innovation and empowerment the way the NSF’s revision of the internet backbone’s Acceptable Use Policy did back in the early 1990s. (Remember that one?)

The background (which I didn’t know until fairly recently), is that any investment where the return does not depend on the investor’s active, day-to-day involvement is considered a security. And securities, no matter how small, are either regulated by the SEC or state securities departments. There are no de minimis exceptions; shares in a lemonade stand would require registration, which I’m told costs $50,000-$100,000 or more (federal) or $20,000-$50,000 (state), mostly legal fees. For VC-free startups based on people doing things that they care about, these costs are prohibitive.

There are exemptions from registration, but never for investments that are described on the open web, like the donation pitches that have made sites like Kickstarter and IndieGoGo such fonts of creativity — this is prohibited as “general solicitation.” Investments offered privately to friends and family can be exempt, but with strict limits on the numbers of “unaccredited” investors (non-millionaires) allowed in, like a maximum of 35.

These laws were enacted to protect unsophisticated investors from fraud, but they also prevent people from investing in small businesses in their own neighborhoods, or garage ventures launched out of communities of interest that they belong to — despite the likelihood that their personal ties to such investments gives them a better basis for evaluating risk (and contributing to success) than some mass of SEC filings cooked up in an office somewhere. And so, in the name of investor protection, the investments industry currently has a monopoly on all the invested assets of the non-millionaire public. People can’t invest in the people they know from their own communities; they can only entrust their money to the choices contained in a managed menu of exclusively non-local, large-scale investment products.

As an alternative, the Sustainable Economies Law Center (SELC) in Oakland (for whom I volunteer) petitioned the SEC last year for a new exemption to cover investment offerings where individual investments are capped at $100 and the total amount is less than $100,000. The SEC posted it to their website last July 1 as File No. 4-605 (PDF). Check it out! It’s a great document, written to be understandable by laypeople, and I think everyone involved is proud of how it turned out. The funding for the legal work behind the petition was itself raised through crowdfunding.

As hoped, the proposal has been bouncing around and gaining support from Republicans and Democrats alike. The SEC’s comments page for the petition (which you can add to by emailing and putting “4-605″ in the Subject line) contains more comments than any other petition listed, all of them positive (as of this writing). Last November, when I and some other supporters of the petition attended the SEC’s Small Business Forum to promote the idea, the SEC seemed interested.

Since then, Rep. Darrell Issa wrote a letter to SEC chair Mary Schapiro asking about easing regulations for crowdfunded investments, and Schapiro wrote back (PDF) to say they were evaluating the issue, citing 4-605 and our visit (see footnotes 77 and 78 in the document). Meanwhile, Florida entrepreneur Sherwood Neiss also met with the SEC to promote the idea, and published a less restrictive proposal for a small offering exemption (which also cites 4-605) at his website StartupExemption.

Neiss has also done a wonderful job of spearheading and publicizing this issue. Understanding the power of celebrity, he encouraged Whoopi Goldberg to tweet her support for his exemption proposal. The Wall Street Journal blog covered Goldberg’s tweet on March 23. This reified the issue among financial journalists, who have since reported on it in Bloomberg, The Fiscal Times, The Washington Times, and POLITICO Pro. (Before Goldberg’s endorsement, only the Boise Weekly had covered the idea.)

Now Neiss is scheduled to testify before Issa’s committee next Tuesday, May 10th, and everyone I’ve been working with on this who knows is thrilled. I’ve read an early draft of his planned testimony, and it’s terrific — a great argument with great supporting facts for a revolutionary new idea. I was excited just reading it, and in an idle moment afterwards I caught myself humming “Marching to Pretoria.”

This past Monday, I called C-SPAN’s main number (202-737-3220) to suggest that they cover Issa’s hearing and Neiss’ testimony. The receptionist told me to call back on Monday, May 9th because they don’t decide what to cover until the day before. When I asked her if there was any other way to suggest coverage, she asked me what hearing I was interested in, and told me that she would pass my suggestion on to the editors. Fingers crossed!

Campaign Totally Owns Footnotes 77 and 78 :-)

On April 6, SEC chair Mary Schapiro wrote a letter (PDF) about the SEC’s role in capital formation to Rep. Darrell Issa, chair of the House Committee on Oversight and Government Reform.  This was in response to Issa’s letter of March 22 (which I haven’t found a copy of yet). Towards the end of the letter, Schapiro discusses “New Capital Raising Strategies” and states that, “The [SEC staff] has been discussing crowdfunding and possible regulatory approaches to this developing capital formation strategy.”

As proof-of-impact, check out footnotes 77 and 78 on pages 22 and 23 of Schapiro’s letter, which discuss the SELC’s petition (PDF) and our visit to the SEC’s Small Business Forum back in November. It’s nice to have the SEC on record as listening to and considering the idea of a new de minimis exemption, and it’s fun to see a couple of footnotes at the end of an official government document like this and be able to point to them and say, “hey, that’s us!”

To the SEC’s concerns, I believe crowdfunding would be a bad frame to use for any scams– at least to the extent that the public understands how crowdfunding works.  Scammers rely on isolating and pressuring their marks for large amounts of money, but crowdfunding solicitations ask for peanuts, and they are open, driven by word-of-mouth, and widely-seen. They originate within an offeror’s personal connections or community of interest, and potential supporters are free to research and discuss the pitches on their own time, using any tools at their disposal. Some scams might certainly use “crowdfunding” as a buzzword, but I cannot imagine how such ruses could be successfully contrived to resemble the real thing for more than a short amount of time.

“Required Warning: Do not invest in anyone you do not personally know, or at least know of, and be sure to verify through a second channel that they are the true originators of this solicitation.”

International CF Petition / CF Book

Crowdfunding guru Kevin Lawton believes (as I do) that we would all benefit from the creation of an international authority that sets and enforces best practices for crowdfunding, and works to coordinate crowdfunding policy across countries. This is why he created the forward-looking LinkedIn group International Organization of CrowdFunding Commissions (IOCFC).

Towards this end, he has now also posted for public review a draft proposal for lifting the general solicitation ban on ‘private’ (unregistered) investment offerings, thereby legalizing web-based offerings, under requirements designed to be simple, sensible, and replicable across state and national borders.  After input, discussion, and (hopefully) some consensus, the idea is to use the future, final revision of this proposal as a template for a formal legal petition. Localized versions of this formal petition will then be submitted to regulatory bodies worldwide in a coordinated effort.  It’s big and important stuff, and it’s great to see it starting. I want to help Kevin move it forward, and I hope you will too.

Meanwhile (and this is old news for many of you), Kevin co-wrote a landmark book, The Crowdfunding Revolution, which came out a couple months ago. Read it!  You can learn more about it and buy a copy at, where Kevin has been posting other great things (check out his eye-opening TTS animation about tax and liability issues for crowdfunders). Below is my own review of it, which I just posted to

Believe It

This is a book about the Next Big Thing.

Crowdfunding isn’t yet a universally understood term, so Lawton and Marom define and describe the phenomenon, and explain why crowdfunding is now needed (to the extent that any economic behavior can be “needed”) given the current state of venture funding. Through it all, they present extensive reporting on the topic, drawn from wide-ranging interviews and deep reading, pulling together an essential “Crowdfunding State of the World” for late 2010.

Perhaps more valuably, the authors also map out some possible roads ahead, with recommendations, warnings, and vivid scenarios– like the story of FundHarmony, a matchmaking service for investors and investments that grows in its sophistication and effectiveness.

Reading this book, I appreciated the authors’ sense of history. I’ve read business books that drop history cliches (“Tulipmania” for example) in order to bolster some point that they’re trying to make. But Lawton and Marom are clearly history buffs, and they illuminate their discussion with detailed accounts of less widely-cited historical situations that I was glad to learn more about.

For example, the pedestal for the Statue of Liberty was essentially crowdfunded. A nationwide fundraising effort led by Joseph Pulitzer rewarded $1 donations with a 6″ Lady Liberty statuette and $5 donations with a 12″ statuette– exactly the sort of multi-tier “perks” setup that you see today on Kickstarter, IndieGoGo, RocketHub, and other popular crowdfunding sites. The book’s introduction recounts this successful campaign, and I can think of no better symbol for the spirit and potential of crowdfunding. (The Statue of Liberty itself was also crowdfunded, by French citizens, via a lottery.)

The book also benefits from what I know to be Lawton’s own background and contributions to open source software. Much of the philosophy behind crowdfunding draws from the open source movement, and I see crowdfunding as an inevitable next step for open source that will amplify its scope and impact enormously. Kevin’ first-hand perspective on how people work together on open source software projects, what works and what problems arise, informs the book’s arguments with an understanding that someone without this kind of background would lack.

I see this seminal book as a call-to-arms for a revolution that will, in the coming years, allocate human effort better and make human society smarter. I’m excited about it– can you tell? I may be wrong, but if I am, The Crowdfunding Revolution shows that a growing number of people worldwide are operating under the same delusion, and are likewise working to make it real. Read this book, and join us!

Boise Weekly article

Boise, Idaho’s alternative weekly newspaper, the Boise Weekly, recently published a nice article by Josh Gross about crowdfunding that discusses the Crowdfunding Law campaign:

Alms for the Creative: Crowdfunding means passing on traditional funding to pass the collection plate
Move to change securities regulations could mean big changes in the micro-funding model

Go Josh!  Dare to cover things that people haven’t already seen in print!

UPDATE (Aug 2012)

I’m updating old blog entries to include linked screenshots to relevant external documents. Here’s the one mentioned above, which quotes me and Jenny:

24 Nov 2010
Alms for the Creative” by Josh Gross, Boise Weekly


The Cool Kids at the SEC

Before last Thursday’s SEC Annual Forum on Small Business and Capital Formation, I suspected that the afternoon breakout sessions, the event’s main avenue for public comment and discussion, might involve being corralled into a room to rant together without actually being heard by the SEC. Thankfully, I was completely wrong. SEC staff co-ran the open sessions with panelists from the morning presentations, and were deeply engaged and interested in the discussions. They actively made sure that recommendations from all attendees were heard and impartially transcribed into a master list. In the coming weeks, all attendees will be sent this list and asked to vote to prioritize it, with the results published on the SEC’s website, along with video and transcripts of all the panels and presentations.

Against the recent backdrop of news stories detailing mind-boggling ineptitude and possible corruption at the SEC, it’s easy to generalize about the place, but I was very impressed with the folks in the SEC Office of Small Business Policy. It’s a small group, with only six full-time staff. But as SEC chair Mary Schapiro noted in her presentation, small businesses are responsible for 60% of all domestic jobs in and 90% of all U.S. patents. (It also generates over half of the country’s private non-farm GDP.) So that means six people at the SEC are in charge of regulating securities for most of the U.S. economy and nearly all of its innovation (in terms of patents, at least). Presumably the SEC’s other 3792 employees somehow divide up the rest.

Furthermore, as one person at the Small Business Forum quietly mentioned once, Office of Small Business Policy had no hand in any of the SEC’s recent scandals.

But this characterization isn’t entirely fair; the rest of the SEC has its own ongoing work: participating in the vast machine that has, in the name of investor protection, acquired the ability to harvest profits from the non-millionaire, unaccredited-investor public’s bank accounts, investment accounts, retirement accounts, homes, and other assets by shutting down all shareholding options outside of their own managed menu of non-local, in-system big businesses.

Given these facts, I think of the Office of Small Business Policy as the cool kids at the SEC. And in a moment that I hope was understood as simple appreciation and enthusiasm, I shared this characterization with one of its staff. He responded that it wasn’t true, explaining that they are sometimes listened to, but that the high-paying private-sector jobs that people take after working at the SEC are not open to people from their group. I took this to mean that in other SEC departments, people do their time in order to jump the fence to the easy green, but the Small Business Policy folks actually believe in what they’re doing, and tend to continue working there.

OK, enough gushing. Here’s a more specific trip report. The take-away is that Gerald Laporte, who heads the SEC’s Office of Small Business Policy, now wants to figure out how the SEC should address the SELC’s de minimis exemption petition, and crowdfunding in general. This is great news!

The blow by blow: On Wed eve Nov 17th, a bunch of us got together at the CommonWealth Gastropub in DC: me, Frank Knapp (South Carolina Small Business Chamber of Commerce), Atlee McFellin (American Sustainable Business Council – ASBC), Stacy Passeri (KiteTale LLC), Brian Parkinson (recent Law School grad with community development experience), and Doug Rand (White House Office of Science and Technology Policy – OSTP). Unfortunately my phone ringer was on too low, so I missed Ken Priore (SELC) — but I hooked up with him the following day.

We had fun introducing ourselves and discussing the proposed exemption. Two ideas that bubbled up were, 1) the SEC would probably want to limit the specific contract between offeror and investor– it’s not enough to just say “that’s up to the parties involved” because they’re interested not just in whether the offeror fulfils the terms of the agreement, but whether the terms are fair in the first place, and 2) investment offerors need to earn the right to do a crowdfunding offering by being as transparent as possible, publish your checkbook etc.– “radically transparent” is the only way to play if you want to crowdfund a securities offering.

Meanwhile, Doug Rand recommended that I discuss crowdfunding with Gerald Laporte at the SEC forum the following day, and keep in mind the SEC’s inevitable question, “what about fraud?”

On Nov 18th, at the forum itself, the SEC Small Business folks seemed genuinely interested in considering our exemption petition. Kevin O’Neill assured me that they read and consider all of the public petitions and comments submitted to the SEC, and that their decisionmaking can take a while, but that we should continue pushing. Anthony Barone said that they’ve been discussing our exemption proposal and see its potential, but are leery of it due to bad memories of widespread “microcap” stock fraud that was widespread during the 1990’s.

(So now I want to learn more details about that , and figure out the similarities and differences between 90’s era microcap and crowdfunding today and under a possible exemption in terms of potential for fraud. For starters, crowdfunding probably has lower stakes, and 90’s microcap investors weren’t one click away from communicating with everyone else making the same investment, and one Google tab away from the ability to instantly search and verify any claims made by the offeror.)

Michael Sauvante of the CommonWealth Group, whom I had originally met a couple of weeks ago at the SELC launch party, also met with Gerald Laporte and learned that Gerald was going to look into crowdfunding issues for the SEC. Michael said that Gerald had said that he’d received some “pressure from the White House” regarding crowdfunding, so I’m wondering if the OSTP folks might have been the source– if so, I’m sure that helped, and they are to be thanked! [OSTP did not do this; see Addendum below]

Michael also said that they’d heard about a very new book about crowdfunding that sounded interesting and was available on the Kindle. I recognized this as Kevin Lawton and Dan Marom’s groundbreaking The Crowdfunding Revolution, which you should all read– I’ll post a review soon. So I called up Kevin (whom I know– he’s a great guy and he also lives in SF) and talked to him about how Michael and Gerald could see a sample and buy copies– so that’s cooking now.

By all accounts, the SEC will be up to their ears until at least mid-2011 dealing with Dodd-Frank legislation, which requires 90+ rule changes etc. But Michael Sauvante got an assurance from one of the Small Business folks that they should be able to start at least looking at crowdfunding-related rulemaking around February 2011.

Addendum, 29 Nov 2010: OSTP has no authority over the SEC, which is an independent agency, so they cannot “apply pressure” to the SEC– and even if they had tried, this would not have been appropriate or good. (I was informed of this twice, and the second time it stuck…)  Also, I don’t mean to diss all the people at the SEC who regulate big business; they’re doing very important work and I believe that most of them are competent, dedicated, and trying to do what I would consider the right thing. (I would welcome a conversation with anyone who works there.)


DC action plan: Nov 17 eve meetup / Nov 18 SEC Small Business Forum

For people attending this week’s  SEC Small Business Forum in person with an interest in the de minimis regulatory exemption proposal SEC File No. 4-605 by the Sustainable Economies Law Center (SELC), here’s the plan:

Wednesday eve, Nov 17th

We’ll be gathering Wednesday evening starting 7:30pm in the bar area of the CommonWealth Gastropub (1400 Irving St NW, 202-265-1400, to meet in person, coordinate for the SEC forum, and plot the revolution. All are welcome! To help you recognize us, I’ll be wearing a leaf pinned to my shirt, ribbon style– it’ll be an actual leaf, like from a local, sustainable, green, growing, biodegradable tree out on the sidewalk.  If anyone else in our group wants to do the same, it will make our group easier to identify, and will also make me feel like less of a dork.

Among those I’m hoping may join us on Wednesday, besides the SELC and American Sustainable Business Council (ASBC) folks, are representatives from the Capital Formation Institute (CFI), Catalyst Capital Management, the Commonwealth Group (Lompoc, CA), KiteTale, the South Carolina Small Business Chamber, and Wall Street Without Walls.

For late updates, like if there are too many people at CommonWealth Gastropub watching football and we move elsewhere, I’ll twitter @pspinrad.

Thursday, Nov 18th

The SEC’s agenda has been posted for Thursday.  Unfortunately, it looks like it’s pretty much sitting in an audience until after lunch, but then at 2pm we divide into breakout groups– ours is in Room 6000, “Securities Regulation of Smaller Public Companies.” I hope we can bring our lunches or otherwise get into Room 6000 early and find the good seats prior to 2pm.

If you can only make it for part of the day, these breakout groups, which run until 4:45, seem to be where attendees are actually granted the talking stick (although the agenda’s footnotes indicate that no SEC staff are expected to attend these sessions).

Then at 4:45 there’s a wrap-up in the auditorium, which also seems open-ended since it has a moderator, and at 5:30 is the “Networking Reception at Nearby Restaurant.” It should be interesting, and I’m really looking forward meeting everyone in person and seeing what happens!

UPDATE (Aug 2012)

I’m updating old blog entries to include relevant external documents from around the same time. Here’s one that I wrote for Boing Boing to catch people up on campaign progress and invite interested people in DC to come join our SEC Forum pre-party on Nov 17th.

12 Nov 2010
Grassroots Securities Deregulation,” Paul Spinrad, Boing Boing




Let’s Go: SEC Small Business Forum, Nov 18

Every year, the SEC holds its Government-Business Forum on Small Business Capital Formation (a.k.a. Small Business Forum), to discuss small business policy. It’s open to the public, and I’ve been told by people at both the SEC and at the White House that it’s the place to be for promoting SEC rulemaking petition File No. 4-605.

So, I’m going! I’m attending as an affiliate of the Sustainable Economies Law Center (who wrote the petition), along with others who support the petition, including representatives from the American Sustainable Business Council. The forum takes place Thursday, November 18 from 9:00 am to 5:30 pm at SEC headquarters in Washington DC, and registrants can participate either in person or remotely.

You can find out more and register for the forum at It should be very interesting– I’m looking forward to it!

I also want to get together Wednesday evening (Nov 17) with any other 4-605 supporters who are attending the forum, so that we can all meet in person and perhaps strategize a bit. Let’s meet up somewhere in or near the Adams Morgan neighborhood, north of Dupont Circle, specific time and location TBD (unless the ASBC folks have another plan). Please let me know if you want to join us! petition surpassing original goal

Last weekend, CREDO Action member Mimi Plevin-Foust posted a petition on that does a terrific job of summarizing the issue and lets you submit a comment to the SEC by clicking a “Sign” button instead of sending an email. Mimi’s original goal of 100 signers is close to being reached, so she raised it to 200. Yay!

As of this writing, these letters have not yet appeared on the SEC’s comments page, but with past petitions the SEC has registered identical or near-identical comments online as a single “Letter Type A” and tallied them, rather than listing the individual signers.…

CORRECTION, Nov 5, 2010: The letters generated by the CREDO/ petition are sent to the office of SEC Chair Mary Schapiro, not, so they will not appear on the SEC’s website.



Jenny Kassan Radio Interview

Jenny Kassan, who authored SEC rulemaking petition File No. 4-605, did a great radio interview about it last Friday, Oct 29, on U Need 2 Know with Frank Knapp (tagline: Talk Radio for the Brain), WOIC 1230 AM, Columbia, SC. Knapp starts out by saying he’s “fascinated” by our proposal, and among other things, Jenny mentions the support from the American Sustainable Business Council. The interview is about 12 minutes long– check it out!

if (FlashDetect.installed) { $(‘flash_embed-HwbvofqChG’).show(); $(‘quicktime_embed-HwbvofqChG’).hide(); } else { $(‘quicktime_embed-HwbvofqChG’).show(); $(‘flash_embed-HwbvofqChG’).hide(); }

The Sustainable Economies Law Center focuses on small businesses seeking local community-based investment rather than artist types crowdfunding creative ventures online, so that’s what the interview discusses– but people in both camps want the same exemption.


American Sustainable Business Council to support SEC File No. 4-605

Great news: the American Sustainable Business Council (ASBC), a DC-based lobbying and advocacy group, has decided to support our SEC rulemaking petition as part of a new “Sustainable Economic Development” campaign, which will also encourage the SBA (Small Business Administration) to promote “TBL” accounting (Triple Bottom Line: financial, labor, and environmental)– informed in part by the City of Cleveland’s promising new efforts to “Empower a Green City on a Blue Lake.”

The ASBC’s new Sustainable Economic Development campaign will be on their back burner (and won’t appear on their website) until January or so, because they’re currently focused on other efforts targeting the current Congress during its remaining time in session.  But after the new Congress is sworn in, it’s time for this baby to explode– in a positive sense.