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
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.”