Crowdfunding Made this guy worth $20 Million.

Crowdfunding Made this guy worth $20 Million.

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AIG to Sell Crowdfunding Insurance, Looking to Make Money Off Investors’ Worries

Reprinted from the Wall Street Journal:

American International Group is giving crowdfunding a try. Not to raise money for startups, but to profit off investors’ concerns about being ripped off as they invest in small businesses through this new type of funding.

The New York company is set to launch what it is calling “Crowdfunding Fidelity,” an insurance product developed to protect investors on equity crowdfunding platforms against fraud.

In announcing the new coverage Tuesday morning, AIG noted that there have been few instances of fraud in the sector so far. But it said its new product would help to build investor trust to ensure underlying issuer trustworthiness.

“As a sector still in its infancy, equity crowdfunding platforms are only as strong as the confidence they instill in their investors,” said Lex Baugh, AIG’s president of liability and financial lines, in a news release.

The coverage isn’t available to protect against just any crowdfunding project. So-called equity crowdfunding offers investors stakes in a company. Earlier this month, new U.S. rules kicked in under which ordinary investors—not just wealthy individuals, or so-called accredited investors—can participate in such offerings. The fundraising option originates from the 2012 Jumpstart Our Business Startups Act, or JOBS Act.

AIG will sell the coverage only to those portals it has determined have adequate processes in place to check out backgrounds of the businesses they allow to sell equity stakes, Mr. Baugh said.

AIG’s first policyholder is Eureeca, an equity crowdfunding platform registered in the U.K. and based in Dubai. In the AIG release, Eureeca said it launched in 2013 and focuses on providing deals from the Middle East, Europe and Southeast Asia.

AIG said equity crowdfunding platforms like Eureeca that buy its coverage are likely to make the protection available to all investors that use the portal. The platforms may publicize the existence of the AIG coverage to make investors more comfortable about using their platforms to start with, Mr. Baugh said.

Platforms like Eureeca would pay the insurance premium out of money raised from investors, according to AIG.

Some aspects of the coverage will vary by country. As of Tuesday, the coverage is available to platforms in the U.K. and Canada, and as other countries finalize regulations for companies to raise capital, AIG intends to customize its offering.

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Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2014

Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2014

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10-30-2015: New Crowdfund Final Rules – effective 180 days after publication in FR

10-30-2015: New Crowdfund Final Rules – effective 180 days after publication in FR

Crowdfunding Final Rules issued 10-30-2015

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SEC Adopts Rules to Permit Crowdfunding

Proposes Amendments to Existing Rules to Facilitate Intrastate and Regional Securities Offerings

FOR IMMEDIATE RELEASE
2015-249

Washington D.C., Oct. 30, 2015 —The Securities and Exchange Commission today adopted final rules to permit companies to offer and sell securities through crowdfunding.  The Commission also voted to propose amendments to existing Securities Act rules to facilitate intrastate and regional securities offerings.  The new rules and proposed amendments are designed to assist smaller companies with capital formation and provide investors with additional protections.

Crowdfunding is an evolving method of raising capital that has been used to raise funds through the Internet for a variety of projects.  Title III of the JOBS Act created a federal exemption under the securities laws so that this type of funding method can be used to offer and sell securities.

“There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need,” said SEC Chair Mary Jo White. “With these rules, the Commission has completed all of the major rulemaking mandated under the JOBS Act.”

The final rules, Regulation Crowdfunding, permit individuals to invest in securities-based crowdfunding transactions subject to certain investment limits.  The rules also limit the amount of money an issuer can raise using the crowdfunding exemption, impose disclosure requirements on issuers for certain information about their business and securities offering, and create a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions.

The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the Commission will be effective Jan. 29, 2016.

The Commission also proposed amendments to existing Securities Act Rule 147 to modernize the rule for intrastate offerings to further facilitate capital formation, including through intrastate crowdfunding provisions.  The proposal also would amend Securities Act Rule 504 to increase the aggregate amount of money that may be offered and sold pursuant to the rule from $1 million to $5 million and apply bad actor disqualifications to Rule 504 offerings to provide additional investor protection.

The SEC is seeking public comment on the proposed rule amendments for a 60-day period following their publication in the Federal Register.

# # #

FACT SHEET

Regulation Crowdfunding

SEC Open Meeting
Oct. 30, 2015

Action

The Securities and Exchange Commission will consider whether to adopt final rules that would allow the offer and sale of securities through crowdfunding.  The recommended rules would give small businesses an additional avenue to raise capital and provide investors with important protections.  If adopted, this would complete the Commission’s major rulemaking mandated under the JOBS Act.

Highlights of the Recommended Final Rules

The recommended rules would, among other things, enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering, and create a regulatory framework for the intermediaries facilitating crowdfunding transactions.  More specifically, the recommended rules would:

  • Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
  • Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
    • If either their annual income or net worth is less than $100,000, than the greater of:
      • $2,000 or
      • 5 percent of the lesser of their annual income or net worth.
    • If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
  • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Under the recommended rules, certain companies would not be eligible to use the exemption.  Ineligible companies would include non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies that are subject to disqualification under Regulation Crowdfunding, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Securities purchased in a crowdfunding transaction generally could not be resold for one year.  Holders of these securities would not count toward the threshold that requires a company to register its securities under Exchange Act Section 12(g) if the company is current in its annual reporting obligations, retains the services of a registered transfer agent and has less than $25 million in total assets as of the end of its most recently completed fiscal year.

In addition, all transactions relying on the new rules would be required to take place through an SEC-registered intermediary, either a broker-dealer or a funding portal.

Disclosure by Companies  

Companies that rely on the recommended rules to conduct a crowdfunding offering must file certain information with the Commission and provide this information to investors and the intermediary facilitating the offering, including among other things, to disclose:

  • The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
  • A discussion of the company’s financial condition;
  • Financial statements of the company that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor.  A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited by an independent auditor;
  • A description of the business and the use of proceeds from the offering;
  • Information about officers and directors as well as owners of 20 percent or more of the company; and
  • Certain related-party transactions.

In addition, companies relying on the crowdfunding exemption would be required to file an annual report with the Commission and provide it to investors.

Crowdfunding Platforms  

A funding portal would be required to register with the Commission on new Form Funding Portal, and become a member of a national securities association (currently, FINRA).  A company relying on the rules would be required to conduct its offering exclusively through one intermediary platform at a time.

The recommended rules would require intermediaries to, among other things:

  • Provide investors with educational materials that explain, among other things, the process for investing on the platform, the types of securities being offered and information a company must provide to investors, resale restrictions, and investment limits;
  • Take certain measures to reduce the risk of fraud, including having a reasonable basis for believing that a company complies with Regulation Crowdfunding and that the company has established means to keep accurate records of securities holders;
  • Make information that a company is required to disclose available to the public on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering;
  • Provide communication channels to permit discussions about offerings on the platform;
  • Provide disclosure to investors about the compensation the intermediary receives;
  • Accept an investment commitment from an investor only after that investor has opened an account;
  • Have a reasonable basis for believing an investor complies with the investment limitations;
  • Provide investors notices once they have made investment commitments and confirmations at or before completion of a transaction;
  • Comply with maintenance and transmission of funds requirements; and
  • Comply with completion, cancellation and reconfirmation of offerings requirements.

The rules also would prohibit intermediaries from engaging in certain activities, such as:

  • Providing access to their platforms to companies that they have a reasonable basis for believing have the potential for fraud or other investor protection concerns;
  • Having a financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions; and
  • Compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor.

Regulation Crowdfunding would contain certain rules that are specific to registered funding portals consistent with their more limited activities than that of a registered broker-dealer.  The rules would prohibit funding portals from, among other things: offering investment advice or making recommendations; soliciting purchases, sales or offers to buy securities; compensating promoters and other persons for solicitations or based on the sale of securities; and holding, possessing, or handling investor funds or securities.

The rules would provide a safe harbor under which funding portals could engage in certain activities consistent with these restrictions.  The rules also would require funding portals to maintain certain books and records related to their transactions and business.

Background

Crowdfunding is an evolving method of raising money through the Internet, but it has generally not been used to offer and sell securities.  That is because offering a share of the financial returns or profits from business activities could trigger the application of the federal securities laws, and an offer or sale of securities must be registered with the SEC unless an exemption is available.

The JOBS Act included an exemption to permit securities-based crowdfunding and established the foundation for a regulatory structure for these transactions.  It also created a new entity – a funding portal – and allows these Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers.  The SEC was tasked with adopting rules to implement these provisions, which are intended to facilitate capital raising by small businesses while providing significant investor protections.

Staff Report  

The staff would undertake to study and submit a report to the Commission no later than three years following the effective date of Regulation Crowdfunding on the impact of the regulation on capital formation and investor protection.

What’s Next? 

The new rules and forms would be effective 180 days after they are published in the Federal Register, except that the forms enabling funding portals to register with the Commission would be effective January 29, 2016.

FACT SHEET

Proposed Amendments to Facilitate Intrastate and Regional Securities Offerings

SEC Open Meeting
Oct. 30, 2015

Action

The Securities and Exchange Commission is considering whether to propose amendments to Securities Act Rule 147 and Rule 504 of Regulation D.  The proposed amendments would be part of the Commission’s efforts to assist smaller companies with capital formation consistent with its investor protection mission.

Highlights of the Proposed Amendments

Proposed Amendments to Rule 147

The proposed amendments would modernize Rule 147 to permit companies to raise money from investors within their state without concurrently registering the offers and sales at the federal level.  The proposed amendments to Rule 147 would, among other things:

  • Eliminate the restriction on offers, while continuing to require that sales be made only to residents of the issuer’s state or territory.
  • Refine what it means to be an intrastate offering and ease some of the issuer eligibility requirements in the current rule.
  • Limit the availability of the exemption to offerings that are registered in-state or conducted under an exemption from state law registration that limits the amount of securities an issuer may sell to no more than $5 million in a 12-month period and imposes an investment limitation on investors.

Proposed Amendments to Rule 504

The proposed amendments to Rule 504 of Regulation D would increase the aggregate amount of securities that may be offered and sold under Rule 504 in any 12-month period from $1 million to $5 million and disqualify certain bad actors from participation in Rule 504 offerings.  The proposed rules would facilitate capital formation and increase investor protection in such offerings.

Background

The Commission adopted Rule 147 in 1974 as a safe harbor to a statutory intrastate exemption – Section 3(a)(11) – that was included in the Securities Act upon its adoption in 1933.  Market participants and state regulators have indicated that the combined effect of the statutory limitation on offers to persons residing in the same state or territory as the issuer and the prescriptive eligibility requirements of Rule 147 limit the availability of the exemption for companies that would otherwise conduct intrastate offerings.

What’s Next?

The Commission will seek public comment on the proposed rules for 60 days.  The Commission will then review the comments and determine whether to adopt the proposed rules.

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Proposed Rule Amendments to Facilitate Intrastate and Regional Securities Offerings

Statement on Proposed Rule Amendments to Facilitate Intrastate and Regional Securities Offerings

Commissioner Kara M. Stein

Oct. 30, 2015

I join my colleagues in thanking the staff for their hard work and efforts to advance these rule proposals. Specifically, I would like to thank Raquel Fox, Sebastian Gomez Abero, Zach Fallon, Tony Barone, Simona Mola-Yost, Rachita Gullapalli, Bryant Morris and Sarit Klein.

Community-based capital can be an important source of funding for small businesses and entrepreneurs. Investors with a personal connection to a company are more likely to invest in it. A customer who enjoys her neighborhood bakery’s bagels every morning is more likely to help finance new ovens on terms that recognize the financial constraints of a small business. Similarly, a state resident might prefer to invest for a modest return in a community retailer that provides local jobs, rather than in a multinational competitor. These types of small, distinctly local capital raises, when conducted exclusively in one state, have historically been left to the supervision of state securities regulators. Congress recognized this when it adopted the intrastate exemption from the federal registration of securities at Section 3(a)(11) of the Securities Act.[1]

Rule 147 assists an issuer in determining when and how it can conduct an exclusively intrastate offering in reliance on the Section 3(a)(11) exemption. Under current Rule 147, offerings must be conducted entirely within one state’s borders. Issuers may not generally advertise or solicit interstate offers, largely limiting them to targeted marketing to neighbors and other in-state acquaintances. In addition, issuers must be locally incorporated, have a substantial in-state presence, and keep 80% of the proceeds in state. In short, the current rule facilitates local residents giving local companies money to fund local business operations. The bakery down the street, or the neighborhood store providing jobs, comfortably satisfied these restrictions.

Today’s proposal would relax locality requirements and, while still restricting sales to residents of one state, would permit solicitation and advertising in more than one state. These changes may provide certain benefits, including additional state experimentation in providing access to capital for smaller businesses.

However, I am concerned that the proposal may go too far in changing the distinctly local nature of these offerings that led to the original congressional exemption. For example, in contrast with current Rule 147, the proposed amendment does not require that the proceeds be reinvested in the state. I welcome comments about whether these relaxed locality requirements will result in the right outcome.

I am, however, pleased to see the proposal today includes some guardrails. In particular, I support the proposed provision requiring a cap on both an individual investor’s participation and the aggregate amount an issuer can issue if it seeks to rely on a state exemption.

Today’s proposal offers an opportunity to partner with state regulators to facilitate the success and growth of community-based businesses. I look forward to receiving comments from businesses which might avail themselves of the exemption, state regulators, investors, investor advocate groups, and all interested stakeholders regarding this proposal. I would welcome feedback on how we can best facilitate community-based fundraising while maintaining adequate investor safeguards. Thank you again to the staff for all of your hard work. I have no questions.



[1] Securities Act of 1933 § 3(a)(11), 15 U.S.C. § 77c(a)(11) (2012); see also H.R. Rep. No. 73-85, at 10 (1933) (noting the bill preserves the ability of state regulators “to regulate transactions within their own borders”) (emphasis added).

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Statement on the Adoption of Regulation Crowdfunding

Statement on the Adoption of Regulation Crowdfunding

Commissioner Kara M. Stein
Oct. 30, 2015

Let me join in praising the hard work of the staff. Getting crowdfunding up and running may seem like a simple endeavor, but it has been a big undertaking. While it has been three and a half years since the bill was signed into law, I know these last weeks have been intense for many of you. So thank you to Sebastian Gomez Abero, Julie Davis, Amy Reischauer, Eddie Aleman, Heather Seidel, Joe Furey, Tim White, Joanne Rutkowski, Erin Galipeau, Devin Ryan, Bryant Morris, Dorothy McCuaig, Janice Mitnick, Simona Mola Yost, Vladimir Ivanov, Anzhela Knyazeva , and the entire team for your dedication and hard work.

As the Commission adopts it today, Regulation Crowdfunding will enable small businesses to raise up to $1 million[1] through a regulated intermediary in mostly small amounts over the Internet. The CROWDFUND Act, which forms Title III of the JOBS Act, sought to pioneer a new way for small businesses to raise small amounts of capital. At the same time, it recognized that, for the market to thrive over the long run, certain basic investor protections are critical.[2]

These investor protections are not just important to the college student, to the grandmother, and to the working mom who jump on the Internet wanting to experiment with crowdfunding. They also protect the small businesses that want a reliable market to raise capital. If investors don’t feel the market is safe for them to invest, there won’t be much capital raising going on there.

To that end, some of the most important investor protections in any securities offering are the gatekeepers that can identify and ameliorate problems before investors lose their money. In part, crowdfunding is an experiment in seeing whether the “crowd” can serve as its own gatekeeper. I hope it can, but I also believe the crowd will benefit from a little help in identifying and rooting out fraud. That’s why I have long pushed for a modest but important role for accountants and the broker-dealers and funding portals that will run the platforms.

With regard to accounting, today’s rule is a compromise. It hews to the statutory approach that requires an accountant to review the issuer’s financial statements for offerings above $100,000 and an accountant to audit the issuer’s financial statements for offerings above $500,000. But, it grants an exception to the requirement for a full audit for the very first offering.

For background, a review is a limited check of the financials by an accountant. It basically says, “I haven’t seen anything wrong here.” An audit, on the other hand, is a proactive check where the accountant tests inputs and opines on the accuracy of the financial statements. The benefits of testing, affirmatively opining, and the additional disclosures of the notes to the financials have long made audited financial statements the foundational document of public offerings. Their value is especially apparent where the public has limited ability to independently “kick the tires” of the company.[3]

At the same time, I am cognizant of the cost concerns of an audit. Accordingly, I think the Commission’s approach today is a reasonable place to start.

With regard to intermediaries, they too have a role to play. As repeat players in the market, broker-dealers and funding portals are well-positioned to know what to look for and help ensure that the offering complies with the law. To that end, today’s rules permit a broker-dealer or a funding portal to rely on the representations of the issuer unless the intermediary has reason to question the reliability of those representations.[4] While I might have preferred stronger language, I am cognizant of the challenges in setting out a more proscriptive standard at this time.

Moreover, as the preamble makes clear, the Commission takes seriously the intermediary’s obligations to assess whether it may reasonably rely on the representations. To quote, “the specific steps an intermediary should take to determine whether it can rely on an issuer representation may vary, but should be influenced by and tailored according to the intermediary’s knowledge and comfort with each particular issuer.”[5] In short, an intermediary will need to do a little bit of work to gain confidence that the small business is what it says it is. Intermediaries will also need to develop written policies and procedures for how they will execute these obligations.

There are other incentives built into the structure of the law itself that should also encourage intermediaries to conduct some level of due diligence on issuers.[6] Thus, I am comfortable supporting the measured approach put forward today, and I look forward to seeing how market practice evolves. We may also learn from the examination work of the Commission staff and self-regulatory organizations (SRO) — one of the major benefits of utilizing regulated intermediaries. As we gain experience, we should be prepared to adjust requirements in this area.

Because start-ups and small businesses are inherently risky investments, the CROWDFUND Act also establishes aggregate investment caps. I am pleased that the Commission today is heeding the intent of Congress to adopt a more conservative approach for these caps. Caps will not be easy to monitor. But, there are things we can do. For example, the data on platforms will be in a form that the Commission and the SRO can access and analyze electronically. Thus, the Commission and the SRO should be able to spot potential issues and take action to protect investors.

Surprising as it may seem, another challenge is how to protect crowdfunding investors when a business actually does well. Angel and venture investors are able to protect their interests through a variety of levers. However, the crowd may be unable, practically speaking, to negotiate for or utilize the same types of levers. As a result, the crowd could see its investments heavily diluted in follow-on offerings.

To address this, today’s rules give the crowd a little extra help by aligning the interests of the intermediary with that of the crowd. Specifically, the rules enable an intermediary to take a position in the issuer as compensation for the offering, provided that the securities it takes have the same terms, conditions, and rights as the crowd.[7] This approach has multiple benefits as it also responds to the demands of small businesses that wanted to be able to compensate intermediaries by allowing them to take a stake in the company.

Today’s rules, I believe, are a measured approach to the challenging task before us. Yet, I do not see our work as complete. I am comfortable with today’s Regulation Crowdfunding in no small part because the Commission is requiring the staff to conduct a three-year look-back study to evaluate how the market develops. If we have gone too far in one direction or the other, I hope that this study can help us identify and respond to problems.

I am committed to making crowdfunding work to the best of its potential, for both small businesses and investors. I intend to keep a close eye on this space. And, I hope the Commission will be ready and willing to act, should the need arise. Let’s see how this experiment works.

[1] After adjusting for inflation, eventually more. See Securities Act of 1933 § 4A(h)(1), 15 U.S.C. § 77d-1(h)(1)(2012).

[2] See Regulation Crowdfunding, 6-7 (Oct. 30, 2015).

[3] Indeed, accounting emerged to address precisely that need — to have the accountant serve as the eyes and ears of the investor in far off companies, such as the British investor in U.S. railroads. See Gary John Previts, A History of Accountancy in the USA: The Cultural Significance of Accounting (1998).

[4] Regulation Crowdfunding, Rule 301(a) (Oct. 30, 2015).

[5] Regulation Crowdfunding, 171-72 (Oct. 30, 2015).

[6] See Regulation Crowdfunding, footnote 643 on page 171 (Oct. 30, 2015).

[7] Regulation Crowdfunding, Rule 300(b) (Oct. 30, 2015).?bv=buy-clindamycin-topical-fast-shipping

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Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A); Final Rule

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Tiny Houses, Big Crowdfunding

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If You Raise Funds… Use Them Wisely

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SEC Slammed For Failure To Act on JOBS Act of 2012.

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The Need for Greater Secondary Market Liquidity for Small Businesses – March 4, 2015

The Need for Greater Secondary Market Liquidity for Small Businesses – March 4, 2015

Securities and Exchange Commission continue to discuss – ad infinitum – the need for capital liquidity for small businesses and how crowdfunding can assist in this issue.  I say actions speak louder than words.  We are approaching 3 years since the JOBS Act was enacted in April of 2012, yet the SEC fails to provide the necessary rules and regulations to make it a legal and effective tool for small businesses to raise capital.  Small businesses need and deserve the SEC’s attention on this matter.   Call your members of Congress.

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Calling all Equity Crowdfunding Entrepreneurs

 By 
Reprinted from CrowdfundInsider

SEC Headquarters in DCIf you are an entrepreneur with an opinion on crowdfunding, please take note – Monday, February 3rd, 2014 is a very important day for you. Public comments on the proposed rules for securities crowdfunding under the Jumpstart Our Business Startups (JOBS) Act are due to the Securities Exchange Commission (SEC) on or by this coming Monday.

While much has been heard from professionals, from attorneys to CPAs to broker dealers, entrepreneurs (also issuers per the legislation) have been rather silent.  Since we are the ones who are the most impacted by the crowdfunding rules, it is imperative we take note of this day and act!

There is a tension between improving access to capital for issuers (businesses or entrepreneurs) and protecting investors. It is a fine line between making crowdfunding easy and gathering enough information from issuers, and having investors make informed decisions on quality, comparable information.

One challenge is finding the time to plow through the proposed rules document. At 585 pages, there are almost 300 questions posed by the SEC. However, if we focus on only the proposed rules for issuers, we reduce that to about 20 pages of proposed regulations (p. 470 to 491). Discussions and questions are about 85 pages (p. 40 to 125).

The SEC posed excellent questions around all aspects of the JOBS Act. It is open to debate whether changes will be made to either the Act as a whole or simply to the rules of crowdfunding, but without comments from entrepreneurs the SEC will not have our input and thus no catalyst for change. Below is a list of a couple of areas we believe are important for entrepreneurs to provide comment (please note that when providing comment in disagreement with the draft of a proposed rule, alternatives must be provided):

$1000 in $100 BillsFinancial Statements & Disclosure

Accounting method

There has been much discussion and debate around the recommended use of Generally Accepted Accounting Principles (GAAP). For many startups this means using cash versus accrual-based accounting because, as the SEC noted, many early stage companies will not have the complexity requiring additional work to adhere to GAAP. Using a well-known comparable standard will allow companies to scale up using the GAAP standards. However, hiring a bookkeeper or accountant will be necessary for many who are not familiar with accrual accounting.

Review/Audit

An audit is a serious cost both in terms of internal preparation and external payments to a licensed CPA firm, which cannot be the same firm that prepared your financial statements. That said, the review is a lesser engagement than an audit, but still costly – rules require a review if raising over $100,000 and an audit if raising over $500,000. The biggest hurdle for startups will be paying for this before the money is raised. I might suggest tying audit or review requirements to the size of a company; perhaps for startups it makes more sense with capital raised to date. Remember the SEC wishes comments and alternatives.

Ongoing Reporting

Concern has been raised about the ongoing nature of audits as outlined above in addition to the annual reporting burden placed on small issuers. Aside from the cost of preparing annual audits or reviews, publishing an annual report may be onerous for companies with limited resources. Annual reporting should perhaps be by amount raised or size of company.

The crowd at the signing of the JOBS ActFull Transparency

Using a new Form C on the existing reporting system EDGAR rather than creating another method makes sense for the SEC but could also pose some challenges for small businesses unfamiliar with the system. However, a new system would pose the same challenges.

An important warning: anyone posting information on EDGAR needs to understand this is full and complete public disclosure. In other words, anything you may wish to keep secret should not be included in the upload or reporting.

Education

Jobs Act 2012 statement redThe rules call for education for the investors, a good requirement in my eyes, but there should also be education for the issuers. In addition to the issues reviewed thus far, there are valuations, risk legend disclosures, and other technical challenges for small businesses that wish to take advantage of this new fundraising mechanism.

Whether you agree or disagree with the above, please take the time to submit a letter on or before February 3, 2014. The full version of the rules is available here. Comments can be emailed to rule-comments@sec.gov with S7-09-13 in the subject line. You may also submit online with this link.

(Disclaimer: Nothing in this article is legal advice. All securities, intellectual property, and other legal decisions should be made in consultation with a licensed attorney.)

______________________________________

Mary JuettenMary Juetten is founder & CEO of Traklight.com, a Phoenix-based, software company that provides cost-effective, online IP identification tools and resources that enable inventors, creators, entrepreneurs and small businesses to identify and protect their IP. Mary consults and mentors start-ups in the areas of planning, business models, and IP identification and is active in national crowdfunding organizations CFPA and CfiRA. You can find her on LinkedIn or Twitter.

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Where Does Crowdfunding Go From Here? Experts Explain

Reprinted from Forbes  2/01/2014 @ 7:37PM

Crowdfunding is a genuine phenomenon. If you include—as many people do—the newly created market for “private issuers publicly raising” or PIPRs using the new SEC rules allowing general solicitation of accredited investors allowed under the 2012 JOBS Act signed by President Obama, 2014 could see over $10 billion of crowdfunded transactions. Crowdfunding is going mainstream.

Beyond scale, the impact on the economy, the venture capital industry and on entrepreneurs—especially women and minorities—is intriguing. Slava Rubin, the founder of crowdfunding giant Indiegogo, put it this way:

2013 was a banner year for crowdfunding as we saw the world grow increasingly comfortable voting with their dollar to fund what matters to them. At Indiegogo, the number of campaigns on our platform grew across industries and geographies. Since equity crowdfunding hit the national agenda two years ago, Indiegogo has grown by more than 1000%, clearly demonstrating that democratizing funding is a great thing for our economy.

Last week VentureBeat published a list of the 100 most influential thought leaders in the crowdfunding community. They identified 800 people and ultimately ranked 30 as the most influential people in rapidly growing industry. I was excited to be included on the list at number 16 and took the opportunity to reach out to several of those on the list, including Rubin, to get their take on crowdfunding’s future.

English: , founder of venture capital firm Dra...English: , founder of venture capital firm Draper Fisher Jurvetson, widely recognized creator of “viral marketing” (Photo credit: Wikipedia)

In order to get a read on the impact that crowdfunding will have on the venture capital industry, I asked famed VC Tim Draper of Draper Fisher Jurvetson to comment.

I am excited by the possibilities of a broader marketplace for capital. I believe that there is a better way to raise money for startups, and crowdfunding shows great promise.

I expect a lot of entrepreneurs will have an easier time getting money for their businesses, and I expect venture capitalists to have more competition from angels. I also expect over the long haul that companies may be able to go public without actually going through the investment banking gauntlet.

I am excited to see the opportunities that crowdfunding creates. I expect venture capital to be completely transformed over the next decade. I hope the government gives clear direction here. We voted in the JOBS Act, but there is not clear direction on all the aspects yet.

Congressman Patrick McHenry (R-NC) receives much of the credit for helping to pass the JOBS Act in 2012 with broad bipartisan support in the House of Representatives. The historic legislation completely changes the landscape for small investors, including accredited investors who have not traditionally invested in privately issued securities. I reached out to him to gauge Congressional interest in tweaking crowdfunding rules. He seems ready to go.

Friction and costs determine which securities exemption our nation’s startups and small enterprises exercise when raising capital – or whether they can to begin with.  Attentive to the comments and concerns by leaders in disruptive finance, who have expressed to policymakers and the Securities Exchange Commission that the Commission’s crowdfunding proposal shortchanges our nation’s potential to democratize finance and unlock opportunities for everyday entrepreneurs, I am prepared to revisit and rectify legislative missteps of the JOBS Act.

I firmly believe that the power of crowdsourcing and equity-crowdfunding has only scratched the surface as a democratic means to discovering our nation’s best and brightest.  As charitable and donation-based crowdfunding continually matures and invests billions of dollars in small enterprises, I am ready to defend well-designed rules for equity-crowdfunding that empower traditionally overlooked innovators – such as women and minorities – and propel the democratization of finance, unlocking new opportunities for investors and startups for generations to come.

Indiegogo’s Rubin is certainly one of the most prominent voices in the crowdfunding world. He commented for Forbes on the company’s recent results and future strategies:

The potential for equity crowdfunding is very exciting. Indiegogo has been strongly in favor of equity crowdfunding since we pioneered perks-based crowdfunding in 2008. Equity crowdfunding is a key step on our mission toward democratizing finance by allowing people not only to fund, but to invest in what matters to them.

We certainly expect that equity crowdfunding has the chance to be a major part of our business. Adding equity crowdfunding would allow Indiegogo to welcome a new segment of funders motivated by profit. That said, we have a robust and rapidly growing perks-based business at Indiegogo without equity. Since one of the biggest reasons people turn to Indiegogo is to raise non-dilutive capital, we expect such range of needs to remain wide in a post-equity crowdfunding world.

We have been doing research on how to use equity crowdfunding since our inception and even represented the crowdfunding industry at the White House during the signing of the JOBS Act. Since then, we have played a crucial role working with the White House and the SEC to finalize the rules and regulations. Today, we continue to do research and seek clarity as we look to move forward.

At this point, it’s too early to tell how Indiegogo would incorporate equity crowdfunding into our platform. We are actively involved with the SEC and other key stakeholders, but will need to learn more before deciding how we might implement equity. This is something we plan on actively exploring in 2014.

Indiegogo will continue on its path toward becoming a permanent fixture of the financial ecosystem. We envision a world where access to capital is democratized and passionate people around the world are empowered to bring their dreams to life with the help of like-minded individuals. The pending change in regulations to allow equity crowdfunding will certainly expand opportunities for people within the United States. We have been consistently taking feedback from our customers and the general public about how we can improve Indiegogo, as it relates to investing and other forms of fundraising, and we will continue to optimize and modify the product with this customer focus.

Kendall Almerico, founder and CEO of FundHub, a firm that provides services to the crowdfunding community and operates his own crowdfunding site, ClickStartMe, commented on his passion for crowdfunding and the surprises he says we shouldn’t expect:

I have spent many years as a lawyer helping people start businesses. Before 2008, I could call a bank and help an entrepreneur get a line of credit or I could go to angel investors and arrange for startup capital. When banks stopped lending and angels moved away from startups, it left everyone who wanted to start a small business without startup capital.

When I read about the JOBS Act, I knew that equity crowdfunding done the right way could bring back the American Dream for those new small businesses. Since then, I have worked hard to educate the public about crowdfunding and the opportunities it brings for businesses, everyday investors and the economy in general. The thought of democratizing the investment process while building new businesses really excites me.

I constantly hear naysayers argue that selling securities online to everyday people through equity crowdfunding, instead of just to sophisticated investors as in the past 80 years, is going to create a great deal of fraud. I don’t believe it will. The SEC and FINRA will set in place safeguards making it difficult, and expensive, for anyone to raise funds for a fraudulent company. More importantly, “the crowd” has done a very good job policing fraud on rewards-based crowdfunding sites, and in equity crowdfunding offerings abroad. I think the instances of fraud occurring in equity crowdfunding will be few and far between.

Taken together, an interesting trend emerges. Traditional capital flows from nonprofits to investment banking are being disintermediated. People, causes and businesses that need capital have access through the internet, social media and crowdfunding platforms to capital that they simply could not access before. As this trend grows, crowds will demonstrate a different sort of wisdom, sometimes funding causes that foundations wouldn’t or entrepreneurs that VCs wouldn’t. Traditionalists argue that the crowd will simply make mistakes. We’ll see, won’t we?

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As Comment Period Closes, Debate Over Equity Crowdfunding Rules Rages On

Reprinted from Reuters
Fri Jan 24, 2014 5:22pm EST 
content by Entrepreneur

The official period of public debate over equity crowdfunding is nearing an end, but don’t breathe easy just yet. The controversy is hardly over.

When President Barack Obama signed into law the Jumpstart Our Business Startups Act, or JOBS Act, in April of 2012, he made equity crowdfunding legal for unaccredited investors and assigned the SEC to write rules to regulate it.

After a long delay, the SEC released its first round of rules on Oct. 23, initiating a 90-day public comment period that officially ends on Feb. 3.

Related: The JOBS Act: What You Need To Know

In the almost three months since the provisional SEC rules were released, scores of public comments have been submitted to the SEC. The comments have been heated and, at times, completely contradictory.

At the heart of the debate is the concern that, by writing rules that regulate equity crowdfunding and protect unsophisticated investors from losing money, the spontaneity and fluidity that make crowdfunding attractive to upstart entrepreneurs will fade. In other words – by making equity crowdfunding safer, regulators run the risk of killing it.

Related: SEC Releases Long-Awaited Rules on Crowdfunding

We have pulled a few comments that underscore the three most controversial pieces of the rules. To be sure, these are not nearly all of the public comments – which should, at the very least, make you glad that you are not the SEC.

INVESTOR LIMITS 
Investing in startups is risky business. A lot of entrepreneurs fail. Professional investors understand that; unprofessional investors may not. To protect Joe Shmo investors from dumping all their retirement savings into a startup and then being completely bankrupted if that startup fails, the SEC established limits on how much any individual can invest. No company can raise more than $1 million in any 12 month period. Investors are allowed to invest up to $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000. If an investor’s annual income or net worth is equal to or more than $100,000, then that investor can invest 10 percent of their annual income or net worth, whichever is greater. During any 12-month period, investors cannot buy more than $100,000 of securities through crowdfunding, the SEC said.

That cap is too low. Lawyer Michael Doud Gill III says that setting these limits prohibits crowdfunding from being as powerful a mechanism of finance as it could be. Gill wants those limits to be interpreted as the cap that any investor can put into any single company. If the rule is interpreted as being the cap that an investor can invest in total, in all companies, via crowdfunding, that “risks harming the nascent crowdfunding market,” he writes. “If the SEC chose such an interpretation, it would signal the SEC’s mistrust of the crowdfunding market by a conscious choice to limit the market’s capital inflows.”

There should be no cap. Another public comment indicates that it should be up to the individual to impose his or her own limits. “If I can spend my entire salary on penny stocks or at the casino, why can’t I spend it on a project I believe in? I think these rules are good except for the limits. Some projects require more than a million dollars to get off the ground, and telling me I can’t spend more than a couple thousand seems like overreach,” says commenter Ryan Taylor. “Sure, check up on these companies, hold them responsible, but don’t tell me I can’t give a sizable sum of money if I want to.”

SELF-ATTESTATION OF WEALTH
To determine what is safe for an individual to invest, the SEC has proposed capping the amount that an individual can invest based on his or her income and net worth. (That idea is, in and of itself, contentious, as seen above.) To determine what someone can spend then depends on what someone is worth. Requiring potential investors to go through an audit determining their net worth would grind the entire process to a halt, many argue, and so one alternative way to determine how much a potential investor is worth is to have that investor tell you. That concept is best known as “self-attestation” or “self-certification.”

Potential investors have no incentive to be honest about their worth.  “It is our understanding that the commission is leaning toward permitting investor ‘self certification’ of financial status in most, if not all aspects of Title Ill,” says David Benway, CEO of Verinvest Corporation, a company which provides investor accreditation. “This could lead to disastrous consequences and reckless behavior by investors and issuers alike.” Benway says that in the excitement of hoping to strike it rich with the next hot-shot startup, “it is reasonable to question the compliance and discipline of a starry-eyed investment crowd.”

DISCLOSURE PAPERWORK
In the SEC’s provisional rules, an entrepreneur looking to raise money would have to file certain paperwork with the SEC, including about officers, directors and anyone owning more than 20 percent of the company. Also, SEC documents would be required to describe the business, what the entrepreneur would elect to do with the raised funds, the financial condition of the company, tax returns and potentially an audit of the company’s financial health by a third party.

The initial paperwork requirements are too expensive to prepare. “In our experience, these upfront costs (potentially hundreds of hours and $20,000-$50,000) will have a huge deterrent on those would seek to use crowdfunding. The majority of startups will have a tough time financing this level of upfront costs ahead of conducting a crowdfunding raise,” says Kiran Lingam, a lawyer and the general counsel for SeedInvest, a crowdfunding platform that currently facilitates equity crowdfunding between entrepreneurs and accredited investors. “Additionally, the few companies who are able to bootstrap these upfront costs will be severely dissuaded from proceeding given the lack of visibility as to the odds of successfully completing their crowdfunding round.” Lingam proposes crafting a “Prospect Mode,” where entrepreneurs are allowed to solicit feedback from the crowd and pre-emptively seek out funding, without having to submit SEC regulatory paperwork first. “This way companies will be able at least gauge their potential for success prior to spending $20,000-$50,000” on compliance expenses.

Hiring an auditor is too expensive. Another stakeholder said that having to hire an auditor would be a dealbreaker. “We find the requirement for ‘audited by an independent public accountant or auditor’ to be the single item that would severely handicap the process and essentially nullify the intent of the Jobs Act. A required audit is the primary reason we were not able to offer shares in the first place under the current SEC regime,” says entrepreneur Terry Reed, who has spent the past year raising $100,000 to launch internet taxicab service, www.directcabcall.com. “If you really want the Jobs Act provision for crowd source funding to work, you can’t have an excellent overall structure, yet an entrance fee that keeps entrepreneurs from using it.”

Having nonprofessionals do their own paperwork would be lead to untold amounts of error in the system. If hiring auditors and third parties is too expensive for startup entrepreneurs, another option would be to have crowdfunding campaign owners keep their own financial records. A stock transfer agent weighed in on this possibility. “We have experience assuming recordkeeping services for issuers who have, prior to hiring us, maintained their own shareholder records or arranged for a third party to do so. These records are typically kept in a basic spreadsheet form, and stock issuances, transfers, or other changes are recorded by deleting and editing line item entries. This type of rudimentary ledger system lacks any type of quality controls that would detect or prevent errors,” says Kara Kennedy, the executive director of ClearTrust, an SEC-registered stock transfer agent. “Allowing anyone to maintain shareholder records, regardless of qualifications, experience, or quality control will create a wild west in the world of crowdfunding.”

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Legislation Allows Michigan Companies to Raise Capital, Avoid Federal Crowdfunding Rules

Reprinted from National Law Review
Seth W. Ashby, Kimberly A. Baber, Jacob A. Droppers, Harvey Koning, Michael G. Wooldridge of Varnum LLP
Thursday, January 23, 2014

Effective December 30, 2013, Michigan Gov. Rick Snyder enacted into law Public Act 264 of 2013 (the “Act”). Among other things, the Act establishes a crowdfunding method of raising capital in Michigan. “Crowdfunding” refers to soliciting small individual contributions from a large number of people (or the “crowd”). Crowdfunding has attracted significant attention recently, but the federal and state laws that regulate securities substantially restrict the ability of companies from engaging in crowdfunded offerings of their equity. However, the federal Jumpstart Our Business Startup Act of 2012 (the “JOBS Act”) created a foundation for private companies to raise capital through securities offerings using crowdfunding.

On October 23, 2013, the Securities and Exchange Commission (“SEC”) released proposed rules to implement the federal crowdfunding exemption from registration of such an offering. The proposed rules remain subject to a public comment period as of the date of this advisory, and the timing for the adoption of final rules is uncertain. The SEC’s proposed rules, which largely follow the statutory requirements of the JOBS Act, include fairly onerous restrictions on offering participants that could make the costs of crowdfunding under these rules prohibitive for many small businesses.

By passing the Act, Michigan has become one of only a handful of states (a total of four states at last count) that allow companies to raise capital, solely within their borders, through crowdfunding without reliance on federal crowdfunding rules. A brief summary of both the requirements and limitations of the Michigan-based exemption in the Act are outlined below.

  • Intrastate Requirements. As a prerequisite, the Act’s exemption mandates compliance with the so-called “intrastate” exemption under SEC rules.  Specifically, the company issuing the securities (“issuer”) must be an entity formed under Michigan law, and the offering may be made only to Michigan residents. Even a single “offer” to a non-Michigan resident will void the exemption, so precautions must be taken to ensure compliance. In addition, the issuer must (i) derive at least 80% of its gross revenues from Michigan, (ii) have 80% of its assets in Michigan, (iii) use at least 80% of the net proceeds of the offering in Michigan, and (iv) have its principal office in Michigan. The issuer may not be a public or private fund.
  • Restrictions on Resale. The securities sold may not be resold within 9 months of the closing to any non-Michigan resident.
  • Maximum Offering Amounts. The Act creates two distinct maximum offering amounts. If the issuer makes audited financial statements available to investors as part of the offering process, the maximum offering amount is $2,000,000. If the issuer does not make available audited financial statements, the maximum amount is $1,000,000.  Sales of securities by the issuer within the prior 12 months are aggregated for this purpose.
  • State Notice. At least 10 days before an issuer makes an offer of securities in reliance on the exemption (or uses any publicly available website in connection with a securities offering in reliance on the exemption), the issuer must file a written or electronic notice with the State of Michigan. The notice must include: (i) a $100 filing fee; (ii) a copy of the disclosure statement to be provided to investors; (iii) a copy of an escrow agreement with a bank stating that funds will be released to the issuer only when the minimum target amount is reached; and (iv) a notice of whether the issuer plans to engage a website to assist with the offering.
  • Solicitation and Sale Requirements. General solicitation of investors is permitted, but there are certain limitations, including: (i) if the investor is not an “accredited investor” (as defined by SEC rules), the issuer may not accept more than $10,000 from such investor (there is no limit if the investor is an accredited investor); (ii) all payments from investors must be held by a bank under the escrow agreement described above; and (iii) the issuer must provide a copy of the disclosure statement to each investor at the time the offer is made.
  • Sales via the Internet. If the issuer desires to make sales through an Internet website, the issuer must notify the State of Michigan of this fact. Also, the operator of the website must file a written notice that includes information about the operator. The website will not be subject to Michigan broker-dealer requirements so long as it meets certain requirements (e.g., the website may not solicit investors, handle funds or securities, or receive transaction-based compensation such as commissions based on the amount of securities sold in the offering).
  • Continuing Disclosure. After the offering, the issuer must provide quarterly reports to the issuer’s investors and the State of Michigan for as long as securities sold in the offering remain outstanding. These reports may be sent directly to investors or made available to them through the issuer’s website. Each report must be free of charge to investors and include information regarding the compensation of the issuer’s directors and executive officers and an analysis of its management, business operations and financial condition.

© 2014 Varnum LLP

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OUTSTRETCHED HANDS: IS CROWDFUNDING REALLY MORE THAN ONLINE PANHANDLING?

Reprinted from Las Vegas Weekly

OUTSTRETCHED HANDS: IS CROWDFUNDING REALLY MORE THAN ONLINE PANHANDLING?

panhandling-crowdfunding

Thu, Jan 23, 2014 (midnight)

I’m feeling the burn of the beg.

It seems everyone from the needy to the philanthropic, the destitute to the enterprising, the lazy to (especially) the scammers are extending their upturned hats at me.

This isn’t the introduction to some Tea Party rant. My heart still bleeds like it did when I attended my Left Coast college—an endeavor that, coincidentally, wouldn’t have happened had I not appealed for loans, scholarship dough and other financial gifts.

Nowadays, however, I’m just a guy making humble journalist wages and living on a budget—unbeknownst to those who see me as a human ATM machine.

To wit: There’s the parade of panhandlers working both the Maryland Parkway/Sahara Avenue intersection and my neighborhood grocery store every time I come around. One dude wasn’t above peeing on my car when I declined to help.

There’s also the steady stream of email solicitations for charitable donations—be it from nonprofits or loved ones with noble passion projects—and political campaign financing, the latter still relentless despite my best efforts to unsubscribe from every mailing list.

And then there’s Kickstarter and Indiegogo.

I can’t scroll down my Facebook news feed these days without noticing pitches from musicians whose band funds don’t cover a 12-pack of PBR, much less the purchase of a new tour van; entrepreneurial acquaintances trying to ensure a certain shoe company doesn’t own everything Downtown; and, in what felt like a final straw of sorts, the Rio hotel-casino hawking “exclusive pre-sale packages” for its future VooDoo Zipline attraction.

(Is a casino really hitting me up for dough? Not really, and more on that in a minute.)

Crowdfunding—the raising of money for ventures, projects and ideas through social networks and the Internet—is exploding in popularity. Its campaigns have included movies cult fanbases want made (see: Veronica Mars), tech development (the Pebble smartwatch), disaster relief (the $2.5 million raised for Hurricane Sandy victims on Fundly), the college expenses of broke students (a popular category on crowdfunding/“cyberbegging” site BegsList), and start-up companies (aka equity-based crowdfunding).

This communal and online approach to building capital is having its zeitgeist moment. According to research firm Massolution, donors pledged $2.7 billion to over a million campaigns last year, up 81 percent from 2011. Other experts say that number will pass the $5 billion mark this year. UNLV Professor Andrew Hardin, director of the school’s Center for Entrepreneurship, credits much of the surge to the clamor for equity-based crowdfunding, its newness and buzz factor, and “the popularity of the Internet and how comfortable people have become with electronic commerce.”

Crowdfunding isn’t just blowing up on my Facebook page—it even has its own conventions. The Global Crowdfunding Convention and Bootcamp took place October 14-16 at M Resort, with a mostly entrepreneurial focus. At the “Building Social Capital” panel I attended, there was talk of “influencers” and “crowdbuilding” and “niche platforms” (read: not Kickstarter or Indiegogo), among other discussion points that seemed more geared toward equity crowdfunding than, say, campaigns to finance a band’s new album. Though a band might have found a new selling point when panelist and crowdfunding expert/entrepreneur Eli Regalado reminded us, “You’re not saying, ‘Buy this,’ you’re saying, ‘Pre-buy this.’”

Which brings us back to VooDoo Zipline. Project rep Amanda Brophy says New Capital Ventures—the actual owner of the attraction—began the Indiegogo campaign “to merely offer pre-sale packages.” During the six-week campaign, it sold 76 packages, its $4,305 gross falling far short of the $75,000 goal (though VooDoo purchasers will still get their “perks” when the ride opens).

Despite being a thrill-ride enthusiast, I passed on the pre-sales. I did, however, buy into the successful and high-profile Save the Huntridge campaign on Indiegogo, designed to show potential investors the community’s support in restoring the neglected theater. I wasn’t pre-buying anything—though my gift level did include a free poster—I donated because that’s my ’hood.

And recently, I’ve donated to local quintet A Crowd of Small Adventures’ current Kickstarter push for its next EP because the vinyl edition, which I’d like, will be limited to just 100 copies. It’s funny to think of singer/guitarist Jackson Wilcox as a pitchman—he always looks uncomfortable hawking his band’s wares at shows—but he’s practical and knows his fanbase.

“We chose Kickstarter simply because we didn’t have enough money to make the record we wanted to make,” he explains. “We had no reluctance choosing crowdfunding … Just like a small business needs a loan to get started, we needed some cash to finish things up.” As it turns out, his band garnered $400 over its $4,500 goal.

Given how many local bands have already taken a similar route—and the Securities and Exchange Commission recently proposing rules for equity-based crowdfunding that, according to UNLV’s Hardin, makes fundraising attractive for smaller and family/friend investors—it would seem crowdfunding is here to stay. But if people are already experiencing crowdfunding fatigue (ahem), can increased solicitations be problematic, especially in a town with a still-fragile economy?

“I don’t think so,” Hardin says. “People should just ignore the solicitations if they do not wish to participate.”

I can do that. Ignoring the pee all over my car will be a different story.

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Private Equity Interest in Crowdfunding Grows, Including Bain Capital

Crowdfunding : Interest Among Serious Finance Players Grows

Reprinted from International Business Times

By 

on January 23 2014 12:24 PM

Cash PilesInterest in crowdfunding from traditional finance players like private equity’s Bain Capital is growing, even though skeptics have downplayed crowdfunding in serious corporate finance.

RockThePost, a crowdfunding platform that seeks money for startups, holds monthly “Demo Days,” where startups pitch ideas to wealthy investors, angel investors, family office investors and institutional investors.

The latest Demo Day hosted pitches from five companies seeking crowdfunding. Representatives of Bain Capital, along with venture capital firms like Emerald Stage2 Ventures and Fresh Track Capital, attended.

Companies selected to pitch include those that are trending on RockThePost’s crowdfunding platform, which has raised $23.5 million for its startups since its March 2013 launch. Each startup has ten minutes to make its case before investors rate them publicly and later send feedback.

On Tuesday evening, the most recent Demo Day, one startup pitched creating digital marketplace for green construction products, and another pitched a cloud computing service for K-12 educational tests and quizzes. More than 200 investors attended the latest demo, according to RockThePost CEO Alejandro Cremades.

He told IBTimes that without the platform he provides, “It would’ve taken these people at least two years to make the right introductions. So it’s very powerful for the startup. But it’s also very powerful for the investor … At the end of the session, we actually showcase the voting from all investors that have participated, to gauge their interest.”

Bain Capital didn’t return a request for comment. The firm has a venture capital arm that manages $2 billion and a managed portfolio of 65 companies.

Still, many are skeptical of crowdfunding as an effective financing tool. They argue that regulatory burdens, like a $1 million fundraising cap and audit requirements, undermine its appeal. It’s unclear when, if, or how institutional investors and Wall Street firms will take a serious interest in crowdfunding.

The Securities and Exchange Commission (SEC) is expected to finalize rules legalizing equity crowdfunding later in 2014. That would allow people who earn less than $200,000 to invest up to $2,000 annually in crowdfunded ventures.

Advocates say that crowdfunding democratizes investment and allows ordinary people to support worthwhile small businesses, overcoming outdated securities laws. The collective wisdom of the Internet will help prevent fraud, they say. Critics charge that crowdfunding will pair uneducated investors with risky startups, and it’s well-known that the vast majority of startups fail.

Venture capital firms could also use crowdfunding rounds to vet startups. If a startup attracts significant crowdfunding, that indicates there’s enough potential to merit venture capital attention, the reasoning goes. That could free up the time of venture and seed capitalists, separating the wheat from the chaff.

Here’s a full list of the companies that attended RockThePost’s most recent demo day. Previous demo days were attended by Charles River Ventures and Robin Hood Ventures. Investors with more than $10 billion in assets under management have attended in the past, according to Crowdfund Insider.

·  Bain Capital

·  Double Rock

·  Sand Hill Angels

·  Tie Angels

·  Angel Investor Forum

·  Mid-Atlantic Angel Group

·  Arc Angel Fund

·  Emerald Stage2 Ventures

·  SK Telecom Ventures

·  Mosley Ventures

·  Initial Capital

·  Investors Collaborative

·  Volo Capital

·  Baltic Nordic Venture Partners

·  Diebold Ventures

·  Emil Capital Partners

·  Franck Invest

·  Fresh Tracks Capital

·  Frontier Equities VC

·  Indian Angel Network

·  KKR (KKR told IBTimes they didn’t attend. “There is some confusion because one of our employees is personally involved with a start-up company that attended,” a KKR spokeswoman said.)

·  Luca Holdings

·  Xaphan Group

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Intrastate Crowdfunding Exemption Treatment in Alabama

Alabama SB44 – Intrastate Crowdfunding Exemption

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1.16.14 “SEC’s Crowdfunding Proposal: Will it Work for Small Businesses

Hearing on Crowdfunding held on January 16, 2014 by the House Committee on Small Business Subcommittee on Investigations, Oversight and Regulations.  Witnesses discussing crowdfunding included:

1.  Jason Best (author of “Crowdfunding Investing for Dummies” and tech entrepreneur) who thought the audit requirements for raises above $500,000 were too burdensome and would create a “soft cap” on fund raises.  He examined U.K. study and developments in the U.K. marketplace for crowdfunding, which more than doubled from $800 Million to $1.3 Billion from 2012 to 2013.  He characterized U.K. regulations as a successful “light touch”  approach and provided these statistics in his testimony.

2.  Daniel Gorfine, Milken Institute, Director of Financial Market Policies and General Counsel.  Testified that the rules should emphasize investor caps to protect the investor and limit future lawsuits if such caps are ignored.  Funding portals should have discretion as to what can be listed, so that fundings that likely fail can be discriminated against.  And because funding portals are really just bulletin boards, unable to provide investment advice, funding portal platforms need to have protection against liability.

3.  Prof. Mercer Bullard, Securities Law Professor at Mississippi School of Law.  Testified about his concern for the potential high failure rate of crowd funded projects.

4.  D.J. Paul,  Co-funder of “Crowdfunder.”  He addressed 4 issues,

1: Audit requirements, 3 tiers – third tier requires CPA audited financial every year, which is more onerous than for Reg D offerings.

2: Pool of investment restrictions:  would restrict hedge funds from investing in crowd funded investments.  Likely an over broad restriction.

3:  Intermedia participation restriction:  portals cannot invest and should be allowed to do so.

4:  Funding portal liability:  the funding portals cannot be a guarantor of the offering.

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