The Roar of the Crowd

Reprinted from Economist

TWENTY-FOUR hours into a crowdfunding campaign, your correspondent became nervous. He had launched an effort on Kickstarter, the largest player in rewards-based collaborative project funding sites, to fund the production of hardcover and electronic books that collected non-fiction work from a bijou electronic magazine he owns and edits.

The first day had gone stupendously. The 29-day campaign had a goal of $48,000, which was budgeted to cover the cost of paying reprint fees, designers, printers, shippers, T-shirt makers and the like, and printing some books in excess of those needed for project backers to sell after the fundraising was done. It also included the off-the-top overhead of Kickstarter’s fee (5%); the credit-card processing fees charged by its payment processor, Amazon Payments (3-5%); the gross business tax in Babbage’s home, Washington State (0.5-2%, depending on category of item); and uncollected amounts, which are typically below 1%.

At almost exactly 24 hours from launch, over 500 people had pledged about precisely $16,500. And then the rush of pledges to his inbox and notifications via the Kickstarter app on his iPhone went from a steady gush to a trickle and nearly stopped—worrisome because the first 24 to 48 hours of a campaign set the tone for the remainder. Condolences began to come in immediately as well-wishers noticed the total wasn’t budging much. But Babbage was sanguine, and despite some worn fingernails by the final week, was right to keep a level head.

In July 2012, Babbage attempted more modest funding to cover the cost of writing and producing a book on crowdfunding. The tautology and ontology aside, the project failed, and while in recovery, he nursed his wounds and listened to other old soldiers explain their wins and losses. The next year was one of study and researching, including launching a podcast, now 13 months old, in which he interviewed publishers, songwriters, product designers and others who often employ crowdfunding as the seed capital behind an album, book, gizmo or career.

Among other lessons learned was that the most lauded pattern of crowdfunding success, in which money gushes in and a project overfunds by dozens of times or even a hundredfold, is the far exception, and mostly reserved for consumer electronics and similar products. Rather, in most crowdfunding campaigns in which a threshold must be reached for any funds to be collected, as is the only model at Kickstarter and an option at Indiegogo, failed and successful projects have distinctly different revenue curves.

Kickstarter publishes an array of statistics updated at least daily. On the coarsest level, it’s easy to see that $942m has been pledged in its four-and-a-half-year history, yet only $111m went towards projects that didn’t meet goals, and thus funds weren’t collected from backers. This is typical: projects that fail, fail in a big way. Remarkably, 10% of projects launched receive no pledges whatsoever: apparently, the campaign’s managers have no parents, friends or other loved ones they can cajole into participation.

But more remarkable is that partial funding is a high predictor of full funding. The statistics show that 93% of projects that fall short of their goal don’t surpass 40% of funding. Only 2% of projects that cross the 80% threshold fail to reach full funding. An analysis from mid-2012 showed further that 97% of projects that hit the halfway mark then hit their goal. (This varies somewhat by size of the goal, with the largest project more likely to fail.) That same research revealed that just half of all projects raise funds 10% above their goal; a quarter raise no more than 3% more than the target.

Thus the blockbusters that seem to define Kickstarter—in which, say, aiming for $50,000 brings in $5,000,000—are exceedingly unlikely. Further, most successful campaigns aren’t a flat inclined line from start to finish; rather, most bring in more than half the total during the first two and last two days with a maddeningly slow climb of donations in the middle, which was the case with your correspondent’s book.

Babbage gnawed on his limbs a bit until the 50% threshold was reached, and then sent up flares that he was writing checks and proceeding on schedule, which worried some backers and friends. He didn’t tut-tut anyone, but between the statistical likelihood and the self-fulfilling nature of projecting success leading to actual success, he felt it was a winning strategy.

The campaign was to end on a Thursday in mid-December. On the Monday of the final week, your correspondent’s friends and colleagues, and many loyal readers of his publication, began to freak out, not to put too fine a point on it. They tweeted, Facebooked, blogged, cajoled via email and perhaps made some phone calls to rally support. It was lovely and it did the trick.

The project hit its goal by Tuesday, pushed over the top by a few high-dollar backers pledging for podcast sponsorships. By the close of the campaign, the total was $56,484, or 117% of the target. (All but $26 was collected, remarkably, plus some hundreds paid directly after the campaign for add-ons for which people hadn’t included the dollars by accident, or through misunderstanding the pledge system.)

Babbage had a private estimate in his spreadsheets before launching the campaign, tweaked over months, that about 1,500 people would be needed to reach the funding goal. Instead, the campaign brought in 1,467, which is close enough for spitting distance. Now: to make some books.

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Crowdentials Wants to Make Investor Verification ‘TurboTax Easy’ Online

Reprinted from Wall Street Journal


An Ohio startup called Crowdentials Inc. has raised $300,000 for technology that verifies accredited investors online so that when they attempt to put their money into startups, funds or other assets, the process goes smoothly, with little paperwork and no delays.

Under Title II of the JOBS Act, startups have been permitted to engage in “general solicitation“–advertising their need of funding publicly, not just to accredited investors. But to take an investor’s’ money, entrepreneurs must make a reasonable effort to verify that their would-be backers meet the legal definition of “accredited investor” when a deal is struck.

The paperwork and process affiliated with such verifications is a subject that Fred Wilson, managing partner at Union Square Ventures, recently groused about,writing on his blog:

“Though the size of the accredited [and] qualified investor market may be small, I really don’t understand why there isn’t a Web service where I can go, fill this form out once, and then certify that the answers are correct, and then simply [authenticate] with this service each time we make an additional investment.”

Rich Rodman, chief executive and founder of Crowdentials, said his company’s software and services do as Mr. Wilson suggests, making fundraising and investing online “painless,” the way that Intuit and its TurboTax software made paying taxes easier. Mr. Wilson couldn’t immediately be reached for further comment.

The early users of Crowdential range from investment banks and private equity and venture capital firms to individual angel investors and startup founders. The company licenses its software as a service, and offers it as a “white-label API,” Mr. Rodman says.

Crowdfunding platform companies can outsource investor accreditation to Crowdential using its API, and focus instead on connecting hot startups with “value add” investors, Mr. Rodman said.

The company charges startups to verify investors in a syndicate at the cost of $20 to $40 per investor. The charge is a one-time fee. Once an angel investor in a syndicate is verified, the startup does not have to pay again. Crowdential keeps an investors’ accreditation status verified, over time.

Crowdfunding platforms and institutional investment firms that use Crowdential’s API on their own sites can choose to pay verification fees on behalf of startups they want to fund. They can buy “batches” of verifications at a discounted rate.

This kind of vetting used to cost startups and venture firms hundreds to thousands of dollars per deal or fund, said Charles Stack, CEO of FlashStarts and lead investor in Crowdentials.

The investor expects the company, a graduate of his FlashStarts accelerator in Cleveland, to use its seed capital to bring in at least 50 institutional partners and crowdfunding platforms in 2014, and to work with even more individual businesses.

Competitors providing compliance-related services to investors and startups include other startups like CrowdCheck and CrowdBouncer LLC.

Some equity crowdfunding sites like SeedInvest in New York, or CircleUp Network Follow her on Twitter at@lorakolodny

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SEC’s Proposed Crowdfunding Regulations: Six Deadly Sins

Reprinted from Crowfund Insider



In a previous article in Crowdfund Insider on November 4, 2013, I identified a number of serious problems with the SEC’s proposed crowdfunding regulations. I also promised readers to share my opinions on what can and should be done by crowdfunding supporters to fix the problems – and how to do it.  As I said then: “It will take a large and vocal crowd – and the wisdom and political will of the SEC to implement it.”  With the February 3 SEC comment deadline fast approaching – there is no time like the present!

Is the SEC Trynig to Kill the CrowdWhere is the Crowd?

At last check, there were less than 100 comment letters submitted to the SECregarding the proposed crowdfunding regulations – not very impressive by Kickstarter’sbenchmarks for successful crowdsourced projects.  Though there is likely to be a flurry of new comment letters as the February 3 deadline approaches, I remain concerned about the relative lack of comments, more than two months after the proposed regulations were made available to the public.

The time is at hand to crowdsource comments for the SEC!

It’s not a lot of fun to go through 585 pages of proposed regulations (my sympathies are with the SEC staff who wrote them). Some of the provisions which may seem innocuous at first read, upon further scrutiny have the potential to be “industry killers”.  As I took my second deep dive into the proposed regulations, in preparation for two upcoming speaking engagements, I noticed a couple of these “industry killers.” Even more disconcerting, some of these “industry killers” have not been noted in the published articles or comments I have read to date.

SECOn a more optimistic note, I have also concluded that some of the more major failings of the proposed rules do not eminate from the JOBS Act itself – which for now is written in stone. Rather, these failings are a product of the SEC’s collective wisdom.  What this means is that there is an opportunity for the public to present concerns to the SEC, with a reasonable expectation that the SEC will listen – and hopefully fix the defects when it enacts final rules.

With that in mind, here is my short list of issues embedded in the proposed regulations (not the JOBS Act) that have the potential to snuff out the investment crowdfunding market – not necessarily in order of importance (they are all important).

The Six Deadly Sins of the SEC’s Proposed Regulations

Sin No. 1 – Audited Financial Statements

Doug Ellenoff and Kim WalesThis is an issue which, fortunately, has not gone unnoticed by the public. Kudos to Kim Wales, a co-founder of CfIRA, who recently wrote a comprehensive article on this issue onCrowdfund Insider.  Others have joined in her concerns.

The issue is this:  The proposed rules require a company which seeks to crowdfund more than $500,000 (including prior crowdfunded offerings in the prior 12 months), to provide two years of audited financial statements when it files its initial offering materials with the portal and the SEC.  This requirement is problematic for a number of reasons.

First, crowdfunded companies will generally be small companies, many of whom have no revenues.  So it is not clear what the requirement of audited financials will provide – as opposed to independently “reviewed” financials – other than more upfront costs which a potential crowdfunder will need to incur simply to get in the game.

Second, it simply is not fair for the SEC to require audited financials for any company crowdfunding up to $1 million in a 12 month period.  For more than 20 years, the SEC has allowed companies to raise up to $5 million, in a mini-registered offering called SEC Regulation A – withoutthe requirement of audited financials. All that is required under Regulation A are “reviewed” financials.

And to add insult to injury, this Regulation A requirement does not appear to be an oversight on the part of the SEC.  On December 18 the SEC issued proposed rules addressing Regulation A and the new Regulation A+ – the latter courtesy of Title IV of the JOBS Act, which directed the SEC to raise the Regulation A limits from $5 million to $50 million.  Though the Regulation A+ release proposed some changes to the existing Regulation A, it left companies the ability to use reviewed financial statements for offerings up to $5 million.

The SEC can do plentyIn the crowdfunding release the SEC advises that it received preliminary comments asking it to limit or eliminate the requirement for audited financial statements. The SEC ignored these comments when it issued the proposed rules – without providing any cogent reasons for doing so.  Essentially, the SEC simply said that it preferred to take a wait and see approach.  Given the tremendous burden this requirement places on small business, it seems to me that “wait and see” is not an option – especially when it has given much better treatment to companies seeking to raise up to $5 million.

So what can the SEC do about this?  Plenty.

State of the Union Congress and SenateThe JOBS Act does require that crowdfunded companies seeking to raise over $500,000 provide audited financial statements.  However, what has gone unnoticed in the press and comment letters on the proposed rules is that in the very same sentence in Title III of the JOBS Act that Congress required audited financial statements – it also gave the SEC the express discretion to change the $500,000 threshold.  “Wait and see” simply doesn’t cut it.

It is time for those who wish to see investment crowdfunding as a viable market to submit their comments to the SEC on this issue.

Sin No. 2 – Restrictions on Compensation Paid to Crowdfunding Platforms

This is another potential “industry killer” – not required by the JOBS Act.  The JOBS Act prohibits officers and directors of the intermediary (platform) from having any economic interest in the crowdfunded company.  In the proposed rules the SEC expanded this requirement to prohibitintermediaries from having any economic interest, in addition to officers and directors. The principal reason given by the SEC for this expansion of the statutory requirement – it seemed like a logical extension of the Congressional mandate.

I and many of my brethren have made highly “logical” arguments to a judge in the past – which have been (properly) rejected because they make no sense when viewed as part of a bigger picture.  So too is the case with the SEC’s logic.

OK. Why should I care about the ability of a platform to have an economic interest in a crowdfunding company?  Let me count the ways.

Economic interests, such as warrants or “carried interests” in future profits, are commonplace on Wall Street, especially with high risk transactions.  It is a way to increase the potential financial reward – but without cash flow drain to the company it is funding.  So too, with crowdfunding and portals.  If intermediaries are limited to cash compensation, that will translate into higher up front and backend costs to crowdfunded companies. This will come initially out of the pocket of the crowdfunder, and if the offering is successful, will indirectly come out of the pocket of investors – leaving less money available for working capital.

Wall Street Charging Bull (Wikipedia)By all accounts crowdfunding is a high risk proposition – indeed one of the riskiest possible investments.  And the dollars involved are small, by financing standards – a maximum of $1 million over 12 months.  If the potential reward is out of line with the risks to an intermediary and other costs of doing business – one of two things will happen. First, many intermediaries will not enter this arena at all, and those that do may ultimately fold their tents if business is not profitable.  Second, It also ensures that a licensed broker-dealer, who is free to engage in any type of financing transaction (not so with a non-broker dealer “funding portal”), will eschew the crowdfunding route for an otherwise fundable company – and instead will go another route such as Regulation D private placement – which carries no SEC restrictions on equity compensation.

In sum, this logical extension of a JOBS Act requirement will ensure that most broker-dealers will ignore the investment crowdfunding route – and it will increase costs to companies in need of funding. And for non-broker-dealer portals, this is an unnecessary variable in their cost-benefit analysis – particularly problematic for them (versus broker-dealers) as their only revenue will be derived from crowdfunded offerings – and not from other avenues such as private placements.

An extension of the law – yes. Logical? No!

Sin No. 3 – Unnecessary Liability for Funding Portals – Based Upon a Tenuous Read of the JOBS Act

JOBS Act 2012 TextSection 4A(c)(1)(A) and (B) of the JOBS Act impose liability for misstatements or omissions as to an “issuer described in paragraph (2)” of such section. Subsection 4A(c)(3) defines “issuer” as “any person who is a director or partner of the issuer, and the principal executive officer or officers, principal financial officer, and controller or principal accounting officer of the issuer (and any person occupying a similar status or performing a similar function) that offers or sells a security [in a Title III transaction] and any person who offers or sells the security in such offering.” [Emphasis added]

The statute imposes liability on an issuer and the specified officers and directors any other person who offers or sells the security.  Thus, there is no statutory liability for any intermediary unless the intermediary (or its agents) is engaged in the offer or sale of the Title III security.

The Problem 

What can the SEC Do? PlentyThe problem for intermediaries who are not broker-dealers is created not necessarily by any proposed rule, but in dicta which the SEC gratuitously (and wrongly, in my opinion) included in the proposing release – at page 280.  Section 4A of the JOBS Act provides that an “issuer” is liable for the refund of the purchase price of the security to the purchaser if in connection with the offer and sale of a crowdfunded security it makes a material misstatement or a material omission, and is unable to sustain the burden of showing that it could not have known of such untruth or omission even if it had exercised reasonable care.

In Section II.A.5 of the Release, entitled “Scope of Statutory Liability” the Commission states:

Section 4A(c)(3) defines, for purposes of the liability provisions of Section 4A, an issuer as including “any person who offers or sells the security in such offering.” On the basis of this definition, it appears likely that intermediaries, including funding portals, would be considered issuers for purposes of this liability provision. We believe that steps intermediaries could take in exercising reasonable care in light of this liability provision would include establishing policies and procedures  that are reasonably designed to achieve compliance with the requirements of Regulation Crowdfunding, and that include the intermediary conducting a review of the issuer’s offering documents, before posting them to the platform, to evaluate whether they contain materially false or misleading information.  [Emphasis added]

By the SEC making this statement,  in effect saying that all intermediaries are “likely” engaged in the offer or sale of Title III securities within the meaning of statutory liability provisions, it has opened the door wide open to an investor bringing an action against an intermediary as a an “offeror” or “seller.”And to prevail the intermediary must meet the statutory burden of proof of a “due diligence” defense.  This position by the SEC is problematic on a number of levels, the biggest impact falling on intermediaries who are not broker-dealers.

Balance Scale (Wikipedia)What the SEC has done, in my opinion, based upon a faulty reading of the JOBS Act, is to take a position which would impose statutory seller liability on a funding portal where there is no basis to impose such liability on a funding portal – as (in my opinion) it is not correct to state that a funding portal will be engaging in activities arising to the level of offering or selling securities, as intended by Congress – they are simply a conduit with limited duties under the JOBS Act.

According to the SEC’s release regarding the proposed rules, what follows from this perceived statutory liability on funding platforms is further dictum  suggesting that funding portals must affirmatively conduct due diligence on an issuer’s offering materials.  This appears to be contrary to the express obligations which Congress imposed on intermediaries in Section 4A(a).

The net result of the SEC’s position is that in order for a funding portal to avoid liability to a purchaser on the basis of an issuer’s false or misleading offering materials, the funding portal would be well advised to conduct due diligence on the issuer’s offering materials.  This seems at odds with the passive role to which a funding portal is limited.

A broker-dealer who operates as an intermediary, on the other hand, should (and would) face liability if it were actively engaged in the offer and sale of the security, which is normally the case. Accordingly, FINRA rules affirmatively require a broker-dealer (in any private placement) to conduct due diligence on an issuer and the offering materials, and to have proper procedures and controls in place in regard to due diligence.  FINRA imposes similar duties on the broker-dealer to evaluate suitability of the investment for the specific investor.

Thus, if the SEC’s expansive dictum is not qualified (better yet, a safe harbor provided for a funding portal not acting as a broker-dealer), not only will newly established funding portals have the burden and expense of creating internal due diligence procedures, but will be required to perform additional due diligence for each and every issuer to effectively establish a “due diligence” defense.

These initial and transaction specific costs in and of themselves are burdensome, and may serve as an unnecessary barrier by non-broker-dealer intermediaries (i.e. funding portals) to enter this industry. Also, consider that to the extent imposing unnecessary liability may not deter funding portals from entering the business, the heightened risk and additional due diligence costs will of necessity require a funding portal to charge higher fees than would otherwise be necessary.

FINRABear in mind that a broker-dealer will already have these procedures in place under FINRA rules, as they offer and sell securities in the ordinary course of their business – so they will not have this initial cost of doing business.  Nor will funding portals have businesses other than Title III crowdfunding to spread these internal control costs – as would a  broker-dealer.  Moreover, a broker-dealer would, in theory, have an opportunity to engage in other business transactions with a Title III issuer outside the Title III offering, including future private placements and market-making activity.  These opportunities would not be available to a funding portal, as they are not a fully licensed broker-dealer.  So as to the opportunity of a funding portal to earn fees in a Title III transaction, it would not be on a level playing field with licensed broker-dealers.

This issue is a potential “industry killer”, with small business being the victim – especially if broker-dealers shun the Title III market as too small relative to the risks and rewards.

Note the SEC’s request for comment, Paragraph 120, appearing at page 131 of the release:

120. No intermediary can engage in crowdfunding activities without being registered with the Commission and becoming a member of FINRA or another registered national securities association. We recognize that while there is an established framework for brokers to register with the Commission and become members of FINRA, no such framework is yet in place for funding portals. We do not intend to create a regulatory imbalance that would unduly favor either brokers or funding portals. Are there steps we should take to ensure that we do not create a regulatory imbalance?337 Please explain. [Emphasis added]

In this regard:

  • There is a “regulatory imbalance” as between funding portals and broker-dealers, as noted above.
  • The SEC, in footnote 336 to Paragraph 120 (see below), even acknowledges this regulatory imbalance.
  • The SEC highlights in footnote 336 that a broker-dealer, but not a funding portal, may “engage in solicitations” in a crowdfunded offering – the precise activity that should trigger liability as an “offeror” or “seller under the 1933 Act and Title III liability provisions for persons who “offer” or “sell”.

Here is Footnote 336, in all of its glory:

336/  We note, however, that a registered broker could nonetheless have a competitive advantage to the extent it would be able to provide a wider range of services than a registered funding portal could provide in connection with crowdfunding transactions made in reliance on Section 4(a)(6). Unlike a funding portal, a registered broker-dealer could make recommendations, engage in solicitations and handle investor funds and securities. In addition, a registered broker-dealer, but not a funding portal, could potentially facilitate a secondary market for securities sold pursuant to Section 4(a)(6). See Exchange Act Section 3(a)(80) [15 U.S.C. 78c(a)(80)] (providing that a funding portal may act as an intermediary solely in securities transactions effected pursuant to Securities Act Section 4(a)(6), which are offerings by issuers and not resales).   [Emphasis added]

I note for the sake of completeness that funding portals are allowed (but not required) to assist an issuer in preparing offering materials. However, this activity ought not arise to the level of a solicitation – it is analogous to the services an issuer’s securities counsel might perform – an activity which clearly would not trigger statutory liability as an offeror or seller.

Graveyard CemetaryThis potential, unnecessary liability to a funding portal, is further complicated in view of two other factors discussed in this article. First, as discussed above, under the SEC’s proposed rules all intermediaries are prohibiting from mitigating this financial risk by taking an equity stake in the issuer. And second, as discussed below, according to the SEC in the proposed rules, an intermediary which is not a broker-dealer is prohibited from excluding companies from its platform based upon subjective factors, such as quality of management, valuation of the company, market size, need for additional capital, pending litigation, or other subjective factors which increase the risk to an investor.  Not so for a licensed broker-dealer.

As I stated in my November 4 article on Crowdfund InsiderThe Commission, in effect, has created a schizophrenic business paradigm for funding platforms – a business model which imposes the risks/liability attendant to being a broker-dealer – but without the ability to use the broker-dealer compensation model – or even to create value for a different compensation model by being able to screen issuers.

The Solution 

In my opinion, what the SEC needs to do, going forward, given that it has not only put its foot in its mouth, but hung every funding portal out to dry by (in my opinion), erroneous dictum, is to create a safe harbor rule for funding portals that do no more than conduct their business in the ordinary course, and do not otherwise engage in activities that could be deemed solicitations.  If not, this gratuitous imposition of guarantor liability on a funding portal may very well kill Title III crowdfunding before it can get off the ground – or force funding portals to impose needlessly high fees.

Sin No. 4 – The Prohibition Against Curation by Non-Broker Dealer Intermediaries

Why Stop CurationCongress dictated that funding portals (i.e. non broker-dealers) could not offer investment advice or recommendations – unlike licensed broker-dealers, who may offer investment advice and recommend securities.  The SEC has taken this one step further in the Release, by prohibiting funding portals from excluding companies on the basis of subjective or qualitative factors,   Under the proposed rules an intermediary which is not a broker-dealer is prohibited from excluding companies from its platform based upon qualitative factors, such as quality of management, valuation of the company, market size, need for additional capital, pending litigation, or other qualitative factors which increase the risk to an investor.  As I noted in my November 4 article on Crowdfund Insider, why would someone bother going to a portal that reads more like an unfiltered Craig’s List bulletin board, as opposed to a menu of carefully curated investment opportunities.  This gives broker-dealers a major competitive advantage over funding portals, both from the company (issuer) perspective and the investor perspective.  Though, in my opinion, Title III of the JOBS Act does not preclude funding portals from presenting a list of carefully curated investments (so long as there is a disclaimer by the funding portal that they are not recommending any security, and a statement that all of the listed investments carry significant risks), the SEC in in the proposing Release has clearly precluded funding portals from doing so – even if they have on their staff a licensed broker-dealer, certified public accountant, or Certified Financial Planner.

And given the position of the SEC in the proposed release that an intermediary has an affirmative obligation to review offering materials, and likely will face statutory liability as a seller of the security, the inability of a funding portal to screen issuers based upon qualitative factors becomes a significant deterrent to conducting business – even with higher fees.

Sin No. 5 – Complex Non-Financial Disclosure

As I discussed in my November 4 article, the disclosure regime proposed by the SEC is overly complex – especially considering the dollar size of the transactions.   The 10  pages of disclosure regulations will unnerve the average entrepreneur, no matter how seasoned –discouraging crowdfunders from even going down this road – especially those considering a raise on the lower end of the financial spectrum.

Why should I careThough the SEC in recent statements has discussed, as a general matter, the need to tailor disclosure to the size of the company – in order to avoid unnecessary costs and expenses to a company –  it clearly is not ready to apply this broad policy objective to crowdfunding companies.  And the concept of scaled disclosure is not something new, either to the SEC or under state securities laws.

Today, many companies seeking to raise up to $1 million may take advantage of what is known as a “SCOR” offering – an offering up to $1 million which is exempt from federal registration, but typically requires a “blue sky” review at the state level.  To facilitate disclosure for these smaller offerings, in the late 1990’s the North American Securities Administrators Association (NASAA) in conjunction with the American Bar Association, came up with a simple, plain English disclosure format that has been adopted in over 30 states.  This was done by NASAA in order to alleviate some of the burden and expense associated with preparing a comprehensive investor disclosure document.

The SCOR disclosure model remains in use today at the state level, and ought to serve as a useful starting point for the SEC to craft a more user friendly disclosure regime for crowdfunding companies – lest they not travel down this road at all.

Sin No. 6 – Ongoing Annual Disclosure Following a Successful Crowdfunded Offering

One of the most burdensome requirements in the SEC’s proposed rule is the requirement that every year after a company successfully concludes a crowdfunded offering it must file detailed disclosure reports, including financial statements, essentially long as the crowdfunded securities are outstanding.

Sins of Excessive RegulationsUnder Title III of the JOBS Act, Congress required the SEC to promulgate rules requiring annual “reports of the results of operations and financial statements, as the Commission shall, by rule, determine appropriate, subject to such exceptions or termination dates as the Commission shall establish by rule.”

The proposed rules, as promulgated, when far beyond anything that it was required to do under the JOBS Act – essentially requiring the same detailed disclosures, year after year, that are provided to investors when the offering is conducted.

And not only was the extensive (as in expensive) SEC-proposed ongoing disclosure not mandated by Congress, it directly conflicts with requirements of the SEC in other types of offerings to unsophisticated investors allowing raises up to $5 million. Specifically, under Regulation A, discussed above, after an offering is completed (Regulation A is essentially a mini-public offering)there is absolutely no ongoing disclosure whatsoever.

Is the SEC trying to kill the crowd before it can even form?

What to Do Next

What I have attempted to do is to identify what I consider to be the most serious issues embedded in the proposed regulations – it is not intended to be an exhaustive list.  There may be other points which need to be addressed. And perhaps some will not agree with my conclusions or analyses.

However, for all of those people who have an interest in making investment crowdfunding not only work, but work well, and not be hampered by unnecessary, burdensome regulations, I urge you to put your comments in writing and submit them to the SEC no later than February 3, 2014.  And feel free to quote from my articles if you find this helpful or convenient.  Otherwise, there may not be a second chance – either to comment – or for the investment crowdfunding market itself.

This is the link to the SEC website to submit comments.

There is no time like the present!


Samuel S. GuzikSamuel S. Guzik writes a regular column, The Crowdfunding Counselor, for Crowdfund Insider.  He is a corporate and securities attorney and business advisor with the law firm of Guzik & Associates, with more than 30 years of experience.  He is admitted to practice before the SEC and in New York and California. During this time he has represented a number of public and privately held businesses, from startup to exit, concentrating in financing startups and emerging growth companies.  He also frequent blogger on securities and corporate law issues at The Corporate Securities Lawyer Blog.


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Best And Neiss: Crowdfunding Will Change The World

When Jason Best and Sherwood Neiss helped lead the charge to launch investment crowdfunding in the U.S. they couldn’t have guessed at its global impact. Now, having completed a months-long report to the World Bank on the likely economic impact of crowdfunding in the developing world, they have much greater insight on the role crowdfunding will play in allowing people to lift themselves out of poverty.(Best and Neiss’s firm Crowdfund Capital Advisors sponsored the publication of my book, Crowdfunding for Social Good, in July of 2013. We have no other business relationship.)

On January 9, 2014 at noon Eastern, Best and Neiss will join me for a live discussion about the potential for crowdfunding to make a meaningful difference in the lives of millions of people around the world.

Tune in and listen while you work.

Best and Neiss, together with Zak Casady-Dorian also wrote the book, Crowdfund Investing for Dummies.

The World Bank Report, published in late 2013, outlines the potential economic impact of all kinds of crowdfunding, not just investment crowdfunding. The report is intended to help international development professionals identify the benefits of crowdfunding and the legal, social and infrastructure required to develop a successful crowdfunding ecosystem in a developing country.

Best, Neiss and Cassady-Dorian were instrumental in the passage of the JOBS Act, which was passed by Congress with bipartisan support and was signed by the President in April 2012. After being present for the signing ceremony in the Rose Garden at the White House, the Best and Neiss launched their firm, Crowdfund Capital Advisors to help educate the world about crowdfunding.

This interview is part of a series that will examine what can be accomplished in the fight to solve the world’s biggest challenges within the next thirty years. The solution to every big problem also presents opportunities entrepreneurs will exploit to change the world. From this series of interviews, a book with the working title Thirty Years to Peace will emerge.

Best and Neiss, together with Zak Casady-Dorian also wrote the book, Crowdfund Investing for Dummies.

The World Bank Report, published in late 2013, outlines the potential economic impact of all kinds of crowdfunding, not just investment crowdfunding. The report is intended to help international development professionals identify the benefits of crowdfunding and the legal, social and infrastructure required to develop a successful crowdfunding ecosystem in a developing country.

Best, Neiss and Cassady-Dorian were instrumental in the passage of the JOBS Act, which was passed by Congress with bipartisan support and was signed by the President in April 2012. After being present for the signing ceremony in the Rose Garden at the White House, the Best and Neiss launched their firm, Crowdfund Capital Advisors to help educate the world about crowdfunding.

This interview is part of a series that will examine what can be accomplished in the fight to solve the world’s biggest challenges within the next thirty years. The solution to every big problem also presents opportunities entrepreneurs will exploit to change the world. From this series of interviews, a book with the working title Thirty Years to Peace will emerge.

Please help me continue this conversation below, on Twitter or on my personal website.

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How to Keep Your Business Lean and Profitable

FOXBusiness, The Young Entrepreneur Council (YEC)

In many ways, “stay lean” has become the new American motto. People everywhere are trying to stay lean through diet, exercise or banishing meaningless possessions. There’s a reason the “stay lean movement” is so popular. It’s healthier and more efficient, and it provides the space for meaningful growth. Why should businesses be any different?

They’re not.

Staying lean in business means having everything you need and nothing you don’t. It requires examination and retooling to find and wipe out inefficiencies. Lean is a never-ending process, not something to achieve once and expect to continue. Lean might seem like the opposite of growth and expansion, but the reality is that the two can work quite well together.

Warning: Don’t Forget What Got You Here

I believe in having a narrow focus with your business, especially when starting out. It’s important for a business to find solid footing before moving on to new things. However, once a company is established and its core offerings are profitable, it makes sense to stretch a little. Diversifying business offerings — in the same way an investor diversifies her portfolio — helps increase reach and revenue potential, while decreasing the risk of a single revenue stream. Unfortunately, expansion comes with its own set of risks.

Diversifying your offerings across multiple services means that a bad month or two in one area won’t sink your business. But don’t neglect your cash cow! Paying too much attention to new areas at the expense of the core services that made you successful can be a fatal mistake.

The Danger Zone: You’re Getting Bloated

When expanding beyond core services, growth can easily become bloat. It can take the form of unnecessary meetings and slower processes, as multiple layers of management try to report up and send requests down inefficient — and perhaps unnecessary — command chains. We see a similar pattern in software development in the form of unneeded complexity and technical debt.

Google’s defunct Wave product is a prime example of bloat sinking the ship. They built a groundbreaking product but because it was so heavy with features, making changes became a slow and agonizing process. As a result, it was plagued with speed issues and bugs. Even a software giant like Google was unable to recover. Had Wave launched as a smaller, leaner offering, I believe the results would have been very different.

How to Get Lean

You can get lean while expanding beyond your core service. However, it requires an open mind, an attitude of experimentation, and a goal to maintain efficiency. If you find that your company feels like it’s bogged down, here are a few ways to get lean:

  • Be ruthless. Nothing is sacred. Every process should be analyzed to see if it’s the most efficient option. Poor-performing processes need to be replaced or eliminated.
  • Take a bottom-up approach. It’s hard to become lean from the top down. Improving efficiency starts at the frontline. Allow outward-facing staff members’ ideas to flow up the chain.
  • Empower employees. Give up control and empower employees to change processes that aren’t efficient. You’ll be surprised by the results.

Maintaining a lean, expanding organization is a balancing act that requires constant attention. You must grow, but only as much as is necessary, while not diverting too much attention from your core services. If you focus and commit, you will be rewarded with an efficient business with new strengths, diversified offerings, less risk, and a healthy bottom line.

Peter Baumgartner is the founder of full-service Web studioLincoln Loop, makers of Ginger, an online platform to help distributed teams communicate. Peter is an expert in Django-based Web development and a thought leader in entrepreneurship and remote teamwork. He welcomes anyone to reach out to him on Twitter or Google+.

The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launchedStartupCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

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Alternative Lenders Peddle Pricey Commercial Loans

Reprinted from the Wall Street Journal

With Credit for Businesses Tight, Nonbank Lenders Offer Financing at a Price



Updated Jan. 7, 2014 11:03 p.m. ET

When Khien Nguyen needed $180,000 to open his 13th nail salon near Philadelphia in November, he didn’t go to a bank. Mr. Nguyen’s credit score had dropped during the recession, so he figured a bank would put him through weeks of aggravation, then reject him.

He turned instead to one of the nonbank, short-term lenders that have been gaining traction since the financial crisis. The lenders cater to small businesses, often at high cost.

Delaware-based Swift Capital reviewed his financial records and social-media sites such as Yelp and Facebook for reviews, then dispatched someone to one of his salons to pose as a customer. Swift wired him the money a few days later.

Mr. Nguyen is paying 14.9% interest over the loan’s six-month term—the equivalent of about 30% annually. Payments are drawn automatically each day from his business bank account. “It’s not cheap, but they served my needs quickly,” he says.

About two dozen such nonbank lenders—including OnDeck Capital Inc., Kabbage Inc. and CAN Capital Inc.—lent about $3 billion collectively last year, double the 2012 total, estimates Marc Glazer, chief executive of Business Financial Services Inc., a lender with about $100 million of such loans outstanding.

These short-term lenders want to become the go-to financiers for business owners needing quick cash, often $50,000 or less.

“It is a substantially underserved segment of the economy,” says former American Express chairman and chief executive James Robinson III, an investor in OnDeck alongside Google Ventures, GOOG +0.21% SAP Ventures and PayPal co-founder Peter Thiel.


Banks generally require solid credit scores and spend weeks reviewing financial statements, tax returns and business plans. Biz2Credit, an online loan broker for small businesses, says an analysis of loan applications made in December through its website showed big banks approved 18% of loan applications by its customers in December, while small banks approved 49%.

Various nontraditional lenders have stepped into the void. Peer-to-peer online-lending platforms channel funds from ordinary investors to borrowers. Private investment partnerships, including hedge funds, make direct loans to struggling businesses, often with costly strings attached.

Short-term lenders such as Swift and OnDeck typically structure their loans to be repaid in months, not years. To reduce risk, payments are collected daily or weekly, enabling lenders see how loans perform “in real time, as opposed to the wait-and-hope model,” says Daniel DeMeo, chief executive of New York-based CAN Capital.

Interest rates on such loans can run in excess of 50%, on an annualized basis, much higher than on conventional bank loans. Usury laws limiting interest rates generally don’t apply to the short-term lenders. Some of the loans are originated in states that don’t cap interest rates on commercial loans. Others are structured as private contracts between two businesses. Many loans come through brokers working on commission.

Speaking at a recent Small Business Administration conference, Treasury Secretary Jack Lew said the government wants to “do more to knock down barriers to financing,” and he voiced support for new approaches to lending. “These companies are using alternative measures to assess a business’s ability to pay back a loan,” he said. “They use data like real-time shipping schedules, records held in a business’s accounting software, and even social-media traffic to determine creditworthiness.” The government, he said, wants to provide access, with a borrower’s permission, to certain information reported to the government.

Since launching in 2007, New York-based OnDeck has issued more than 20,000 loans totaling more than $825 million. Fifty-six of its 225 employees have backgrounds in math, statistics, computer science or engineering and work on data analysis, credit modeling and technology infrastructure.

The typical customer is a restaurant, auto-body shop, beauty salon, retailer or physician seeking about $35,000—businesses that often have trouble getting traditional bank loans, says OnDeck chief executive Noah Breslow.

Ron Wendolowski, co-owner of DJ’s Delights LLC in Asbury Park, N.J., sought cash to expand in 2012. He says he was turned down by a bank because the business was only two years old. So he applied to OnDeck.

OnDeck analyzed credit-bureau data and DJ’s cash flow, and electronically checked state corporate filings and court records. It even checked diner reviews on social-media sites Yelp, Urbanspoon and Foursquare. Within a day, it approved a $6,000 loan with a six-month term.

Since then, DJ’s has taken out three more loans from OnDeck. The most recent, for $20,000, carries a nine-month term. The daily payment requirement equates to a 34% annual interest rate. “The rates are higher than bank loans, but it’s a lot less aggravation,” says Mr. Wendolowski.

Mr. Breslow says OnDeck customers are willing to pay a premium for “our speed, convenience, certainty and electronic delivery,” and many “have not been served by banks.”

Alternative lending to small businesses expanded during the financial crisis as bank credit dried up. The value of outstanding commercial loans under $1 million at federally insured banks—a proxy for small business—has declined by 15% since 2007, on a non-inflation-adjusted basis, to $284.5 billion in last year’s third quarter, according to the Federal Deposit Insurance Corp.

In 2008, when the financial crisis hit, sales at Robin’s Nest Floral and Garden Center in Easton, Md., dropped by 15%, according to owner Ken Morgan. The 30-year-old company needed $50,000 for a shipment of Christmas decorations. “I went to the bank, where I’d always done business on a handshake, and they were scared and having their belts tightened,” he says. He was turned down.

Mr. Morgan applied to Business Financial Services, which examined his company’s credit score, sales volume, cash flow and other financials—then clicked on Facebook.

The Robin’s Nest page was “continuously updated with promotions and events,” an underwriter reported. “There are numerous ‘likes.’ ” The business topped Google searches of area florists, and had a stellar Better Business Bureau rating.

Business Financial Services wired the money, which was repaid within six months. Interest payments totaled about 18%—an annual rate of more than 35%.

“This isn’t cheap money,” says Mr. Glazer, CEO of Business Financial. “But we charge these rates because we are taking a risk, and losing millions every year.”

As private companies, the lenders aren’t required to disclose default rates. Several said they run in the single digits.

OnDeck says it approves 25% of all applicants and 75% of those meeting its initial business and credit filters, which include being in business for at least one year and having at least $100,000 in annual revenue.

Swift says it approves more than three-quarters of applicants. “If we looked at just the credit score, the way a bank does, that eliminates more than half the market,” says chief executive Ed Harycki. Swift says it has provided $350 million to more than 10,000 businesses.

Unlike banks, the short-term lenders don’t take deposits, so they need other sources of capital to fund the loans. OnDeck has an $80 million credit facility from a syndicate that includes Goldman Sachs Group Inc. GS +0.08% “They have a successful business model that we like,” says a Goldman spokesman.

This fall, OnDeck secured another $130 million from, among others, KeyCorp.KEY +0.66% Adam Warner, president of Key Equipment Finance, says loans to OnDeck and to CAN Capital are “a way to diversify our small-business lending.”

Write to Ianthe Jeanne Dugan at and Ruth Simon at

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Dino owners hope to crowd-fund their next project

Reprinted from Washington Business Journal

Jan 6, 2014, 2:53pm EST UPDATED: Jan 6, 2014, 5:12pm EST

Dino owners hope to crowd-fund their next project

Staff Reporter-Washington Business Journal

It’s been a few weeks since Dino owners Dean Gold and Kay Zimmerman said they will close their Cleveland Park Italian restaurant and teased their next move: a new restaurant in Shaw.

Now plans for that restaurant seem to be taking further shape — if the owners can raise the cash. Gold and Zimmerman launched an indiegogo crowd-funding campaign Jan. 4 to raise $50,000 for the project, which will be called Dino’s Grotto.

They have raised $4,720, or nearly 10 percent of the goal, by Monday morning. The campaign lasts until Feb. 6. Dino’s owners hope to raise some of their startup costs through the campaign “so we can have the freedom to do what we do best: support our sustainable network of small family farms and wineries and artisan producers,” according to the site.

Gold said this week that the crowd-sourcing was always something he hoped to capitalize on.

“We have an email list of 3,500 people, and 38 percent of them opened the email [about the campaign], and that doesn’t include smartphones,” he said. “It’s an unbelievably motivated group of people and it seemed silly not to do something that was designed to get them excited about the new place.”

All told, the owners will need more than $200,000 in startup capital, Gold said. The money from indiegogo will help fund special projects such as a walk-in refrigerator and tap lines so the restaurant can offer up to a dozen beers on tap.

“What we’re trying to do with the indiegogo campaign, is take some of these things that I want to do but don’t need to do to get open, and move them to the before we open list,” he said.

Gold and Zimmerman expect Dino’s Grotto to have some of the same menu items as Dino but also offer a wider range of cocktails, craft beers and local spirits.

“I have no idea what our new neighbors will want from us, but I do know that we will continue to be a local joint,” Gold wrote on the site. The entrees and pastas will probably be fewer, and the menu of “fun”items — including perhaps a rotating burger of the month, Gold said — will likely be expanded.

They’re going for a lively atmosphere, “a friendly hubbub of fun,” according to indiegogo. Gold envisions the ground floor will be largely dominated by a bar area — “the grotto” and then the dining area will be concentrated upstairs.

Gold and Zimmerman have not yet provided the future address of Dino’s Grotto — they’re still finalizing a lease. They plan to do minimal construction inside the space, however, so an opening could happen as soon as March, Gold said.

Dino in Cleveland Park is set to close Jan. 12.

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What’s the deal with crowdfunding investments?

Reprinted from NEW YORK (CNNMoney)

A rule changed in September that transformed the way small business owners can seek investment, but it appears to be flying under the radar.

The new rule allows private companies to publicly advertise that they are seeking investment, known as “general solicitation.” Part of the JOBS Act, it aims to make it easier for smaller companies to access new investors and raise capital — something a majority say is their biggest challenge.

For the past 80 years, startups that wanted to raise money couldn’t publicly say they were seeking investment. They couldn’t mention it at speaking engagements, post an announcement on their website or tweet about it. That’s all changed.

“I’ve seen an entirely new class of individuals taking a look at my business now,” said Rick Field, CEO of Rick’s Picks, a New York-based company selling specialty pickles and beets.

Field — one of the small number of business owners to take advantage of the new rule — has seen three times the traffic to his fundraising profile on the crowdfunding site CircleUp. Though he says it’s too early to tell if that will lead to more investment, more and more people are discovering Rick’s Picks — and they could become investors down the line.

Shahab Kaviani is the CEO of CoFoundersLab, an online matchmaking platform connecting entrepreneurs with business partners. He also took advantage of the rule change in September by tweeting and blogging about his fundraising campaign. Since then, Kaviani has received about $150,000 in investments, and he says half of those investors were the result of general solicitation.

“It’s really going to help startups all around. They can sell out loud, which is going to give them more exposure, more quickly,” said Alejandro Cremades, CEO of the crowdfunding platform Rock the Post.

His website launched in 2012 and helps startups raise funds. Unlike crowdfunding sites Kickstarter or Indiegogo, Rock the Post allows entrepreneurs to sell shares, as does CircleUp, a site for consumer product companies.

Yet businesses haven’t been lining up to publicly solicit investors.

Only about one-third of the 66 startups currently using Rock the Post have taken advantage of the general solicitation rule, while just six of 34 companies on CircleUp are using it.

Advertising for investment really only works well for businesses with a tangible product like pickles, or those with an already established social network, said Cremades.

The National Federation of Independent Businesses and the Small Business Majority are not yet tracking the extent that small firms are using general solicitation. That may be because the JOBS Act in its entirety has yet to take effect.

Although the new rule allows business owners to tell the world they’re raising capital, that doesn’t mean they can take money from just anybody. Only accredited investors — those who have a net worth of more than $1 million or have earned $200,000 in each of the previous two years — can pony up funds. The burden to verify these investors is placed on the fundraiser.

And once a business owner opts to solicit publicly — done by filing out a fairly straightforward form with the SEC — he or she can’t take any funds from a non-accredited investor, which means passing up investments from family or friends they might otherwise have received.

The SEC is eventually expected to loosen that limitation.

“General solicitation is a step in the right direction, but without that second part we’re still not opening up to a broader population,” said Rhett Buttle, vice president at the Small Business Majority.

Ryan Caldbeck, the CEO at CircleUp, believes the rule change is significant regardless. There are millions of inactive investors that already meet accreditation standards, he said. The change helps small business owners reach them. To top of page

First Published: January 7, 2014: 7:04 AM ET
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A Year End Look at the JOBS Act

Reprinted from JDSupra

Anna T. Pinedo
Anna T. Pinedo,
James R. Tanenbaum
James R. Tanenbaum


2013 has proven to be a strong year for IPOs.  According to a recent PWC study, total IPO volume for 2013, as of December 17, reached 237 public company debuts, which is an increase over 2012.  The overwhelming majority of these IPOs were completed by issuers that qualified as emerging growth companies.  (The full details of the study are available here:  Issuers and their counsel have become progressively more comfortable with the IPO on-ramp practices.  Issuers continue to rely on the confidential submission process for at least one or two amendments.  EGCs are regularly relying on the executive compensation disclosure accommodations.

During 2013, the SEC also made substantial progress with JOBS Act implementation.  Here is a brief recap:

Title I:  The SEC recently published the report required by Section 108 regarding the disclosure requirements of Regulation S-K.  Given the dialogue on disclosure reform generally, it seems safe to say that we should expect continued focus on this in 2014.

Title II:  Title II provided additional legal certainty (beyond that which had been provided by pre-JOBS Act no-action letters) for matchmaking sites.  Even before the Rule 506 amendments were finalized, it became clear that matchmaking sites that use the internet to reach (at that point) accredited investors would play an important role in the private financing market.  During 2013, the SEC Staff provided additional guidance on these models both through the issuance of FAQs and through the issuance of no-action letters to AngelList and Funders Club.  On September 23, 2013, the amendments relaxing the prohibition against general solicitation in certain Rule 506 offerings and in Rule 144A offerings became effective, as did the bad actor rules (required by the Dodd-Frank Act, not the JOBS Act).  The SEC Staff also released guidance on various questions related to Rule 506 offerings and on bad actor issues.  However, many questions have arisen regarding the necessary steps for investor verification in Rule 506(c) offerings, and additional guidance on these would be welcome.  Relaxing the prohibition against general solicitation raises fundamental questions regarding the demarcation between “private” offerings and “public” offerings, and the integration of offerings occurring in close proximity to one another.  SEC representatives have acknowledged that these integration issues will need to be tackled in the future.  The SEC also proposed amendments to Regulation D, Form D and Rule 156.  These have proven quite controversial, and it is difficult to predict whether certain of these amendments will be adopted.

Title III:  The SEC released proposed rules establishing a framework for crowdfunded offerings.

Title IV:  Most recently, the SEC released for comment proposed rules that provide a framework for Regulation A+ offerings.  The SEC’s proposed rules would implement the JOBS Act mandate by amending and modernizing existing Regulation A; creating two tiers of offerings, Tier 1 for offerings of up to $5 million  ($1.5 million for selling stockholders) and Tier 2 for offerings of up to $50 million ($15 million for selling stockholders); setting issuer eligibility, disclosure and reporting requirements; and imposing additional disclosure and ongoing reporting requirements, as well as an investment limit, for Tier 2 offerings, and, given these investor protection measures, making Tier 2 offerings exempt from blue sky requirements.  Regulation A+ offerings may prove to be an important financing alternative for non-reporting companies seeking capital and broader market exposure.

All told, it has been a year of significant changes.  Over time, we believe these changes are likelier to have more lasting impact on exempt financings than on the IPO market.

Topics:  Dodd-Frank, IPO, JOBS Act, No-Action Letters, Regulation D, Rule 506 Offerings, SEC, Title II, Title III, Title IV

Published In: General Business Updates, Finance & Banking Updates, Securities Updates


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It might cost you $39K to crowd fund $100K under the SEC’s new rules

Reposted from Venture Beat

It might cost you $39K to crowdfund $100K under the SEC’s new rules

January 2, 2014 2:14 PM
Sherwood Neiss, Crowdfund Capital Advisors

On October 23, 2013 the Securities and Exchange Commission (SEC) issued the proposed rules for Regulation Crowdfunding.  The 585-pages included an explanation of the rules, the feedback it received, and a cost/benefit analysis.

A cost/benefit analysis is common in many regulations to give the public an estimate of the costs associated with implementing the proposed regulation.  It answers the question, “Do the costs outweigh the benefits?”  For Regulation Crowdfunding it sheds light on the question, “How much will it cost to raise money via crowdfund investing, and how do I keep it to a minimum?” Here’s a closer look at what that analysis tells us.

The Background

The legislation requires that the selling of crowdfund securities take place on registered websites.  The websites hosting the transactions are known as funding portals or broker dealers.  These entities must register with the Securities and Exchange Commission (SEC) and the Financial Intermediary Regulatory Authority (FINRA).  The legislation mandates investors have access to a business plan, use of proceeds, a valuation of the company, and financials. Firm may need to retain a Certified Public Accounting firm to certify the company’s financials or audit the company’s books.  Every step costs money, from completing the required documents to retaining professional services to assist in compliance.

The SEC looked at 3 variables:

a) the success fee (in terms of a percent (%) of proceeds) paid to websites for facilitating the transaction,

b) the compliance cost related to the preparation and filing of individual forms both during and after a campaign, and

c) the costs for a Certified Public Accountant (CPA) review or audit(an expense that scales over $100,000).  Certain costs like the success fee as a percent of the raise are variable, others scale like the CPA/Audit costs for raises over $100,000 and others like the compliance costs are fixed.  The SEC provided both low and high estimates for these costs based on assumptions and surveys it took.

For raises under $100,000, the SEC estimates portal and compliance fees will eat up between 12.9% and 39% of the money raised. For raises over $100,000 but less than $500,000, that figure may drop down to 7.96%.  And for raises over $500,000 but under $1M, it may drop to 7.66%.

For those of you who just want to see a graph, my team at Crowdfund Capital Advisors plotted that below. We decided to stick with industry estimates and make individual calculations for every extra $1,000 in capital sought. This is close to what it looks like:

The Strategy

If you are looking to raise money via crowdfunding, the moral of the story is, try to raise as close to the next threshold as possible. The thresholds are at $100,000, $500,000, and $1M. So if you need to raise $60,000 for your business, aim for $99,000. Not only will you pay less for that money but you will have more of it. Of course, this assumes you will be able to secure $99,000 from backers. Same holds true for the $100,000 to $500,000 levels and over $500,000 level. While this was not the intent of the legislation (to force companies to seek more capital than they need), it may make sense when trying to decrease the cost of raising that money.

The Most Likely Scenario

The proposed rules allow entrepreneurs to do a crowdfund offering to unaccredited investors at the same time they do a private offering to accredited investors. This is called a parallel offering. Entrepreneurs who want product and market validation from the crowd, with more substantial capital (outside of the $1M cap in Regulation Crowdfunding), while skipping the full audit requirements required of raises over $500,000, will most likely do a $499k crowdfunding raise and seek the rest from accredited investors outside of Regulation Crowdfunding.

Sherwood Neiss helped lead the U.S. fight to legalize debt and equity based crowdfunding, coauthored Crowdfund Investing for Dummies and cofounded Crowdfund Capital Advisorswhere he provides strategy and technology services to those seeking to benefit from crowdfund investing. 

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2013 Crowdfunding Predictions Revisited

Reprinted from Forbes

Last December, I ventured out onto that proverbial limb and made a few predictions about what 2014 was likely to hold for crowdfunding. Now that the New Year is almost upon us, it’s time to revisit these predictions. Let’s see how accurately my crystal ball viewed the future.

“The implementation of the JOBS Act will not lead to an explosion of equity crowdfunding.”

Equity crowdfunding, by almost any measures, has grown dramatically. But the JOBS Act wasn’t the driver. Though many thought that the finalization of the JOBS (or Jumpstart Our Business Startups) Act—which directed the SEC to both simplify IPOs and corporate fundraising, and also allowed individuals to invest in crowdfunded equity campaigns for startups—would serve as what the Harvard Business Review described as a “big bang moment” in equity crowdfunding. So far in 2013, this has not been a key driver for growth.

Why not? It’s complicated.  Timing is a big part of it.  Title II of the JOBS Act, which allows for general solicitation, didn’t go live until September 23—long after most people thought—so we’re just starting to see its initial effects. For instance, CircleUp just closed our first deal using Title II. While companies, and their attorneys, work to understand the rules related to Title III, the growth will take time.  In the long run we still believe Title II will be a big driver for private capital raises.

Title III is a different story.  This section of the JOBS Act allows unaccredited investors to invest, but it stilll has not been implemented.  Nonetheless, the rules have been proposed by the SEC, and those rules don’t look attractive. It’s extremely hard for us to imagine any attractive company raising money using Title III. Its restrictions are simply too significant.

“Donation-based crowdfunding sites will differentiate or die.”

When I say donation, I’m including rewards sites.  I was too early about this one, but I think it’s still correct.  Just as in so many other web industries—social media, flash sale sites, etc.—I believe this consolidation will play out over time. Successful donation sites are already differentiating based on industry or other factors, such as an integrated API (See Crowdtilt’s very interesting API). Of course, the main exception to this rule is Kickstarter, which is gaining scale rapidly. To grab market share from Kickstarter, I believe donation/rewards sites will have to discover a powerful niche, or risk dying a slow death—or a quick death, depending upon their funding.

Want evidence that some of the donation-based sites are struggling? Look at how few have been able to get funding outside of the top 3-4 (there are hundreds).  Or look at the turnover at the top of their leadership teams. Many have seen significant turnover.

“Angel groups will embrace equity crowdfunding.”

This was my most accurate prediction..

Investors look for good investments.  The smartest ones aren’t relying on deals that happen to stumble across their door or present to their local angel groups.  We’ve seen thousands that are now turning to crowdfunding to find high quality dealflow and additional diligence materials that weren’t available offline.

Groups like the Foundry Group’s FG Angels are taking advantage of the ease that crowdfunding offers, as forming an online syndicate is much faster—and simpler—when compared to the process of forming a seed or VC fund. For instance, CircleUp offers profiles of startups that include data such as industry stats, bios, testimonials, product demos and major competitors, making it easier for professional and non-professional investors alike to vet potential investments.


This prediction is a TBD, but we’re already seeing trending toward consolidation. Though the number of platforms still hovers in the 400s and volume continues to grow—a 105% increase from 2011 to 2012, according to Massolution—many of the sites making the most noise in 2012 are now silent. In large part this is because they are running out of money. Many others are realizing it simply takes longer to build a marketplace than they expected, and venture capital firms are already seeing a few winners emerging. Over time, expect to see this trend continue.

Anything you think I missed? Feel free to let me know in the comments section.

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Michigan Governor Signs Intrastate Crowdfunding Exemption

Reprinted from Forbes.

Yesterday Governor Rick Snyder signed Public Act 264 which establishes an intrastate exemption for crowdfunding in the state of Michigan. This allows Michigan residents to invest in businesses that reside within their state through crowdfunding platforms, essentially circumventing federal regulation. According to Governor Snyder, “This legislation enacts useful reforms that will streamline government procedures and eliminate confusing or unnecessary regulations.


Governor of Michigan, Rick Snyder

What is particularly impressive about P.A. 264 is the speed with which it moved through the legislature and ended up on the Governor’s desk.  Republican State Representative Nancy Jenkins, who introduced the legislation, held a hearing before the Michigan House Commerce Committee on October 16 and a little over two months later it became law with overwhelming bi-partisan support.

Michigan is the latest state to implement an intrastate crowdfunding exemption and others are expected to follow suit. Local leaders believe that broad adoption of crowdfunding is inevitable and that they need to take control of their own fate. Nancy Jenkins summed up the sentiment, “By creating an intrastate exemption we are allowing Michigan residents to invest in Michigan businesses and create more jobs at the same time.

In the meantime, the JOBS Act, which authorizes crowdfunding at the national level, is winding its way through the rulemaking process. Title II which allows “general solicitation” of private placements to accredited investors is already in place. The rules for Title III, which permits advertising to non-accredited investors, were published on October 23 for public comment and are expected to be finalized in the first quarter of 2014.

There is a wide range of opinions on what the full implementation of national crowdfunding will look like in practice. Many are optimistic that due to broad political support, the SEC and FINRA will move swiftly to formalize rules and begin licensing crowdfunding platforms. Others are not so sure. They expect government agencies to be overly cautious and inefficient, potentially moving full implementation out eighteen months and imposing requirements that are expensive and impractical.

Either way, momentum continues to build for financial innovation to help businesses grow and states are proving that they can move quickly to support the crowdfunding movement.

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Tom Still: Crowdfunding trend gets green light in Wisconsin – but there are still caution flags 10/28/2013

Reprinted from WisBusiness

Tom Still: Crowdfunding trend gets green light in Wisconsin – but there are still caution flags

By Tom Still

To cut down on fraud in the wake of the 1929 stock market crash, Washington banned private companies from soliciting investments from the general public. Since then, only relatively wealthy people – those who qualify as “accredited investors” by virtue of income or assets – have been able to buy shares of companies not listed on a public stock exchange.

The passage in early 2012 of the federal JOBS Act – short for Jumpstart Our Business Startups – was intended to change that. Among other things, the JOBS Act embraced “crowdfunding” as a way for privately held companies, usually startups, to raise money from ordinary investors through online fundraising campaigns.

A year and a half after President Obama signed the JOBS Act, the federal Securities and Exchange Commission has released the rules of the game for public review and comment. The reasons for the delay are more complex than a federal agency stiff-arming the president and Congress.

Crowdfunding in the Internet era has largely been a province of artists, causes and special projects that don’t come with an expectation of profit. You might get an awesome T-shirt or a front-row ticket out of your crowdfunding investment, as well as some warm feelings about your involvement, but not a lot more.

That changed with the advent of “equity crowdfunding,” through which small companies may sell small pieces of their company in return for the cash needed to move it from startup to success. The expectations for investors are very different: Instead of a T-shirt, they look for a return on investment.

The concept was embraced by the JOBS Act, within certain investment limits, but it ran head-long into the SEC’s historic concern about society inventing new ways to swindle grandmothers and other unsuspecting investors.

So, while most of the nation waited for the SEC rules, several states moved ahead with crowdfunding on their own – including Wisconsin, where the Legislature has passed legislation to rewrite state securities law. To get a crowdfunding exemption under the pending Wisconsin law, a company would need to:

* Be a Wisconsin business selling stock to state investors.

* Not raise more than $1 million, or $2 million if the company issuing stock is willing to be audited and make the audit available to investors.

* Not sell more than $5,000 in stock to anyone who is not a Wisconsin-certified investor. Certified investors have to earn more than $100,000 per year, or $150,000 for married couples, or have a net worth of $750,000 or more. That’s a different standard than set by the SEC.

* Issue the stock through an Internet site registered with the state Department of Financial Institutions; file disclosure statements; and share those disclosure documents with investors. Investors would be told they could lose the entire investment.

* Have stock payments held in escrow by a Wisconsin bank.

* Not have offered or sold other stock through the exemption in the past year.

The advantages of the state bill begin with the democratizing of equity investments in private companies. Mom and Pop could invest in mom-and-pop businesses. It also brings money off the sidelines for deals too small or early for angel and venture capitalists to consider. It could become a “farm system” for angel and venture capitalists to keep an eye on emerging companies.

There are some potential pitfalls, as well. The Depression-era mentality about protecting investors from themselves wasn’t entirely Rooseveltian paternalism. People can and do fall victim to fraud – even in public markets.

A proliferation of state rules could create a patchwork quilt of laws that might hamper commerce rather than encourage it. Can a global portal like the Internet truly screen out non-Wisconsin investors if they’re determined to get around it? Upstream investors might shun buying out crowdfunded deals if the list of previous investors is too hard to unravel, which could leave those initial investors stranded.

Perhaps the biggest danger is adverse selection. If the best deals are attracting experienced money from venture capitalists or angel groups, does that mean crowdfunding investors are left to pick from a less desirable pool? Are they seeing second-tier deals?

If so, the advent of crowdfunding could give way to disappointment among an entire class of investors who aren’t accustomed to the stark reality that many startups fail, even when backed with institutional money.

Now that proposed SEC rules are out, a whole new class of investors will soon be able to take part in startup deals. Wisconsin should make sure its rules don’t make things harder for investors and companies here by contradicting federal rules that should be allowed to work nationally.

— Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal. A panel discussion on crowdfunding will take place at the Wisconsin Early Stage Symposium, Nov. 5-6, in Madison.

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SEC Proposes Crowdfunding Rules Under JOBS Act

Reposted from Harvard Law School

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday October 30, 2013 at 9:15 am

Editor’s Note: The following post comes to us from Michael Kaplan, co-head of Davis Polk’s global Capital Markets Group, and is based on a Davis Polk client memorandum.

On October 23, 2013, the Securities and Exchange Commission proposed rules under the JOBS Act that would permit startups and other businesses to raise investment capital through “crowdfunding”—the process of seeking relatively small investments from a broad group of investors via the Internet. Crowdfunding has historically not been used to raise investment capital (as opposed to being used, for example, to solicit donations) because offers and sales of securities to the public generally require compliance with the registration requirements of the Securities Act of 1933.

The proposed rules provide a limited exemption from the Securities Act registration requirements in order to—

  • permit companies to raise investment capital through crowdfunding, up to certain offering-size and per-investor dollar thresholds;
  • require disclosure from companies raising capital; and
  • create a regulatory framework for intermediaries that facilitate crowdfunding transactions.


Many senior officials of the SEC, worried about potential fraud, spoke out against crowdfunding when the JOBS Act was first considered. The proposed rules contain a number of restrictions and safeguards to help mitigate these concerns.

The SEC is seeking comment from the public on the proposals for 90 days (the deadline for comments is expected to be shortly after January 21, 2014).

Crowdfunding Exemption

As proposed, a company may raise investment capital through crowdfunding if certain conditions, including the following, are met—

  • the company raises no more than $1 million through crowdfunding in the trailing 12-month period;
  • each of its investors has invested no more than the following in all crowdfundings relying on the exemption in the trailing 12-month period:
    • for an investor whose annual income and net worth are both less than $100,000, the greater of $2,000, 5% of annual income and 5% of net worth; and
    • for others, 10% of annual income or 10% of net worth, whichever is greater, up to $100,000 in the trailing 12-month period;
  • the transaction is conducted exclusively through a single qualifying intermediary’s platform; and
  • the company provides certain disclosures.

The crowdfunding exemption will not be available to companies already reporting with the SEC, companies organized outside the United States, investment companies (and certain funds excluded from the Investment Company Act definition of investment company), companies that are disqualified under the proposed rules, companies that are not in compliance with the proposed annual reporting requirements and companies without a business plan or those whose business plan is to enter into business combination transactions with unidentified targets.

Securities sold in crowdfunding transactions would be subject to resale restrictions for one year, during which time transfers could only be made to family members, accredited investors or the company, or in registered transactions.

Disclosure Requirements

Companies raising investment capital through crowdfunding would be required to prepare an offering statement that must be filed with the SEC, provided to its intermediary and made available to investors. Among other things, the offering statement would disclose—

  • information about officers, directors and 20% owners;
  • a description of the company’s business and business plans, number of employees and the use of proceeds from the offering;
  • information about the risks of the offering;
  • the price to the public of the securities being offered, how the valuation of the securities was determined, the target offering amount, the deadline to reach the target amount and whether the company will accept capital in excess of the target amount;
  •  information about related-party transactions;
  •  information about the financial condition of the company; and
  •  financial statements that, depending on the target amount offered in crowdfunding transactions during the trailing 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant.

The rules would require the offering statement to be updated for material events over the course of the offering prior to completion, and provide investors with the option to back out of their investment in such an event.

Companies relying on the crowdfunding exemption would also be required to file an annual report with the SEC and post it on their website, which would include updates of many of the items included in the initial offering statement.

In contrast to the SEC’s newly relaxed rules on advertising in private offerings, no advertising will be permitted for these offerings other than very limited notices and communications through the intermediaries described below.

Crowdfunding Intermediaries

Crowdfunding transactions must take place exclusively online through platforms operated by an SEC-registered intermediary, either a broker-dealer or a new type of SEC registrant called a “funding portal.” A company’s crowdfunding intermediary is barred from any ownership of the company’s securities. The proposed rules would, among other things, require intermediaries to—

  • have a reasonable basis for believing that the crowdfunding company is complying with the applicable rules;
  • ensure that the company’s disclosure is made publicly available for 21 days before securities are sold;
  • provide investors with educational materials;
  • take measures to reduce the risk of fraud and deny access to any company where it believes the company or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection;
  • make available information about the company and the offering;
  • provide communication channels to permit discussions about offerings on the platform; and
  • avoid offering investment advice or making recommendations.
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A Dating Service for Those Who Love Hedge Funds


There’s a new dating website in town. This one doesn’t care if you like brunettes, how often you shower, or if you would ever have sex on a first date. Instead, it wants to know what you like in a portfolio. And as with any online matchmaker, when you fill out your anonymous online profile, trudge through the survey questions, and arrive at your algorithmically determined matches, you’re still facing quite a bit of risk.

The new website Hedgez is doing for investors and hedge funds what sites like and OkCupid do for singles: take their self-descriptions, run their preferences through a program, and offer suggested matches.

Until recently, hedge funds couldn’t court investors publicly. But as of Sept. 23, when Title II of the JOBS Act went into effect, hedge funds and other small businesses with private offerings can mass-market themselves to potential investors.

There’s just one problem: “Hedge funds are very smart about what they do but don’t have a clue about how to raise money,” says Jeffrey Schwartz, Hedgez founder and chief executive officer.

Hedgez uses the tricks of online marketing to target potential investors. Hedgez does search-engine marketing and dives into data from social networking sites such as LinkedIn to target investors based on characteristics such as job description, job history, and geography.

Once lured to the website, investors can search for specific funds or build profiles by answering questions about their investment style, risk appetite, and goals, and let the site’s algorithm do the work. Users are presented with up to five matches, with comprehensive information and performance figures, from a database of more than 6,000 hedge funds. The service is free for users, and charges hedge funds a fee for each inquiry the fund receives. While only “accredited” investors—those who meet income or net worth minimums set by the Securities and Exchange Commission—can put money into hedge funds, non-accredited investors can create investment profiles on Hedgez and access information about other investment options. Schwartz says he aims to have 10,000 investors a month using the service, with about 30 percent of those accredited.

It’s up to the investors whether they want to break the ice and initiate a relationship. Given the drop in hedge funds’ performance lately—they lagged the Standard & Poor’s 500-stock index by about 10 percentage points this year, do investors really need an easier way to find them?

I think I’d prefer to take my chances with online dating. At least then, I know we’d split the check.

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Could Crowdfunding Replace Traditional Marketing?

From Forbes  By:  Cheryl Conner, Contributor

Could Crowdfunding Replace Traditional Marketing?

I posed that question this week to my friend Dr. Phil Windley, an expert technologist, Executive Producer of IT Conversations and a serial entrepreneur. He and co-founder Stephen Fulling have launched multiple ventures together beginning with iMALL Inc., which they sold to Excite@home in 1999. Disclosure: I have no current business relationship with Windley and Fulling but provided PR counsel to their company Kynetx in 2009-2010.

This week Windley and Fulling crossed another horizon together when they pressed the Launch button on their first crowdfunding campaign with Kickstarter to fund a project called Fuse. Fuse is a device that uses a built in GPS and cellular modem to stream data from your vehicle into a personal cloud. The device provides space-age app functionality such as mapping out a car pool route and pinging riders with an automatic call or text to let them know when you’re close. It can keep tabs on the driving habits of teen drivers (NPR has had some interesting things to say on this front). The device also manages fuel economy by calculating best times and locations to fill up and manages car expenses by alerting owners to maintenance needs by accessing the engine codes that only the dealership can normally read.

As I might have suspected, the product also proves a point the two founders are making: that there are new ways for technology to coalesce across many devices and platforms to produce surprising outcomes that are entirely customer driven.

In other words, in addition to the funding, the project is a PR and messaging mission to validate the company’s technology foundation while it kicks off the development of an extreme coolness factor device. So why did these experienced executives launch their idea on Kickstarter as opposed to using a traditional funding model and a traditional (ahem) public relations campaign?

Fuse is the first foray into crowdfunding for serial entrepreneurs Windley and Fulling

Says Windley: “The primary reason I like the idea of Kickstarter is that it validates an idea. For a small investment in time and money to create a good video and a compelling message, we can test whether or not this is a product or an idea that people will actually buy. The money we’ll make is likely small potatoes compared to what we’d raise in a typical funding scenario (unless it really takes off). But the big payoff is the information about the potential market we’ll get.”

Windley and Fulling are far from alone. According to Social Media Today, Kickstarter has produced $786 million (as of Sept 2013) in funding and is a great case study for the benefits of crowdfunding.

However, while crowdfunding is great for the purposes Windley and Fulling are envisioning, far too many entrepreneurs jump into crowdfunding as the potential “answer for everything” without also considering the risks. A full 10 perent of projects on Kickstarter complete their rounds without receiving a single pledge, and 56 percent do not get funded because they fall short of their goals. (However, it is important to note that even incompleted campaigns produce valuable market research and feedback to entrepreneurs about the reasons their ideas aren’t ready for prime time just yet.)

To be a good candidate for crowdfunding, the project must have ample investors and donors who are willing to align with the project both conceptually and with their pocketbooks. Translation: a crowdfund campaign that is meant to generate market buzz and public relations (in addition to funding) will only be successful if the entrant walks in having already created a sufficient amount of—you guessed it—PR and marketing buzz.

To be successful on the marketing front, writer Kriti Vichare advises entrantsto be realistic about the total goals for their program, which requires a fair amount of research of other similar ideas and programs in advance. Vichare also recommends three steps that I agree with as well:

  1. Make the project crystal clear, concise and extremely easy to communicate.
  2. Show ample evidence of potential future success through past sales or market research.
  3. Provide compelling gifts for investors and donators. If you don’t know what your donors would like? Ask them, by getting their ideas and opinions in face to face visits and social media conversations in advance.

What are the other cautions for entrepreneurs? For marketing and for funding in general, Lyn Blanchard of Wavefront on Wireless provides the followingcautionary guidance to entrepreneurs:

  • It’s all or nothing: Don’t forget that most CF platforms will only release the funds you raise when 100 percent or more of the funding goal is achieved. There’s no formal penalty for not reaching the goal, and the increasing number of entrepreneurs who crowdfund primarily for market testing and visibility value have fairly well alleviated the risk of a reputational hit, but if your primary goal (or one of them) is funding, consider the disappointment and the time and effort you’ll have lost if your funding goal isn’t achieved.
  • You may be putting your IP at Risk: This is the single biggest risk to crowdfunding, for any purposes in my opinion. Putting your crowdfund project on the Internet can expose your idea to IP theft by copycats. If your product is unique and a copycat idea could threaten your viability, crowdfunding is not for you. And regardless of your answer, every company will need to weigh in the balance the decision of how much information to disclose. For success, you’ll need to disclose far more information to potential investors (and this will be even more relevant when crowdfund investment emerges) than you would need to reveal in traditional forms of PR. In Blanchard’s opinion the best way to proceed with a unique idea is to register provisional patents as a date and time stamp before proceeding with a crowdfund campaign. On the plus side, you should also consider that a crowdfunding project often results in interesting relationships with people or partners that otherwise would never have happened. Think business networking, writ large. “Opportunities can surface through serendipity with a little bit of boldness,” Blanchard says.
  • It’s less ideal for B2B products: A quick review of popular crowdfund platforms will make it clear that the vast majority of successful projects are marketing to consumers. Crowdfunding speaks, inherently, to the passions and motivations of individuals who are acting from the vantage point of their personal beliefs and self-interests. Customers give to a crowdfunding campaign because they believe the idea is cool, or worthy, or it resonates with their personal passion. Crowdfund projects are less efficient at compeling a business with conflicting corporate objectives and depersonalized motivations to act.
  • Best for  projects that are not complicated: Likewise, complicated or technical projects can be difficult for a lay person to understand, leaving them scratching their heads for a reason to get on board with a project.
  • Less ideal for large capital needs: Yes, Pebble scored big. But the Pebble bonanza is not the norm for the majority of crowdfund campaigns. Crowdfunding is a better choice for seed capital rounds of capital, where a company is looking to validate a cool idea and capital needs are less than $100,000. If your capital needs are higher than this, you should look more strongly to traditional sources. However, crowdfunding as a component of an overall strategy for a capital raise can be a smart arrow to add to the quiver.
  • A poor choice for long R&D: If your business is in a sector where lengthy R&D cycles are the norm (as in years instead of months), crowdfunding is not for you. Crowdfund backers expect to see results within a very short time.

As I look at the Fuse offering I agree with Windley’s assessment: Why not? Nearly everyone has at least one car, and we value them highly. As a society, we spend a great deal on our vehicles. Also, as Windley points out in his most recent Technometria blog, cars generate a great deal of data that combines with the other data in your life (schedules, budgets, projects and destinations) in some very interesting ways. On the marketing front, I will also add the advice that whether failed or successful, crowdfund campaigns remain visible on the crowdfund platform long after the campaign has ended. Potentially even forever. This means that smart marketers continue to update the campaign, even after completion, with new materials, video links and information about how to reach their company for more information.

My personal prediction for Windley and Fulling’s new project: As a way-cool means of making my car even more fun and productive, I am betting the Fuse campaign will succeed. I want one (unless, perhaps, it allows my husband and teens to see just how fast I occasionally drive). As a proof of concept of the underlying technology—we shall see. On that front, I will monitor this project’s progress and report the results over time. As a replacement for traditional PR and marketing, I believe crowdfunding can be a highly beneficial component of a stellar marketing outcome, but that traditional programs are also required for a project to fully prevail.

For those of you who’ve crowdfunded your entrepreneurial projects so far, what went well? What didn’t? I look forward to your advice and remarks.

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Crowdfunding Rule Could Set Dangerous Precedent

From Forbes

If reports are true that crowdfunding companies won’t be required to do income verification of investors, that could open up the door for abuse.

Under the JOBS Act, signed into law by President Obama last year, the U.S. Securities and Exchange Commission (SEC) is writing rules that would govern how companies can raise money online.

Investors with $100,000 or less in annual income are restricted to $5,000 per company annually under the JOBS Act rule. Those with higher net worths can invest more.

What if the SEC doesn’t require that companies raising money in online equity offerings double-check the income of their less-affluent investors? Then crowdfunding could turn into a casino with more losers than winners.

In theory, crowdfunding promises to “democritize” equity offerings by making stock available to investors online. Companies could raise up to $1 million a year using this channel.

Online platforms like Kickstarter and Indiegogo have been raising money in small amounts for years for projects ranging from theatrical productions to video game start-ups.

State regulators have repeatedly warned the SEC not to put in place lax rules for crowdfunding. Last week, the North American Securities Administrators Association noted some of the perils in crowdfunding rules: the guidelines may not be tough enough on the investor protection front:

“With the roll out of rules required by the JOBS Act, investors and small business owners alike must be on heightened alert for questionable
investment offers and services,” said Andrea Seidt, NASAA President and Ohio Securities Commissioner.

Seidt said “NASAA members are concerned that the recent lifting of an 80-year-old ban on the advertising of private offerings, mandated by the JOBS Act, will lead to greater abuse by unscrupulous promoters.”

“Whether a crowdfunding portal or an accredited investor aggregator, it is important to do your due diligence and to understand that use of
an unregulated third party to provide such services does not change your obligations under federal and state securities laws,” Seidt said.

“Investors are not alone in their potential to be scammed. Using a fraudulent portal means both the business and the investor stand to lose.”

The SEC is expected to vote on proposed crowdfunding rules soon.  In the interim, avoid companies that claim offer crowdfunding services before the SEC rules are finalized.

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More States Are Leading The Way In The Push For Crowdfunding

AdvertisementReprinted from Forbes
Alan McGlade, Contributor
10/16/2013 @ 5:15PM

More States Are Leading The Way In The Push For Crowdfunding

After a very slow start, there is momentum at the SEC to enable crowdfunding at the national level. Title II of the JOBS Act, which permits General Solicitation to accredited investors, became law in September. It is expected that the rules for Title III, which expands this right to non-accredited investors, will be published for comment before the end of the year. We’ll see.

Several weeks ago I wrote that crowdfunding will flourish regardless of what the SEC does. One reason for this is that an increasing number of individual states want to tap crowdfunding to expand investment in local businesses and create jobs. Rather than waiting for federal rulemaking, these states are enacting intrastate crowdfunding exemptions. This is a regulatory framework for crowdfunding transactions where both the investors and the businesses reside within the state.

Left to right: Angela Barbash, CEO of Reconsider; Rep. Nancy Jenkins, 57th House District; Michael Sauvante, executive director of the Commonwealth Group; and Diane Bissell. (Courtesy: Michigan House Republicans)

Kansas was the first mover and since then Georgia passed a crowdfunding exemption and legislative processes were initiated in North Carolina, Wisconsin and the state of Washington. A proposal for a crowdfunding exemption, developed by a group I am affiliated with called Funding Wonder, is now circulating in Florida as well.

Recently State Representative Nancy Jenkins introduced legislation (HB 4996) to establish equity crowdfunding in the state of Michigan and earlier today the Michigan House Commerce Committee heard testimony on the bill. She expects that the bill will gain swift approval from the House and then move on to the Michigan State Senate where she believes it will get a prompt review. If successful, HB 4996 would be the first state bill to allow an intrastate exemption legislatively. In both Kansas and Georgia the Commissioners of Securities simply established new rules under their own authority.

Representative Jenkins told me that she believes that there is a lot of capital sitting on the sidelines in Michigan that, with the right vehicle, could be deployed to benefit Michigan businesses and investors. Her bill will allow unlimited investment by accredited investors and up to $10,000 for non-accredited investors. Businesses will be able to raise up to $1 million, or $2 million with the proper financial documentation. The bill also has built in protection for small businesses so that if an out of state investment is inadvertently accepted, they will not fall afoul of the SEC.

Efforts by individual states to increase business investment through crowdfunding are likely to accelerate going forward. This is a positive trend for the nascent crowdfunding industry and will no doubt encourage continued progress at the national level.

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SEC to Release Crowdfunding Rule Easing Investor Verification

Reprinted from Bloomberg Businessweek
Bloomberg News

SEC to Release Crowdfunding Rule Easing Investor Verification

By Dave Michaels October 17, 2013

Small businesses raising money by selling shares over the Internet wouldn’t have to verify that their backers comply with individual investment limits under a U.S. regulatory proposal set for a vote as soon as next week.

The plan, targeted for an Oct. 23 vote by the Securities and Exchange Commission, would allow such companies to use so-called equity crowdfunding without having to check that a person’s investment is a greater share of their income or net worth than allowed by law, according to two people with direct knowledge of the matter who asked not to be named because the proposal hasn’t been made public.

The crowdfunding rule, authorized as part of the 2012 Jumpstart Our Business Startups Act, is intended to benefit small businesses and startups too small to attract funding from banks or venture capitalists. It may also boost business for Internet funding portals such as Kickstarter Inc., IndieGoGo Inc., and CircleUp Network Inc. that are used by startups to raise money.

BLOG: Startups Remain Cloudy on the New General Solicitation Rule

“Some of the verification requirements would effectively negate what Congress had in mind,” Harvey L. Pitt, a former SEC chairman and now chief executive officer of Kalorama Partners LLC, said in an interview. “It has to be done in a way that lets people raise money.”

Crowdfunding was a popular provision in the JOBS Act, with advocates saying it would unlock capital for small businesses and entrepreneurs. In implementing the law, the SEC has been trying to balance the need to protect ordinary investors from potential fraud with Congress’s goal of reducing regulations for small businesses.

Verification Impractical

The proposal, overdue by nine months, will become the second regulatory item from the JOBS Act advanced under SEC Chairman Mary Jo White. Although the law imposes limits on investors based on the person’s income or net worth, the people said the SEC’s proposal won’t require companies or brokers to verify compliance with the limit, something Internet funders have argued is impractical.

Under the law, businesses using crowdfunding could raise no more than $5,000 a year from someone whose net worth is less than $100,000. Investors with a net worth greater than $100,000 could contribute as much as 10 percent of their annual income or net worth, up to a maximum of $100,000 in one year.

1 Million Projects

Crowdfunding platforms raised $2.7 billion in 2012 and funded more than 1 million projects, according to research firm Massolution. Crowdfunding has financed technology projects such as the Pebble smartwatch, which raised more than $10 million on Kickstarter to develop a watch that works with an iPhone or Android-powered device.

Equity crowdfunding, which is practiced legally in the U.K. and Australia, accounts for less than 5 percent of the market, according to Ethan Mollick, a professor of management at the University of Pennsylvania’s Wharton School of Business. Less than 1 percent of the money pledged through Kickstarter has gone to projects that may be fraudulent, according to Mollick, whose research has focused on the practice.

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Wisconsin crowdfunding bill raises concerns

Oct 10, 2013, 2:57pm CDT

Equity crowdfunding has gotten a lot of positive press, particularly quoting startups eager for a new source of capital.

Reporter-The Business Journal
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Much of the news coverage of a Wisconsin proposal reforming state securities law has focused on the creation of an online equity crowdfunding mechanism, but the bill also lowers the threshold of qualifying as an accredited investor — and that has raised some concerns.

The state Assembly passed the bill Tuesday and it appears poised to move quickly toward passage in the Senate, according to Patricia Struck, administrator of the securities division of the Wisconsin Department of Financial Institutions.

A part of the bill that has flown somewhat under the radar, perhaps given the trendy topic of crowdfunding, would amend the definition of “accredited investor” in Wisconsin and create a new category called “certified investor,” according to the amendment posted on the Legislature’s website. The criteria for achieving this designation would be lowered from individual income of $200,000 to $100,000 (or lowered from $300,000 to $150,000 for jointly filed income with a spouse), and would lower the net worth threshold from $1 million to $750,000.

“I think that threshold is pretty low if the premise is the person has enough resources to withstand” a loss on their startup investments, said Struck, speaking on a panel hosted by the Wisconsin Innovation Network’s Milwaukee chapter at the Crowne Plaza Hotel in Wauwatosa.

The Wisconsin Innovation Network is the membership arm of the Madison-based Wisconsin Technology Council.

Much of the discussion at Thursday’s event still focused on crowdfunding, which has been made popular by sites like Kickstarter and Indiegogo. Online portals are poised to allow non-accredited investors to purchase equity in startups, thanks to a federal law passed last year.

But the rules for that option have yet to be written by the U.S. Securities and Exchange Commission, and the Wisconsin bill is in part a reaction to that delay, said Dan Blake, director of the Wisconsin Angel Network. If the state bill passes, Wisconsin would join Georgia and Kansas in allowing intrastate equity crowdfunding. North Carolina is also close to enacting such a law.

“This is truly on the fast track,” Struck said, noting that the Wisconsin bill could hit the Senate floor next week. “It sure hasn’t seen a lot of obstacles yet.”

Equity crowdfunding has gotten a lot of positive press, particularly quoting startups eager for a new source of capital.

Those in the legal community are a bit more “guarded” about the implications of this new frontier for raising capital, said Ryan Van Den Elzen, attorney in Milwaukee. The scenario of startup companies raising money from citizens that don’t have much investing experience raises some concerns.

“If you’ve got an unsophisticated company selling to unsophisticated investors, there’s a material risk there,” Van Den Elzen said during the panel discussion. “Some of these investments aren’t going to be successful. We could have an area of new state and federal regulation” crop up in response.

Jeff Engel is The Business Journal’s reporter covering the manufacturing industry and technology.

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