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The number of crowdfunding portals exploded in 2011, showing a worldwide growth of 60%, according to a new study by the Netsa Operating Company in London. Netsa released on July 17, 2012 the study, entitled “The Venture Crowd” by Liam Collins and Yannis Pierrakis.

The study suggests that crowdfunding could fill the equity void between banks, which may be too conservative to invest in an entrepreneur, and venture capitalists, who seek bigger investments and expect “exceptional returns” from their contributions. As the study points out, many start-ups rely on family and friends to launch the business; however, such individuals may not be able to provide sufficient resources for the start-up. On the other hand, venture capitalists “have increasingly been moving their investment activity upstream in recent years, making bigger investments into more developed companies.”

Crowdfunding opens two investment markets, according to the authors: “One is the initial seed money to start a business, where friends and family finance may be unavailable or insufficient, and amounts required are too small for business angels to get involved. There is also the gap above the level where business angles are usually active, but where the capital required is too small for venture capitalists to get involved.”

The study indicates that crowdfunding could fill the investment void for entrepreneurs seeking up to $ 3 million (Note: the federal JOBS Act will permit crowdfunding investment up to $ 1 million per year in the USA).

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Washington, DC – July 13, 2012.  Securities and Exchange Commission staff members assured participants at a crowdfunding symposium here that the SEC was “mindful” and “working hard” to meet a deadline under the federal JOBS Act to implement regulations that would govern online equity crowdfunding.  They also dropped some hints on the SEC’s thinking about such rules. Earlier in the day, Rep. Patrick McHenry (R-NC) urged a “light touch” to crowdfunding rules.

CFIRA Crowdfunding Symposium, Washington, DC, June 13, 2012.

The Jumpstart Our Business Startups Act (JOBS Act) became law on April 5, 2012, and, among other things, enables small businesses to seek up to $ 1 million per year from small investors through online crowdfunding portals. The Act requires the SEC to implement rules to regulate crowdfunding by December 31, 2012.  The Crowdfund Intermediary Regulatory Advocates (CFIRA), a sister organization of the Crowdfunding Professional Association, sponsored the day-long symposium here entitled “The Crowdfund Act – Framing the new regulatory landscape Symposium,” in which law makers and staff from the SEC and the Financial Industry Regulatory Authority (FINRA) fielded questions and provided comments to members of the crowdfunding industry about crowdfunding.

Issues covered during the symposium included:

  • What role social media will play in crowdfunding? Representatives from the SEC and Financial Industry Regulatory Authority (FINRA) both urged the public to provide comments on the role social media may play in crowdfunding. FINRA likely will serve as the self-regulatory organization for intermediaries.
  • How to regulate broker-dealers if they operate crowdfunding portals. Should broker-deals abide by stricter regulations imposed under current SEC rules?
  • Where will intermediaries — or crowdfuding portals — be deemed investment advisers regulated by the Investment Adviser Act when they post offerings on their portals.
  • Will the SEC rely on a simpler online registration process for portals that seek to register as crowdfunding intermediaries under the crowdfunding provisions of the JOBS Act?

SEC staff members alerted participants that there was still “a lot of heavy lifting” that the SEC will have to do to implement crowdfunding rules, according to SEC’s David Blass. “There’s a fair amount of rule-making,” Mr. Blass said, “we are mindful of the deadlines.”

SEC staff told participants it was analyzing, among other things:

  • How broker-dealers should be regulated if they offer crowdfunding portals and
  • what limits may be imposed on intermediaries regarding questions of investment advice, which is regulated under the Investment Adviser Act of 1940.

Lona Nallengara, Deputy Director in SEC Division of Corporation Finance, expressed his view that any type of equity regulated under federal law likely can be offered through crowdfunding. “I don’t think there is anything inherent in the type of securities that can be offered,” he said. But there is a need for disclosing the terms of the securities, “including the risk of securities.” Mr. Nallengara reminded participants that his comments did not express an official position of the SEC.

Mr. Nallengara repeatedly emphasized the need to provide investors with adequate disclosures. “They should know what they’re investing in,” he said. While offering common stock may be easier to disclose, Mr. Nallengara stressed that investors need to know the implications if they are investing in subordinated classes of securities.

SEC staff members warned that the SEC will scrutinize any activity by an intermediary that suggests the portal is giving investors advice on what type of offers to buy. They pointed out that the Act prohibits crowdfunding portals from giving investment advice.  On the other hand, the SEC were less troubled by intermediaries providing standard forms to help businesses set up an investment offer on the portal. “Part of the reason of the intermediary is to guide issuers through the process,” said Mr. Nallengara.  Advising businesses on how to set up their offerings on a portal is not the same as advising an investor on what to buy, Mr. Nallengara added.

The SEC staff members believed that broker-dealer rules are more likely to apply to broker-dealers who meld their crowdfunding portal business into their broker-dealer business. SEC staff members alerted participants that there was still “a lot of heavy lifting” that the SEC will have to do to implement crowdfunding rules, according to SEC’s David Blass. “There’s a fair amount of rule-making,” Mr. Blass said, “we are mindful of the deadlines.” However, Mr. Blass warned that the proposed rules “may not be all what you want to hear.”

Rep. Patrick McHenry

Rep. McHenry told participants that they should realize the impact that crowdfunding can have on “small business folks,” claiming the JOBS Act “can have a major impact on small business and a small community.”  He said the basic construct of the crowdfund provisions of the JOBS Act was a “light touch to regulation.” While rooting out fraud is a major goal in implementing rules to regulate crowdfunding, Rep. McHenry believes there is power in the crowd.  He pointed out reviews that people post about vendors on eBay as an example. “If you get a bad review, they are done,” he noted.  ”The worst thing is fraud,” he said. “We’re going to have people try to do bad things no matter what. This stuff will happen, but we want to minimize it.”

Rep. McHenry said the Act, as signed into law, has flaws and that technical changes are needed, however, “the good news is that we now have a crowdfunding law in the United States.” Rep. McHenry suggested that the Act should be amended to allow investors with a net worth of under $100,000 to invest up to $5,000 per year and that the crowdfunding ceiling be raised from $1 million to $5 million.

Andy Green

“This is a real testimony to the democratic process,” Andy Green, Legislative Counsel to U.S. Senator Jeff Merkley (D-Oregon), told the symposium. Green said Congress will scrutinize crowdfunding over the “long term.” Such review will include the success based on new companies that grow from crowdfunding and whether investors will return to make new crowdfunding investments. Green likewise observed that the Act does not limit crowdfunding to any specific type of securities.


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How much do you know about crowdfunding?

The Crowdfunding Professional Association is asking entrepreneurs, investors, intermediaries and crowdfunding portals to take a survey to see how much they know about — or understand — the upcoming changes for crowdfunding provided under the Jumpstart Our Business Startups Act.  The JOBS Act will enable businesses to seek up to to $ 1 million in equity per year from small investors through online crowdfunding portals. The Act requires the Securities and Exchange Commission to implement regulations that will govern crowdfunding by December 31, 2012.

The purpose behind the survey is to find out what businesses and individuals really know or understand about crowdfunding, what they find most exciting about crowdfunding, and how they plan to take advantage of crowdfunding once the SEC implements the rules for such investments.  The CfPA plans to award an Apple(R) iPad 3 to one of the first 500 individuals who respond to the survey.  The winner will be randomly selected.

Take the Survey

Image (c) Crestock 

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Fifty-eight percent of capital market executives surveyed in a new study believe that the JOBS Act’s crowdfunding provisions will have a positive impact on the US IPO market. BDO USA, LLP, a tax, accounting and financial consulting firm in Chicago released the survey on June 10, 2012. BDO interviewed 100 capital markets executives of leading investment banks about the impact the Jumpstart Our Business Startups Act will have on IPO markets.


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Financial discussion

The Financial Industry Regulatory Authority (FINRA), the largest independent regulator for all securities firms doing business in the United States, announced it is seeking public comments on crowdfunding regulation under the new JOBS Act.

The Jumpstart our Business Startups Act is aimed at increasing American job creation and economic growth—contains key provisions relating to securities offered or sold through “crowdfunding.” Under the new law, intermediaries performing crowdfunding on behalf of issuers must register with the Securities and Exchange Commission (SEC) as a “funding portal” or broker and must register with an applicable self-regulatory organization (SRO). FINRA is soliciting public comment on the appropriate scope of FINRA rules that should apply to member firms engaging in crowdfunding activities, either as funding portals or as brokers.

Questions regarding this Notice should be directed to:

  • Gary L. Goldsholle, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8104; or
  • Adam H. Arkel, Associate General Counsel, OGC, at (202) 728-6961

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The Securities and Exchange Commission announced an open meeting for August 22, 2012 to consider rules to eliminate the prohibition against general solicitation and advertising on securities offering made under Reg D, Rule 506 of the Securities Act. Mary Schapiro, Chair of the SEC, told a congressional subcommittee on June 28, 2012 that the SEC would miss the the July 4, 2012 deadline to promulgate general solicitation rules under the new Jumpstart Our Business Startups Act (JOBS Act) but that the SEC would have rules by the summer of 2012.

Mary Schapiro, courtesy Securities and Exchange CommissionMs. Schapiro told the committee that the SEC would reveal “within a few days” a timeline for the Commission’s consideration of the general solicitation rules under the JOBS Act, which the SEC announced this week would occur on August 22, 2012. The difficulty, according to Ms. Schapiro, is the requirement that the SEC implements rules to assure that issuers accept investments only from accredited investors who respond to an advertisement. “We want to create something that is workable and usable,” she said. The SEC scheduled the open meeting to consider the general solicitation rules for Wednesday, August 22, 2012 at 10:00 a.m., in the Auditorium, Room L-002.

Ms. Schapiro further assured the committee that the SEC intends to meeting the December 31, 2012 deadline under the JOBS Act to create rules for equity crowdfunding. The JOBS Act enables small businesses to offer up to $ 1 million in equity through crowdfunding, but the SEC first must implement rules before the launch of any equity crowdfunding offers.


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Washington, D.C. June 28, 2012. “Crowdfunding offers tremendous promise,” posted Doug Rand, Senior Policy Advisor in the White House Office of Science and Technology Policy. In a White House blog posting on June 28, 2012, Rand added that “Some believe that it has the potential to revitalize underserved communities by improving access to capital for small businesses.”

Official White House Photo by Pete Souza

One of the key features of the JOBS Act is to enable “crowdfunding” – letting companies raise up to $1 million in small increments from many investors. Rand’s comments restated the enthusism President Obama expressed when he signed the JOBS Act into law, calling it “a potential game changer”:

“Right now, you can only turn to a limited group of investors — including banks and wealthy individuals — to get funding,” the President said. “Laws that are nearly eight decades old make it impossible for others to invest. But a lot has changed in 80 years, and it’s time our laws did as well. Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors — namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”

In many ways, Rand said, nonprofits and social enterprises are already adept at raising money through crowdfunding – think of donation-based tools like Network for Good or zero-interest microfinance platforms like Kiva. What the JOBS Act will do is allow micro-investors to purchase a stake in the venture.

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House Committee on Oversight and Government Reform, June 28, 2012

Washington, D.C. (June 28, 2012) Mary Schapiro, Chair of the Securities and Exchange Commissiontestified today before a House subcommittee that the SEC expects to meet the December 31, 2012 to implement crowdfunding rules under the Jumpstart Our Business Startups Act. Ms. Shapiro testified before the House Committee on Oversight and Government Reform. The Committee held two hearings during the week of June 25, 2012 to examine the implementation of portions of the JOBS Act to ensure the proper elimination of government barriers to small business capital formation and growth.

The Jumpstart Our Business Startups Act (JOBS Act) became law on April 5, 2012 and requires the SEC to implement rules within 270 days to allow entrepreneurs to raise up to $ 1 million in equity from small investors through crowdfunding platforms. Regarding the deadline, Ms. Schapiro told the Committee,   “I don’t for see not meeting this deadline. The staff is working hard on it, there are lots of rule as you know, we are working already on the issue disclosure requirements which are fairly straightforward, but also the intermediary and funding portal requirements of the statutory provision. It’s challenging, but I don’t have reason to tell you that we wont meet that deadline.”

Ms. Schapiro testified that the SEC is retaining an additional 16 Ph.D. economist to help with the cost benefit analysis and crafting rules for crowdfunding, and that the Commission has benefited from more than 80 comments already submitted to the SEC and meeting with representatives from the industry.

SEC Chair Mary Schapiro testifies before House Committee on Oversight and Government Reform. Photo Courtesy of C-SPAN.

Ms. Schapiro also assured the Committee that the SEC intends to conduct a cost benefit analysis to provide workable rules that would not price out small issuances. ”Our goal is to create a workable exemption,” she said. “Our approach is going to be to follow the language of the statute, but to create exemptions that will make crowdfunding work.”

The JOBS Act authorizes the use of “funding portals” or “intermediaries” to facilitate crowdfunding investments. Ms. Schapiro testified that such intermediaries should help investor and entrepreneur confidence with the crowdfunding process. “My personal belief is that the requirements to use an intermediary can be enormously helpful here because they can routinize a lot of the things that the people might be concerned that they may need to have lawyers to do for them, or accountants to do for them,” she said.   It will give people some confidence that there is a regulated entity in this process somewhere. It also will make it much easier for entrepreneurs to navigate this exemption and its requirements.” When pressed by the Committee about concerns that the rules may price out small issuances, Ms. Schapiro replied “We will be very sensitive about costs.”

Ms. Schapiro also told the Committee that the SEC will not meet the July 4 deadline to implement rules for lifting the general solicitation ban under Section D.  Ms. Schaprio said the SEC is expected to reveal within the next two days a timeline for the commission’s consideration and implementation of rules to lift the general solicitation ban.  The difficulty, according to Ms. Schapiro, is the JOBS Acts requirement that the SEC implements rules to assure that issuers who make a general solicitation, such as through advertisements, verify that they are accepting investments only from accredited investors. “We want to create something that is workable and usable,” she said. The SEC Chair expects that general solicitation rules will be issued “this summer.”

“Entrepreneurs are waiting and we urge you to move forward with that,” urged Representative Patrick McHenry (R-North Carolina) at the hearing.

Article by A. Brian Dengler, Managing Board Member of Crowdfunding Professional Association.


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Washington, DC, June 26, 2012. Keep crowdfunding costs down and crowdfunding rules simple, a panel of experts testified today before the House Oversight and Government Reform Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs (Committee). The panel, composed of industry and academic experts, also declared that crowdfunding “can spark a revolution in small business funding.”  The Committee is holding two hearings during the week of June 25, 2012 to examine the implementation of portions of the JOBS Act to ensure the proper elimination of government barriers to small business capital formation and growth.

The Jumpstart Our Business Startups Act (JOBS Act) became law on April 5, 2012 and requires the SEC to implement rules within 270 days to allow entrepreneurs to raise up to $ 1 million in equity from small investors through crowdfunding platforms. Brian Cartwright, Scholar-in-Residence, Marshall School of Business, University of Southern California, and Former General Counsel and Commissioner of the US Securities and Exchange Commission (SEC), urged the panel that the SEC “needs to be encouraged to move with all deliberate speed,” adding “Jumpstarting jobs is too urgent to delay.”

Cartwright pointed out that public companies originally backed by venture funding make up 20% of the US’s current GDP.  Cartwright testified he is observing a disturbing trend where most start-ups ultimate funding are derived through acquisitions, rather than venture capital. “Acquisition, rather than grow companies, often cause decline in the number of jobs, because of efficiencies imposed through the acquisitions.” In additional written testimony submitted to the Committee, Cartright concluded “While my experience as the SEC’s general counsel has left me sensitive to the challenges facing the SEC in rulemaking, the priority assigned to a rulemaking project matters. I urge you to encourage the SEC to give these rulemakings high priority.”

Alon Hillel-Tuch of

Alon Hillel-Tuch, co-founder and CFO of, offered what he called “three areas of improvement” for the JOBS Act and any rules implemented by the SEC:

1.  Audited financial statements should not be required unless the issurer seeks to raise $ 1 million. The current threshold is $500,000. “Audited historical financial statements of these types of companies, which may have little or no operations, do not provide investors with more meaningful information as compared to unaudited financial statements, Hillel-Tuch testified, “yet they impose a significant cost on the entrepreneur.”

2.  Minimize up-front expenses to entrepreneurs and small businesses that seek to crowdfund. Hillel-Tuch suggested that one solution is that crowdfunding platforms and use the current models of charging fees only for successful projects.

3.  Raise the crowdfunding exemption from $1 million to $ 5 million.

C. Steven Bradford, Law Professor at the University of Nebraska, urged that the SEC regulations should be as “light-handed and unobtrusive as possible.” Professsor Bradford testified that the current JOBS Act imposes a fairly substantial disclosure cost on small businesses. “Additional regulation would significantly reduce the utility of the exemption and would be inconsistent with the intent of the JOBS Act – to reduce the regulatory burden on small business capital formation.” Regulations should be drafted in “plain english” that does not require a lawyer to interpret. “Otherwise,” Professor Bradford testified, “most of the offering proceeds will be eaten up the cost of complying with regulation.”

Professor Bradford further testified that the SEC should adopt a “Substantial Compliance” rule, to protect issuers and crowdfunding intermediaries against minor technical violations of the JOBS Act. “Given the complexity of the exemption’s requirements, inadvertent violations are likely, and the consequence of even a minor violation is drastic.” In written testimony, Professor Bradford gave as an example a situation in which a crowdfunding intermediary inadvertently allowed a single investor to participate without answer just one of the required questions about risk under the JOBS Act. “The issue would lose the exemption for the entire offering. If the issuer inadvertently sells an investor securities that exceed the cap for that investor by $1, the exemption would be lost for all of the sales, not just those of the purchaser.”  Professor Bradford testified that the SEC has blanket authority to “issue such rules as the Commission determines may be necessary or appropriate for the protection of investors to carry out sections 4(6) and . . . 4A” under the JOBS Act.

The Committee will hold a second hearing scheduled for 9:30 am on June 28, 2012. The Crowdfund Intermediary Regulatory Advocates (CFIRA) will hold a symposium in Washington, DC on July 13, 2012 to bring together lawmakers, regulators, and crowdfunding advocates. As the leading advocacy group for the crowdfunding industry, CFIRA invites these key constituents to come together and discuss the rules that will govern equity crowdfunding under the JOBS Act.

Article by A. Brian Dengler, Managing Board Member of the Crowdfunding Professional Association.

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David Drake of LDJ Capital and, continues today with his sixth article on his series regarding crowdfunding for equity solution.

Perhaps it was no surprise when Mary Schapiro, Chair of the Securities and Exchange Commission, told a House subcommittee that the Securities and Exchange Commission will not meet the July 4, 2012 deadline impose under the JOBS Act to implement rules for lifting the general solicitation ban under Regulation 506, Section D.

Courtesy Securities and Exchange Commission

Ms. Schapiro explained to the House Committee on Oversight and Government Reform on June 28, 2012 that the JOBS Act mandates that the SEC create rules that will require issuers to verify that they are accepting investments only from accredited investors who are responding to a general advertisement. Creating such rules are difficult and will require more time. “We want to create something that is workable and usable,” she said. The SEC Chair expects that general solicitation rules will be issued “this summer.”

Verifying investors

The SEC’s commitment to provide general solicitation rules this summer is encouraging and badly needed. Representative Patrick McHenry probably summed up the urgency for the rules the best by advising Ms. Schapiro: “Entrepreneurs are waiting and we urge you to move forward with that.”

As the SEC develops rules for general solicitations, issuers must understand that they will need to move cautiously if the plan to use general advertisement to solicit offerings. The JOBS Acts require that issuers verify that they are accepting investments only from accredited investors under the SEC Act. The SEC rules ultimately will determine what verification process is needed and whether any safe harbors are available. We suggest that issuers looking forward to make general solicitations stay apprised of developments as the SEC formulates its rules, so that issuers are prepared to move forward when the rules go public.


The Securities & Exchange Act in 1933 required that only accredited investors could be solicited for investments and non-accredited investors could not be unless they had an exemption through Reg A, Reg D, a Direct Public Offering or a registered security being traded on an exchange.

Under the 1933 Act, the accredited investor was considered someone who made $200,000 per year the previous 2 years and expected to make $200,000 the following year or a couple making $300,000.  Under a later amendment adopted in 1982, another criteria that would allow you to qualify as an accredited and sophisticated investor would be that you had a net worth of $1,000,000.

While the Dodd Frank Act was under consideration, the SEC pushed for a high net worth amount for an accredited investor. This was highly opposed and removed. What was accomplished out of the Dodd Frank Act was:

a) the equity of your primary home would not count towards your net worth.

b) Debt surpassing your equity would count against your net worth.

c) The equity in your summer / vacation / secondary home would count towards your net worth.

The Dodd Frank Act also prohibited the SEC from adjusting the net-worth threshold for a natural person for four years.

If you take inflation into consideration, the $200,000 per year salary in 1982 would be the equivalent of approximately $1,000,000 today, and the net worth requirement set in 1982 would represent a net worth of approximately $10,000,000 today. Wow, that would not leave many people to invest. Another argument would be that are only rich people entitled to invest in private and exciting deals? Are the select few that made money on Facebook the only ones to ‘give it’ to the less rich?

Granted, $200,000 makes you rich today but I was alluding to the rich just like their counter parts in 1933. Remember, the SEC 1933 & 1934 Act was created to protected the non-accredited investors from fleecing but also to assure that they did not leverage their home 99% and spend all their money on stocks that would not only be worthless but put them jobless and homeless. The 1929 crash that led to the great depression was extreme.

While the status quo remains for determining the financial threshold of an accredited investor, a fundamental change is approaching on solicitation. Currently, any issuer intending to rely on Rule 506 of Regulation D cannot engage in any general solicitation or advertising to attract investors. The Jumpstart Our Business Startups Act (JOBS Act) directs the SEC to remove this prohibition, which the SEC expects to implement during the summer of 2012.

History of the Non-Solicitation Rule

Here is a little history on the non-solicitation rule. Be reminded that there was no TV or internet in 1933. The ban on solicitation to non-accredited investors forced brokers and companies to only talk to ‘rich’ people for investments, that is, the accredited investors. The JOBS Act asked the SEC change the writing in 90 days – that is July 4th, 2012 – Independence day – at which point advertising online, via email to millions or on TV would allow you to advertise you wanted capital for your stock to the general public.

Note, you still could only take money from accredited investors but the monumental change is that you can freely advertise wildly. Yet again, you would lose your exemption status under Reg D 506 if you took one single non-accredited investor and they decided to sue you later for loss of capital — a rare occasion but a legal premises that may hold true. So, will this amendment be implemented by July 4th and we will see media go bananas with everyone with their mother advertising stocks of private companies you can buy?


No, the SEC will not allow such madness as they will implement a safe harbor to assure that the ‘accreditation” of an investor through this means is verifiable and not necessarily just self-monitored by the issuer.


 Feature Image (c) Crestock