SEC Quietly Injects Life Into Title III Crowdfunding Solicitation!

[As published on June 27, 2016 in Crowdfund Insider]

Reg CF Securities for Sale

When it comes to capital formation for SME’s through federal legislation, one can usually count on the North American Securities Administrators Association (NASAA) to do their best to block or narrow any new paths which Congress or the SEC may seek to create.  The JOBS Act and its implementation have been no exception to this rule.

Denied Red StampWe were reminded of this very recently, when the District of Columbia Court of Appeals denied NASAA’s challenge to the SEC’s Regulation A+ rules, which broadly preempted the authority of the states to regulate SEC reviewed Regulation A+ offerings, even where unaccredited and unsophisticated investors are involved.

So too with JOBS Act Title III crowdfunding. No sooner had the ink dried on Congressman Patrick McHenry’s “Fix Crowdfunding Act” introduced into the House of Representatives in March 2016, former NASAA President and current Chair of the NASAA’s Committee on Small Business Capital Formation, testified before the House Financial Services Committee, urging lawmakers to do nothing to fix Title III crowdfunding – at least not Patrick McHenry Work is not doneuntil there was more data to show how Title III was broken – and how it should be fixed. Even seemingly benign proposed fixes allowing an issuer to “test the waters” before formally conducting a Regulation CF offering were singled out by NASAA for deferral to some future, unspecified date. (My rebuttal to Mr. Beattyappears in an article published in Crowdfund Insider earlier this month).

Not surprisingly, this was the same Bill Beatty, who urged this same Committee, back in September 2012, to condone disregard by the SEC of rulemaking deadlines dictated by the then five months old JOBS Act and defer consideration of all post-JOBS Act legislative reforms, urging the that the SEC conduct no JOBS Act rulemaking activities until the SEC had promulgated more than 100 rules under the Dodd-Frank Act of 2011 – a multi-year task.

William BeattyIn Mr. Beatty’s words:

“Moreover, we note that many of the rulemakings required by the Dodd-Frank Act are long overdue. We have encouraged the SEC to prioritize its investor-protection rules ahead of the exemptions in the JOBS Act, and we urge Congress not to pressure the SEC to act hastily, especially where ill-considered changes could have a devastating impact on the delicate balance between investors and industry.”

And to give new meaning to the word “hubris”, Mr. Beatty’s formal 2012 remarks to this Congressional Committee were entitled:  “THE JOBS ACT: IMPORTANCE OF PROMPT IMPLEMENTATION FOR ENTREPRENEURS, CAPITAL FORMATION, AND JOB CREATION”. Well, I guess the word “prompt” is susceptible to varying interpretations? You, the crowd, can be the arbiter of this one.

So much for NASAA being a worthy advocate for entrepreneurs, capital formation or job creation, at least where federal legislation and rulemaking removes power from state securities administrators.

Well, despite the continuing protestations of NASAA, history may be repeating itself – albeit in unexpected ways. It seems that once again, as the Commission has done with Regulation A+, the SEC has found an elegant workaround for at least one of the problems that most people, until recently, have viewed as plaguing effective implementation of Title III crowdfunding – the perceived limited ability of a Title III issuer to conduct “off portal” solicitation and advertising during the course of its Regulation CF raise.

You see, with Title III investments being the riskiest class – and being peddled to the most unsophisticated and vulnerable class of investors – Congress provided robust investor protections, including, mandatory disclosures, “bad actor” checks, limitations on investment amounts, and limitations on off-portal advertising. And central to this protective scheme was the tenet that all Title III transactions were to be conducted on and through a statutory “gatekeeper”: an SEC and FINRA registered “intermediary,” either a broker-dealer or a registered “funding portal.”

kool aid 2Most of us, including yours truly, had drank the Kool-Aid, assuming that during a Regulation CF offering an issuer could conduct no off portal solicitation or advertising of its offering – with one very narrow exception – courtesy of SEC rulemaking: Rule 204, which though generally prohibiting an issuer from advertising the “terms of the offering,” allows an issuer to advertise the “terms of the offering” pursuant to a brief notice,” (dubbed by many a “tombstone ad”) containing no more than specified, very limited factual information about an issuer, including a “brief” description of the business and the “terms of the offering” (as defined in the Rule), coupled with a link to the intermediary hosting the raise.  So long as you follow this rule, to the letter, you may circulate this very limited information about your offering off portal – but no more. If you violate this rule – by mentioning a term of the offering, and including with it information outside the scope of Rule 204, you may have blown your exemption from registration under applicable securities laws.

But Then The Memo Came

CrowdCheck MemoI recently received a copy of a publicly available memorandum prepared by CrowdCheck this month, entitled: “Communications and publicity by issuers prior to a Regulation CF offering.”  It seems that CrowdCheck had recently engaged with the Staff at the SEC to flesh out the contours of what exactly an issuer could and could not do prior to and during a Regulation CF offering when it came to off portal communications.  Regarding pre-filing publicity, there is nothing new there from the perspective of a seasoned securities lawyer, a subject I covered in an article back in March.  But one of the conclusions that the memorandum reaches regarding issuer publicity during its Regulation CF offering is STUNNING!

Yes, an issuer conducting a Regulation CF offering is free to not only continue normal business promotional activities off portal, but also to advertise and generate interest in its offering off portal, with one important caveat: these materials may not mention any of the “terms of the offering” – as defined in SEC Rule 204. However, these materials may directly link to the issuer’s offering page on the licensed intermediary.

So, for example, an issuer who has filed its Form C with the SEC and its intermediary, it is free to wax eloquently (but truthfully), off portal, regarding its business and prospects – via social media, webinars, live events, etcetera, so long as it does not mention or refer to the “terms of the offering” – as defined by Rule 204.  Rule 204 defines “terms of the offering” as “the amount of securities offered, the nature of the securities, the price of the securities and the closing date of the offering period. So if you stay away from these areas, as an issuer you have fairly free reign to promote your company and your offering off portal.

Invest Now ButtonThis would allow an issuer, for example to tack onto its promotional materials an “Invest Now” button, or similar verbiage, linking to the host intermediary, so long as the material does not mention the type of securities offered or otherwise contain a “term of the offering.” However, if your Invest Now button says “Invest Now in our Common Stock” or “Invest Now before the offering closes on July 31, 2016,” you will likely have violated Regulation CF since you have included a “term of the offering” with information going beyond the type of information permitted in a Rule 204 notice.

Compliance can be a bit tricky for the lay person, but for the well-counseled issuer, there is a great deal of utility in what one (myself included) might characterize as an unintended “loophole” in Title III – at least when it comes to generating public awareness in your company and your offering through social media and the internet outside the confines of a single intermediary.

So how, exactly, did this “loophole” come about?

It seems that the JOBS Act only requires that specified crowdfunding “transactions” take place on a licensed intermediary. But Title III is silent on the ability of an issuer to engage in general solicitation and advertising off portal, with one narrow exception. Title III, does in fact, restrict advertising by an issuer of its Title III offering. But the statutory ban on advertising only extends to advertising the “terms of the offering.” Anything else is good to go under Title III unless the SEC promulgates additional restrictions through the rulemaking process – which it certainly has the discretion to do – but seemingly has not.

A close look at the final SEC Title III rules confirms that there are no additional restrictions by an issuer on off portal advertising or offering activity. In fact, by reason of the SEC narrowly defining “terms of the offering” in Rule 204, all else is fair game off portal for an issuer’s offering and PR activity during the Regulation CF raise.

SEC Securities and Exchange CommissionFrankly, from my perspective, this was too important an issue to rely solely upon the CrowdCheck memo, or even my own “legal” analysis. Surely I must be missing something in my analysis. So last week I hopped on the Amtrak train from NYC to DC to say hi to the Staff at the SEC – coupled with a simple request: to point out the flaws in my analysis as to the permissible scope of off-portal offering activities under Regulation CF.  Well, it seems that there weren’t any holes in my simple, stupid statutory and regulatory analysis.

As I headed back to NYC, I couldn’t help but ponder how this could have happened. After all, wasn’t Title III, as “butchered” by NASAA and other lobbyists in the Senate before being passed into law, touted as an offering activity neatly compartmentalized and confined to the Title III licensed registered intermediary? And surely, this statutory “loophole” could not have gone unnoticed by the Commission and the Staff during the rulemaking process – though seemingly unnoticed by virtually all other market participants.

Yes, this in my opinion is the same type of elegant (and lawful) creativity which the Commission and the Staff exhibited in proposing and implementing Regulation A+ – in the interest of making the JOBS Act mandate work as well as possible in practice – pre-empting the authority of the states to regulate Regulation A+ offerings to accredited and unaccredited investors alike.

Lessons to be Learned

Legislative sausage making often results in legislation with unintended or unforeseen consequences. Sometimes trapped in the sausage casing are microscopic pockets of air – which go unnoticed in the legislative process – only to surface months or years later.  Well, it seems that once again the SEC found some oxygen for Title III crowdfunding in one of these “pockets” – as it did in Regulation A+ rulemaking – a pocket not clearly evident from the text of the legislation – or even from a close read of the final Regulation Crowdfunding rules themselves.

NASAA Top Investor ThreatsSo perhaps the time has come for NASAA to rethink some of its PR strategy, in particular the constant, familiar harangue by NASAA and some state securities administrators during the Regulation A+ rulemaking process – that after all, the state securities administrators know better than the SEC when it comes to reviewing offerings in their state. Perhaps, just perhaps .  .  . There might be some backlash when you repeatedly tell Congress, the public and the SEC that you know better than the SEC – and even members of Congress – especially when you are on the wrong side of an issue – and are standing in the way of the inevitable changes for the better that are taking place in our financial markets, big and small.

Sara Hanks 2016To be clear, these are my views, and my views alone. They do not necessarily reflect the view of anyone else, including CrowdCheck or the SEC. And they should not be construed as legal advice. Nonetheless, we all owe a debt of gratitude to the folks at the SEC for their hard work on Title III – and to Sara Hanks/CrowdCheck for ferreting out one of the best-kept secrets thus far in Title III crowdfunding.

Having said that, it seems that Title III issuers now have a new tool in their arsenal to draw attention to both their company and their offering off portal, in a meaningful way, during their Regulation CF offering without running afoul of securities laws.

Posted in Capital Raising, Corporate Law, Crowdfunding, General, SEC Developments | Leave a comment

An A+ Day for SEC Regulation A+ – A Victory in Court for Small Business!

Today was an important day for small and emerging companies. On this day the US Court of Appeals for the DC Circuit dismissed the challenge by NASAA and others to set aside the SEC’s rulemaking under Title IV of the Jumpstart Our Business Startups Act (the JOBS Act).

Regulation A, as modified by Title IV of the JOBS Act, was a critical step by both Congress and the SEC in making the public markets available to small and emerging businesses – at an affordable cost and without the burden and uncertainty of a state by state review of the offering.

No longer does a company have to spend millions of dollars for its IPO. Nor does a company face the prospect of having its offering banned in states who view the offering as too risky. Such was the fate of Apple Computer’s IPO back in 1980, both in Massachusetts and elsewhere. In the view of the state regulators, Apple’s stock was overvalued. State regulators are still blushing today over that now infamous call.

Regulation A+ (as it is informally known as) provides a useful, cost-effective path for companies to both become public, and remain public, with a simple offering qualification process at the SEC and much lighter ongoing reporting costs, when compared to fully reporting companies.

And after one year in operation, Regulation A+ has fulfilled expectations. The SEC qualification process has worked well in operation, with offerings clearing the review process in less than 60 days, and with a lighter touch review from the SEC than is typical in a full Form S-1 registration. My own personal experience with these new filings bears this out – an initial comment letter from the SEC barely over two pages – something unheard of in a full SEC registration.

So Regulation A+ is an important and valuable option for small and emerging companies to consider if they are looking to provide liquidity for their shareholders and the heightened profile that goes with being a publicly reporting, and trading, company.

For any of you who would like to learn more about Regulation A+, and other new capital raising options now available since the passage of the JOBS Act, feel free to contact me directly via email at sguzik@guziklaw.com.

Posted in Capital Raising, Corporate Law, Crowdfunding, General, Regulation A+ Resource Center, SEC Developments | Leave a comment

JOBS Act Crowdfunding Begins on May 16, 2016: Don’t Get Busted for Solicitation!

 

Solicitation from Wikipedia by Kay Chernush for the U.S. State Department

 

It’s been five months or so since the SEC published its long awaited investment crowdfunding rules.  Though Congress dictated that this task be completed by the end of 2012, the SEC missed the mark by nearly three years.  Now, with rules in hand, and an anticipated launch date of May 16, 2016, the time is ripe to assess where are we are headed in the brave new world of equity crowdfunding.

Some Preliminary Observations

Mary Jo WhiteGiven the magnitude of the task handed to the SEC, balancing the need to protect the most vulnerable group of investors in the riskiest area of investment, and the confines presented by Title III of the JOBS Act, the SEC did a pretty good job of listening to commenters and critics alike.  Though the proposed rules were in many respects “sinful”, in most areas the Commission seemed to have struck the proper balance between investor protection, critical to establishing and maintaining the integrity of this new marketplace, and the need for the smallest, albeit riskiest, ventures to raise relatively small amounts of capital in a right-sized environment, in terms of both financial cost and complexity.

Audited Financial StatementsThough Congress left it to the SEC to decide if and when audited financial statements would not be required for raises over $500,000, something it was unwilling to do in its proposed rules, the SEC abandoned the requirement for audited financial statements in the final rules for first time crowdfunding companies.  Except for the American Institute of Certified Public Accountants, this was a no brainer for most commenters – requiring audited financial startups added little incremental protection to investors and was a cost that most startups could simply not tolerate.

Non-Financial Disclosure The SEC had very little leeway in dictating the type of non-financial disclosure required by a crowdfunding company – as the JOBS Act had explicit disclosure requirements.  However, the SEC in the final rules heeded the call of two lonely commenters (yours truly and the SBA Office of Advocacy), who pleaded with the SEC to provide an alternate, more simplified Question and Answer disclosure format.  This was not a novel idea. Indeed, this was one of the top recommendations of participants in the SEC’s 2012 Annual Government-Small Business Forum.  Only this time, this “recommendation” was couched in terms of the obligation of the Commission to consider some type of simplified “form” disclosure under a federal statute intended to reduce burdensome requirements on small businesses in the federal rulemaking process – The Regulatory Flexibility Act of 1980.  No wonder that this change in the final rules was one of two changes mentioned by Chair White in her opening remarks when the Commission considered and adopted the Title III Final Rules on October 30, 2015.

Compensation of Intermediaries – In the final rules the SEC backed off somewhat from its position in the proposed rules that no intermediary (portal), not even a licensed broker-dealer, could accept equity compensation. Under the final rules an intermediary can accept equity compensation, with two provisos: it must be the same type of equity as is received by the crowd, and the equity can only be given as compensation for the intermediary’s services.  This was not a trivial issue. Absent equity compensation, in most instances broker-dealers would look to another form of financing which allowed equity compensation.  For a funding portal, whose activities are limited to Title III crowdfunding raises, the inability to receivechampagneequity compensation could be the difference between the portal turning a profit in the long term – or not. And for the crowdfunding company, the ability to pay some of the crowdfunding costs with equity instead of cash would be a useful option.  Having said that, by limiting equity compensation to the same type of equity offered to investors, not required by the JOBS Act, this limited the economic value of equity compensation to an intermediary.  And for a broker-dealer, this limitation makes Title III crowdfunding less attractive to it than other types of financings which do not contain these limitations – the most prominent being unregistered offerings limited to accredited investors allowed under Title II of the JOBS Act since 2013.

However, in my view it is too soon to be popping the champagne corks on the May 16 launch date. Many of the legislative proscriptions in the JOBS Act will make Title III crowdfunding a non-starter for most startups thirsty for capital.  Apart from the relative cost and complexity of raising money through JOBS Act crowdfunding, Congress, in its wisdom, essentially took the crowd out of crowdfunding. How?

Title III crowdfunding is simply not your daughter’s Kickstarter campaign. 

You see, under the JOBS Act crowdfunding companies are prohibited from engaging in advertising their offering, except under limited circumstances. Let’s take a closer look.

Entrance No SolicitingOf course, an issuer can promote their offering on an SEC and FINRA licensed portal. But not so fast. You cannot even begin your campaign on a licensed portal unless and until you file your offering materials with the SEC and make them available on the portal.  So is this a big deal? If tried and true principles of rewards based crowdfunding carry over to equity crowdfunding, which I expect they will, a key metric to a successful Kickstarter campaign is how much traction your campaign generates on the opening days of a campaign.  If you cannot generate interest in the offering among friends, family and fans before your campaign officially begin, the odds of a successful campaign plummet.  And if you go out and spread the word before your campaign officially commences you will likely find yourself engaged in “general solicitation” of the offering, something that in most cases will invalidate the Title III crowdfunding exemption – a serious matter if the issuer and its principals are not prepared to refund backers’ money down the road (what the SEC calls an investor’s right of rescission).

Well, at least you can widely promote your company and its products, without mentioning its securities, before the commencement of the equity crowdfunding campaign. Right? Not necessarily. You see, according to the SEC (and buried in the SEC’s 685 page final rules release) is a cautionary statement. If you go out and start promoting your company and its products right before you start your Title III campaign, you may have already blown the Regulation Crowdfunding exemption before you even start – by engaging in general solicitation (advertising).  If this sounds complicated – well, it is.

So How About Equity Crowdfunding under my State’s Law?

If you want to advertise your state crowdfunding raise under a crowdfunding exemption in your home state – now a possibility in a majority of states – think again. Most states which have enacted local crowdfunding legislation did so under a federal exemption, the intrastate offering exemption.  A key requirement of the federal exemption, which states must follow, is the requirement that no offers or sales of securities be made to residents outside the state. And according to the Staff at the SEC, in two published rulings back in 2014 (and much to my chagrin), an issuer cannot use the Internet or other means of general solicitation or advertising in an intrastate offering. Period. Full Stop.

See No Evil Have No FunThe bottom line? Most equity crowdfunding raises cannot effectively use the Internet or social media to promote their equity crowdfunding raise. Imagine: crowdfunding, Si –  But Internet solicitation – well .   .   .

So unless you wanted to get busted by a regulator for “solicitation”, or be at risk of having to refund your investors’ money, you may want to carefully review your other fundraising options before diving into a Title III campaign, or even a local equity campaign. And yes, there are many good options, courtesy of the JOBS Act.

Title II crowdfunding is one option which has no restrictions on solicitation, but all of your investors must be “accredited” – as in rich.  And then there is Title IV of the JOBS Act, dubbed Regulation A+.  Again, you can solicit to your heart’s content, even before you make any expensive filings with the SEC.  But Regulation A+ will not be a good fit for most startups, simply because in most cases it requires a company to provide a detailed disclosure document with audited financials, all of which must be reviewed and approved by the SEC before a company can begin accepting investor money – not to mention the ongoing public reports which a Regulation A+ must file with the SEC at least twice each year.

QuestionAnd if all else fails, there is the tried, true and relatively unregulated rewards based crowdfunding world. But, unfortunately, no profits can be left on the table for your loyal backers – something that the Oculus backers learned the hard way not too long ago – sold for a cool $2 Billion after running a successful rewards based campaign.

So What is the Solution to this Conundrum for Startups Who Need (and Deserve) Better Options?

Solutions are in the works in our Nation’s Capitol, both at the SEC and in Congress – much of which is behind closed doors. For a peak at what is hopefully around the corner for equity crowdfunders looking to raise money from the great unwashed masses – with a piece of the company thrown in – stay tuned for my next article; Part II – coming to you, of course, on Crowdfund Insider.

Author’s Note: For two other articles I wrote on this subject, addressing the risks of engaging in “off portal” publicity activities, and legislative solutions in the works, see http://corporatesecuritieslawyerblog.com/?p=707 and http://www.crowdfundinsider.com/2016/04/84175-busted-for-crowdfunding-its-rehab-time-on-capitol-hill-this-week/ 


 

Samuel S. GuzikSamuel S. Guzik, a Senior Contributor to Crowdfund Insider,  is a corporate and securities attorney and business advisor with the law firm of Guzik & Associates, with more than 30 years of experience in private practice.  Guzik is also former President and Board Chair of the Crowdfunding Professional Association (CFPA). A nationally recognized authority on the JOBS Act, including Regulation D private placements, investment crowdfunding and Regulation A+, he is and an advisor to legislators, researchers and private businesses, including crowdfunding issuers, service providers and platforms, on matters relating to the JOBS Act. As an advocate for small and medium sized business he has engaged with major stakeholders in the ongoing post-JOBS Act reform, including legislators, industry advocates and federal and state securities regulators. In 2014, some of his speaking engagements have included leading a Crowdfunding Roundtable in Washington, DC sponsored by the U.S. Small Business Administration Office of Advocacy, a panelist at the MIT Sloan School of Business 2014 Crowdfunding Roundtable, and a panelist at a national bar association event which included private practitioners, investor advocates and officials of NASAA. His articles on JOBS Act issues, including two published in the Harvard Law School Forum on Corporate Governance and Financial Regulation, have also served as a basis for post-JOBS Act proposed legislation.

Posted in Capital Raising, Corporate Law, Crowdfunding, General, Regulation A+ Resource Center, SEC Developments, Uncategorized | Leave a comment

JOBS Act Title III Crowdfunding – A Trap for the Unwary?

A few weeks ago I wrote an article discussing one of the potential pitfalls – and weaknesses – in the SEC’s new Regulation CF, which became effective May 16, 2016, which allows private companies to raise up to $1 million on an SEC registered internet portal.  Though equity crowdfunding was inspired by rewards based platforms, such as Kickstarter, the structure that emerged for equity crowdfunding, Title III of the JOBS Act of 2012, was quite different.

In particular, due to intricate SEC rules and doctrines followed for decades, most often in registered public offerings, the ability of a company (the issuer) to generate public interest in its offering before the required filings are made with the SEC is limited, if not entirely precluded. And one of the principal tenets of Title III crowdfunding was that the issuer would not be permitted to engage in any solicitation activity during the crowdfunding campaign except on an SEC and FINRA registered crowdfunding portal.  Though the SEC created a limited exception for Title III crowdfunding, allowing issuers to publicly circulate notices regarding the offering, the contents of the notice are severely restricted, essentially to a brief description of the business and the terms of the offering.

So essentially there are two problems. The first, Title III issuers will be limited in their ability to publicize their offering during the offering campaign itself, and will effectively have  no ability to call public attention to an upcoming offering outside of the particular crowdfunding portal.

And there is a second problem, issuers inadvertently engaging in prohibited solicitation activities. The consequences of this can be draconian to an issuer which inadvertently engages in prohibited advertising or solicitation: investors will have the right to get their investment back, from the issuing company and their “control persons” (management).

We are already seeing the second concern playing out – very visibly – in the national media. In particular, at least two live crowdfunding campaigns have been featured in interviews with the CEO in national news publications – while the crowdfunding campaign is live. In SEC/legal parlance, this is a big “no-no.” An excellent article in this regard, from a non-lawyer perspective, was published this week in Forbes magazine. It is a cautionary tale for would be equity crowdfunders to consider before they embark on an equity crowdfunding offering.

So once again, forewarned is forearmed.

For those of you who wish to have more information on what is permitted, and what is not, under the SEC’s crowdfunding rules, I suggest you read my article published last month in CrowdfundInsider.

And for those companies which hope to benefit from fully leveraging the crowd through the internet and social media, and do not wish to be limited to raising $1 million, they ought to weigh their options under Title II of the JOBS Act (restricted to accredited investors) and no limit on the amount of money that can be raised, or Title IV, a/k/a Regulation A+ (a “mini-IPO”) allowing raises up to $50 million.

Posted in Capital Raising, Corporate Law, Crowdfunding, General, Regulation A+ Resource Center, SEC Developments | Leave a comment

House of Representatives to SEC: Time to Lift Our Entrepreneurs Off the Floor!

Originally Published on Crowdfund Insider on February 1, 2016 -

And as Tweeted by Mark Cuban to his 4.5 Million Twitter Followers on February 2

]

House Debate on HR 2187 and HR 4168

For those of you who have followed my articles on Crowdfund Insider over the past two years, you know that I have not been shy about voicing my concerns over the foot dragging that too often has often characterized the attitude of the Securities and Exchange Commission (SEC) toward the capital formation needs of small and emerging businesses.

A sampling of some of my articles have included a call back in February 2014 for an independent office at the SEC, whose sole function would be to advocate for the interests of small business – the first time that the proposal for an independent advocate for small business at the SEC was floated publicly. And in August 2014, I bemoaned the failure of the SEC to act on the recommendations made by the participants in the SEC’s Annual Government-Small Business Forum on Capital Formation, an Forum on Small Business Capital Formation Final Report 2012annual gathering of market participants considering regulatory changes needed to facilitate access to capital for small and emerging businesses. I had compared the Forum to Ground Hog Day, in view of the “same old same old” which traditionally characterized this annual, Congressionally mandated event, with the SEC routinely ignoring or delaying implementation of much needed regulatory reforms espoused by some of this country’s best and brightest entrepreneurs and securities professionals.

And I was not the only one to publicly call for an advocate at the SEC, or more responsiveness by the Commission to the perennial recommendations of the Annual Small Business Forum.  The need for these reforms was also echoed by former SEC Commissioner Daniel M. Gallagher in two public speeches – in September 2014 and November 2014.

Daniel Gallagher Dont Be Bullied 2To be sure, there are a number of statutes on the books which focus on the needs of our SME’s, most recently the Jumpstart Our Business Startups Act of 2012- which have been dutifully implemented by the SEC.  But as Congress is aware, even the very significant changes in our securities laws created by the JOBS Act, adopted with broad bi-partisan support, were not the result of innovative ideas of federal regulators. Rather, these reforms have been widely viewed as a by-product of regulatory inertia by the SEC which had gone on for all too long.  And judging by the number of recommendations made year in and year out by market participants at the SEC’s Annual Government Small Business Forum, the large majority of these Small Business Forum recommendations have routinely been ignored by the Commission. So there is plenty left to be done in Washington by way of regulatory reform in the securities markets for SME’s – if only the SEC had the political will to do so.

In the words of one noted commentator:

“.   .   . the SEC has refused to adopt reforms to ease the difficulties that small and growing companies face in obtaining financing. Many of these reforms, such as lifting constraints on entrepreneurs’ communications with potential investors, are well within the SEC’s authority. Despite studying small business capital formation for years, the SEC never seems to be able to bring itself to make meaningful changes in response to all that research.”

Hester PeirceInterestingly, these words were first published on the eve of the passage of the JOBS Act, in March 2012.  But perhaps more interesting is the author of these words: Hester Peirce, a former SEC Staffer, a member of the SEC’s Investor Advisory Committee, and the Republicannominee to fill the SEC Commissionvacancy resulting from the departure of Daniel M. Gallagher in October 2015.  Pulling no punches, Ms. Peirce bemoaned the “stubbornness” and “inaction” of the SEC in the face of “oppressive” regulatory barriers for capital formation.

Well, judging by the activity on the Floor of the House of Representatives on February 1, 2016, our Congress is sick and tired of doing all of the heavy lifting when it comes to breaking down unnecessary regulatory barriers to capital formation by our SME’s.   Specifically, two legislative bills came to a vote on the Floor of the House, both passing by an overwhelming bi-partisan majority, and each calculated to further energize the Commission to focus its resources on the needs of SME’s: H.R. 3784 (unanimously, by voice vote) and H.R. 4168 (390-1).

HR 3784 – SEC Small Business Advocate Act of 2016

According to the Republican Bill summary,

“H.R. 3784 would establish the Office for Small Business Capital Formation (Office) and the Small Business Capital Formation Advisory Committee (Committee) within the Securities and Exchange Commission (SEC) to help small businesses resolve problems with the SEC; analyze the potential impact of proposed rules and regulations that are likely to have a significant effect on small businesses; and conduct outreach to small businesses in order to solicit views on relevant capital formation issues. The bill also requires the newly established Office and Committee to submit certain reports to Congress.”

And according to the House Financial Services Committee, which reported the Bill out by a 56-0 vote in December 2015:

“Although the SEC’s budget is now almost four times the size it was in 2000, the SEC has given short shrift to the capital formation component of its statutory mandate – to the detriment of entrepreneurs and start-up ventures.   A permanent office dedicated to small business capital formation within the SEC is a logical outcome of the JOBS Act since the SEC has taken little to no action to advance the many recommendations the agency has received from its annual Government-Business Forum on Small Business Capital Formation (Forum) to help small businesses and EGCs access the capital markets.”

Mary Jo White SEC October 30 2015In other words – time is money – and without money for entrepreneurs and growing businesses, job creation and economic growth are stymied. The SEC has taken too much time, and for too long, to adequately address the capital needs of entrepreneurs – and all this is coming at the expense of this country’s biggest job creators and would be job creatures – small business.

Though the SEC currently has an Office of Small Business Policy (OSBP), its authority and power are severely limited. Unlike the OSBP, which reports to the Director of the SEC Division of Corporation Finance, the Chief of the Office of Small Business Advocate would report directly to all five SEC Commissioners.  And the Bill provides a statutory mandate for this new office to report directly to both houses of Congress on an annual basis.

The Bill would also make permanent a Small Business Capital Formation Advisory Committee, to be placed under the direction of the Office of Small Business Advocate.  Though the SEC does currently have a small business advisory committee, this committee reports only to the SEC Chair and the committee serves at the pleasure of the SEC Chair.

HR 4168 – Small Business Capital Formation Act

This Bill is calculated to change the character of the SEC’s Annual Small Business Forum on Capital Formation from an event more akin to Ground Hog Day to one that requires the SEC to be more responsive to the recommendations made by the participants in this annual gathering.  Currently, the GroundhogSEC is not obligated to respond to the Forum’s recommendations and findings. And the Commission’s track record in responding to these recommendations has been the subject of widespread criticism. H.R. 4168 requires the SEC to assess each recommendation presented at the Forum and disclose any action it plans to take with respect to such recommendations.

While this Bill is certainly no guarantee that the Forum recommendations will be acted upon, the obligation of the Commission to respond publicly to each of the recommendations will create a visible benchmark for further Congressional action if the SEC fails to act appropriately on meritorious proposals.

Some Closing Thoughts

Washington DC Capitol BuildingWhile both of these Bills still have a way to go before they become the law of the land, both are widely expected to have broad bi-partisan support in the Senate, especially in an election year – where job creation and the economy are major vote influencers.  According to reliable sources, a companion bill to H.R. 3784 is already being drafted in the Senate, with its sister bill, H.R. 4168, also expected to find a clone on the Senate side of Capitol Hill.

Of course, though the implementation of these bills provide no guarantees, they are certainly important steps in the right direction:  A dedicated advocacy voice for small business at the SEC, and some measure of accountability in addressing the concerns of SME capital market participants.

But one thing is certain. February 2, 2016, is Ground Hog Day, and you can be sure that when that infamous critter, Punxsutawney Phil, surfaces from his burrow he will be grinning ear to ear, knowing that soon there will only be one Ground Hog Day – in Punxsutawney, Pennsylvania.


Samuel S. GuzikSamuel S. Guzik, a Senior Contributor to Crowdfund Insider,  is a corporate and securities attorney and business advisor with the law firm of Guzik & Associates, with more than 30 years of experience in private practice.  Guzik is also former President and Board Chair of the Crowdfunding Professional Association (CFPA). A nationally recognized authority on the JOBS Act, including Regulation D private placements, investment crowdfunding and Regulation A+, he is and an advisor to legislators, researchers and private businesses, including crowdfunding issuers, service providers and platforms, on matters relating to the JOBS Act. As an advocate for small and medium sized business he has engaged with major stakeholders in the ongoing post-JOBS Act reform, including legislators, industry advocates and federal and state securities regulators. In 2014, some of his speaking engagements have included leading a Crowdfunding Roundtable in Washington, DC sponsored by the U.S. Small Business Administration Office of Advocacy, a panelist at the MIT Sloan School of Business 2014 Crowdfunding Roundtable, and a panelist at a national bar association event which included private practitioners, investor advocates and officials of NASAA. His articles on JOBS Act issues, including two published in the Harvard Law School Forum on Corporate Governance and Financial Regulation, have also served as a basis for post-JOBS Act proposed legislation.

Posted in Business Formation, Capital Raising, Corporate Governance, Corporate Law, Crowdfunding, General, SEC Developments | Leave a comment

Forbes.com Regulation A+ Interview of Sam Guzik Ranks in YouTube 2015 Top Five Interviews

2015 was a busy year for me, with SEC final rulemaking completed for Regulation A+ and JOBS Act Title III crowdfunding. In addition to more than a dozen speaking engagements around the country I had the opportunity to participate in a number of Webinars and interviews, including two interviews on Forbes.com, one with Chance Barnett on Forbes.com on the SEC’s final JOBS Act Title III final crowdfunding rules, receiving more than 38,000 views, and another with journalist Devin Thorpe, addressing Regulation A+.

I was pleased to learn yesterday that my interview with Devin Thorpe, in addition to receiving more than 5,000 views on Forbes.com, ranked number 3 in his top 5 YouTube interviews of 2015, out of 149 of his “Changemaker” interviews, edging out best selling New York Times author Tony Robbins in the number four slot.

Some of the other web-based interviews I have participated in during 2015 include a CBS Podcast on Regulation A+ with Jay Abraham, and a Regulation A+ Webinar with Congressman David Schweikert, the legislative sponsor of Regulation A+.  All of these Internet resources are available to the public free of charge.

Posted in Capital Raising, Corporate Law, Crowdfunding, General, Regulation A+ Resource Center, SEC Developments | Leave a comment

Small Business in Washington, DC: Could Santa be Coming to Town this Year?

 

Merry Christmas to the SEC

December 2, 2015, seemed no different than any other day in Washington, D.C. With a light rain falling, it was a rather dismal day for sightseeing in our Nation’s Capitol – yet the sun seemed to be shining for our small and emerging businesses in the Halls of Congress.

You see, after months of bi-partisan jockeying and wrangling in Congress, and the aroma of 2016 elections not too far off in the distant future, it was finally time for both political parties to get down to business – small business, that is – the job creators and the engine of our economy. It was time for the Capital Markets Subcommittee of the House Financial Services Committee to hold hearings on five bills, grouped under the heading: “Legislative Proposals to Improve the U.S. Capital Markets.”

Carolyn Maloney 2Two of the bills in particular caught my eye, simply because I had written extensively as to the need for action in these areas, either by the SEC or byCongress.  The first bill, entitled “SEC Small Business Advocate Act, HR 3784, would create a new independent office of small business advocate at the SEC, intended to protect the interests of small and emerging businesses and their investors, reporting both to the Commission and to Congress. Originally introduced in October 2015 with the bi-partisan sponsorship of four Representatives, by the time these December 2 hearings had commenced it had picked up at least one additional co-sponsor, Representative Carolyn Maloney, the ranking Democrat on this Committee. In her words, HR 3784 was nothing more than “common sense.” It had the support at these hearings in the form of testimony from the U.S. Chamber of Commerce, the Biotech Industry Organization (BIO), and the Small Business Investor Alliance.  To me, this was the plain vanilla ice cream that went so well with Mom and Apple Pie.

So Who Might Oppose HR 3784 You Ask?

Horse in New York CityWell, as one who is a lawyer by training, there are at least three sides to be argued to every coin. The proposed SEC Office of Small Business Advocate was to be no exception. So along cameJoseph V. Carcello to step up to bat at the hearing in opposition to HR 3784.  By some measures his credentials were impressive, indeed with enough acronyms in the titles following his name to choke a horse (Ph.D., CPA, CGMA, CMA – well you get the picture). In Dr. Carcello’s words:

“I have served as a professor at the University of Tennessee for over 20 years, where I teach accounting, auditing, and corporate governance. In addition to my teaching and research, my remarks are informed by my service on the Securities and Exchange Commission’s Investor Advisory Committee, an outside advisory group to the Commission which was statutorily created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the DoddFrank Act), and the PCAOB’s Investor Advisory Group, which is an outside advisory group to the PCAOB.”

Joseph CarcelloLacking from his resume, it seems, was any experience whatsoever outside of academia – outside, of course, the SEC’s Investor Advisory Committee and the PCAOB’s Investor Advisory Group. Perhaps it was  this missing business experience which best explained the testimony he was about to present.

Dr. Carcello had two noteworthy observations. First, he informed the Committee, a need for this new SEC office needs to first be documented:

“The Congressional record needs to clearly document the inability of small businesses to seek effective redress of problems through Congress and the SEC, and further indicate why the existing institutional mechanisms – the SEC’s Office of Small Business Policy, the SEC Government-Business Forum on Small Business Capital Formation, and the SEC’s Advisory Committee on Small and Emerging Companies — are not adequate to address any problems that might exist.”

Yet as an academic he himself had nothing to add to the Congressional record, good, bad or indifferent. OK, so far, no harm -no foul?

Dr. Carcello’s second noteworthy observation on the bill: it would create what he called a “quasi-lobbying” organization. In his words:

“Creating a quasi-lobbying group to seek a more favorable regulatory climate for small businesses may succeed in reducing the cost of regulation, but at the potential cost of greater information risk to investors – less transparent disclosures, a higher incidence of non-GAAP reporting as evidenced through restatements and, in the extreme, a higher incidence of financial fraud.”

Representative Carney very elegantly disposed of this witness, pointing out to Dr. Carcello that “pejorative” labels, as in his referring to an Office of Small Business Advocate as a “quasi-lobbying” organization, were counterproductive to formulating a bi-partisan (as in non-partisan) dialogue to formulate constructive solutions for what may ail our capital markets. There was no further testimony from that witness on the bill.  By my estimation Dr. Carcello turned out to be the best witness in support of HR 3784.

The Small Business Capital Formation Enhancement Act

Representative Bruce PoliquinThe other bill on the Hearing Agenda on December 2 which caught my eye was a bill introduced by Representative Poliquin (D-ME), in draft form.  This draft bill encapsulated the simplest of requirements in the simplest of terms. Back in 1980 Congress passed a law requiring the SEC to hold an annual forum bringing together both government and small business constituents to discuss and propose initiatives to enhance capital formation for small businesses.  However, as many, including myself have observed, the annual Forum has proven in large part to be a ritual devoid of meaning. History has shown that the recommendations of the Forum participants have been ignored by the Commission. The only saving grace of the Forum, it seems, has been that ultimately, years later some of these recommendations have been taken up by Congress in spite of the inaction of the SEC.  The JOBS Act of 2012 is perhaps one of the best examples of the quality of some of the Forum recommendations that laid dormant with the Commission – only to be acted upon years later by Congress.

HR 4168 Small Business ActHence, the proposed “Small Business Capital Formation Enhancement Act,” which would simply require the Commission, following the conclusion of each Annual Forum, to assess the findings and recommendations of the Forum and disclose the action, if any, the Commission intends to take with respect to such findings or recommendations.

Once again, Dr. Carcello, the only hearing witness who was called to testify in opposition to this draft bill, instead seemed to make the case for the need for this proposed legislation. In Dr. Carcello’s view:

“.   .   .  any individual participant at the Small Business Forum on Capital Investment [sic] can make a recommendation, resulting in the SEC receiving an excessive number of recommendations, some of which may be ill-formed and possibly not within the SEC’s purview. Requiring the SEC to respond to every recommendation is inefficient and a poor use of taxpayer resources, particularly given the chronic underfunding of the agency.”

Ground Hog Small Business Forum SECFor starters, it seems that Dr. Carcello didn’t even bother to read the bill he was testifying about. It requires the Commission to respond to findings and recommendations of the Forum – not to every Tom, Dick or Harry that attends the Forum and opens his or her mouth.  And as to wasting taxpayer money, an annual gathering of hundreds of the best and the brightest at this Annual Forum, whose recommendations are ignored, is in and of itself a waste of taxpayer dollars – and much more.

To sum up some of the remarks at the Hearing by the bill’s Sponsor, Representative Poliquin, we assemble all of this talent to focus on how to better foster the growth of small business and our economy, so we ought to listen. After all, he pointed out, some of the recommendations have ultimately wound up as important, bi-partisan legislation, such as the JOBS Act. So it seemed to this Congressman that if a Forum proposal were to be rejected by the Commission, one ought to know why.

Sounded a lot like a letter I sent to the SEC on July 28, 2014, republished onCrowdfund Insider a few days later, stating in part:

“Given both the importance of capital formation for small business, the role of the SEC in facilitating capital formation, and the time, energy and resources expended by the Forum participants, perhaps it is time for the Commission to consider some element of “follow-up”, and accountability, by the Commission .   .   .”

Christmas in Washington DC Capitol

A Bi-Partisan Holiday Gift for SME’s – Courtesy of Congress?

Well, I never did receive a response from the SEC to my July 28, 2014 letter.  I expect Congressman Poliquin will have better luck, as will the sponsors of HR 3784, establishing an office of small business advocate at the SEC, judging by the progress of these bills. You see, according to the calendar of the Capital Markets Subcommittee, both of these bills have been scheduled for “markup” in this Committee on December 9, a fast pace for a bill by Capitol Hill standards. Moreover, the word on the street in DC is that these bills are quickly gathering broad bi-partisan support.

So write or call your Congressional representative, and tell them to please wish our small and emerging (and underrepresented) businesses a Happy and Prosperous 2016!


 

 

Sam Guzik National Press Club BSamuel S. Guzik, a Senior Contributor to Crowdfund Insider,  is a corporate and securities attorney and business advisor with the law firm of Guzik & Associates, with more than 30 years of experience in private practice.  Guzik is also the President and Board Chair of the Crowdfunding Professional Association (CFPA). A nationally recognized authority on the JOBS Act, including Regulation D private placements, investment crowdfunding and Regulation A+, he is and an advisor to legislators, researchers and private businesses, including crowdfunding issuers, service providers and platforms, on matters relating to the JOBS Act. As an advocate for small and medium sized business he has engaged with major stakeholders in the ongoing post-JOBS Act reform, including legislators, industry advocates and federal and state securities regulators. In 2014, some of his speaking engagements have included leading a Crowdfunding Roundtable in Washington, DC sponsored by the U.S. Small Business Administration Office of Advocacy, a panelist at the MIT Sloan School of Business 2014 Crowdfunding Roundtable, and a panelist at a national bar association event which included private practitioners, investor advocates and officials of NASAA. His articles on JOBS Act issues, including two published in the Harvard Law School Forum on Corporate Governance and Financial Regulation, have also served as a basis for post-JOBS Act proposed legislation.

 

*************************

Editor’s Note – The following article appeared in Crowdfund Insider on December 8, 2015. On December 9, 2015, the House Financial Services Committee voted to approve the bill to establish an office of small business advocate at the SEC, HR 3784, by a vote of 56-0.  The House Financial Services Committee also approved a bill to require the SEC to respond to recommendations made by the participants in the SEC’s Annual Government – Small Business Forum by a vote of 55-1. These two bills will now go to the full House of Representatives for a vote. Further details on these bills are available here.

Posted in Business Formation, Capital Raising, Corporate Governance, Corporate Law, Crowdfunding, General | Leave a comment

Crowdfunding Counselor Sam Guzik, A Voice Galvanizing & Advocating for the Crowd

 

[The following interview of Samuel S. Guzik appeared in Crowdfund Insider on December 1, 2015]

Sam Guzik National Press Club B

“I do not recycle or repackage the ideas of others.  I try to focus instead on broader JOBS Act issues and events which have thus far gone unnoticed – or barely noticed – and which require further thought, analysis and hopefully, action, by louder and more powerful voices.  A lone voice can start a revolution, but history shows that it takes a noisy crowd to get things to the finish line. If you will indulge me for a moment, I suggest that this time history will be no different.”

Sam Guzik Washington DCAfter receiving a B.S. degree in Industrial and Labor relations from Cornell University and graduating from Stanford University Law School, thought leader Sam Guzik was admitted to practice in both New York and California. With more than 35 years of experience as a corporate and securities attorney and business advisor in private practice in New York and Los Angeles, including as an associate at Willkie Farr and Gallagher, a partner at the LA law firm of Ervin, Cohen and Jessup and in the firm he founded in 1993, Guzik & Associates, Samuel Guzik has represented public and privately held companies and entrepreneurs on a broad range of business and financing transactions, both public and private.  Guzik has represented businesses in a diverse range of industries, including digital media, apparel, health care and numerous high technology based businesses. A recognized authority and thought leader on matters relating to the JOBS Act of 2012 and the ongoing SEC rulemaking, including Regulation D Rule 506 private placements, Regulation A+, and investment crowd finance, Guzik has been consulted by Congressional members, state legislators and the U.S. Small Business Administration Office of Advocacy on matters relating to the JOBS Act and state securities matters. He has also been cited by SEC Commissioner Daniel M. Gallagher on two occasions in public statements, both for his advocacy on behalf of SMEs and his thought leadership on SEC rulemaking and post-JOBS Act reforms.

A prolific writer on JOBS Act issues affecting entrepreneurs, small and emerging companies, investors and Internet-based funding portals, Guzik is a frequent blogger on The Corporate Securities Lawyer Blog, addressing developing corporate and securities laws issues, and on Crowdfund Insider as its Crowdfunding Counselor.  In 2014 he published two major commentaries on JOBS Act rulemaking in The Harvard Law School Forum on Corporate Governance and Financial Regulation: the first article, entitled “Regulation A+ Offerings – a New Era at the SEC,” discussing the SEC’s proposed regulations implementing JOBS Act Title IV Regulation A+;  the second article entitled “SEC Crowdfunding Rulemaking under the JOBS Act – An Opportunity Lost?” addressing deficiencies in the SEC’s proposed Title III investment crowdfunding regulations.  His articles have also been cited in national business publications on issues relating to federal securities regulation, including The Economist, Forbes, Bloomberg’s BusinessWeek, Compliance Weekly and Equities.com. Guzik, a founding member of The Heritage Foundation Securities Regulation Working Group, focusing on federal regulatory issues affecting small businesses and emerging growth companies, also served as a member of the Advisory Council of the Crowdfunding Professional Association before being appointed to their Board of Directors in March 2015.

 

Be sure to participate in the 2015 Americas Alternative Finance Benchmarking Survey by Friday, 18 December. The Survey, a joint venture of The Centre for Alternative Finance at University of Cambridge Judge Business School and the Polsky Center for Entrepreneurship and Innovation team at Chicago Booth School of Business, is the first comprehensive and empirical assessment of crowdfunding, P2P lending and other forms of alternative finance across North, Central and South America.

Douglas Monieson“The Alternative Finance team has been contacting hundreds of alternative finance platforms in the US, Canada and Latin America,” according to Douglas Monieson, Associate Director at the University of Chicago Alternative Finance Institute. “The support from our research partners – universities; organizations including Inter-American Development Bank and the Development Bank of Canada; corporate sponsors like the CME Group and KPMG; associations including Crowdnetics, Lend Academy, and Crowdfund Insider; and the platform themselves – has been outstanding.  All recognize the importance of independent, systematic and reliable benchmark research to facilitate a better understanding of Alternative Financing in economics, finance and public policy.”

I recently caught up with Guzik between NextGen’s Equity Crowdfunding Conference, Thanksgiving preparations and CfPA’s Third Annual Crowdfunding Summit.  He discussed the importance of the 2015 Americas Alternative Finance Benchmarking Survey, as well as the hot topics  of post-JOBS Act reform, Title III, Regulation A+, CfPA’s strategic plans and the 2 December House Financial Services Committee’s hearing on bill HR 3784. Our interview follows.

Erin: How will the University of Cambridge / UChicago 2015 Americas Alternative Finance Benchmarking Survey be impactful to the Crowdfunding Professional Association (CfPA)? Do you believe the data will aid policy makers in making good policy decisions? 

Cambridge Chicago Supporting OrganizationsSam: The CCAAFB Survey will be impactful not only to the CfPA, but to the industry, industry participants as well as policy makers.  Raw data, and the conclusions which can be derived from it will be immensely helpful, especially when compiled and analyzed by these leading academic institutions. We are at the very beginnings of a new, Internet-based, financing system. Absent reliable data, we are at the mercy of conjecture and anecdotal events, which is inherently unreliable. Equally as important, academicians can review and analyze this data through a number of disciplines: macro-economic and micro-economic, social and cultural behavior and finance.  The studies which this data will produce will be of immense guidance, both in term of understanding what is working, and why, but also to help the industry, crowdfunders and regulators evaluate important next steps.

Erin: Why is the advent of equity crowdfunding so important? How can crowdfunding help bridge the gap between the “vast capital deserts which lay between the shores of New York City and the San Francisco Bay”?  Which platforms are most effectively bringing people, ideas and capital together? What sets them apart?

New_York_City_Midtown_from_Rockefeller_Center_NIHSam: Equity crowdfunding is immensely important as an efficient allocator of resources, allowing capital to be directed to companies outside the traditional capital networks, and also providing investors with an abundance of real time data and investor feedback through the wisdom of the crowd. Statistically, capital for early stage businesses has concentrated geographically in certain major metropolitan areas, specifically, New York, Massachusetts and California – leaving the “flyover states” underserved. Equity crowdfunding also provides a broader reach for populations traditionally underserved by traditional capital sources, such as women and minorities. We are also seeing data from accredited investor crowdfunding in the U.S. which shows the influx of capital in the U.S. from long distances, including outside the U.S.

Finfair Sam GuzikThere are an unlimited number of platforms which will flourish in this new environment: community based platforms, industry verticals such as real estate, technology and media; and platforms appealing to targeted affinity groups, such as socially conscious companies. It would be unfair to single out any one platform.  Companies looking for the right platform must do their homework, taking into consideration such factors as the area of concentration of the platform, its track record, the strength of its investor base, and site traffic generally.

Erin: Since graduating from Stanford Law, you have honed specialties in corporate, securities, finance, private offerings, public offerings, reverse mergers, contracts, business, mergers, acquisitions and real estate law. You also hold a BS in Industrial and Labor Relations from Cornell and a law degree from Stanford.  How does your background provide a foundation for a nimble career trajectory shift into the realm of crowdfunding and alternative finance? 

standford law schoolSam: As far as my academic background, what has stayed with me most is the conclusion I drew in law school in my first securities law class: our regulatory system, now more than 80 years old, has long lived with too many ambiguities and uncertainties.  Though this has been narrowed somewhat by the SEC providing “safe harbors” for companies to raise money short of a full SEC registration, more is needed to open up avenues of capital formation for startups and SMEs.  The widespread adoption and availability of Internet technology and communications channels now makes it possible to close some of the gaps in our regulatory structure, and provide more cost-effective means for startups and emerging companies to raise capital.  All that is required is the political will of regulators and Congress, and recalculating the appropriate balance as between investor protection, efficiency of capital markets and “right sized” regulation for the smallest of companies who can least afford burdensome, complex regulations.

Erin: How does the CfPA plan to “organize, energize and channel the forces that are necessary to move the post-JOBS Act forward”?

Sam: The first step is to have the industry leaders share my belief that what this post-JOBS Act industry needs is a collective voice, especially in D.C. where there remains a great deal of work ahead, in terms of fine-tuning regulations, adopting new regulations, and effecting further legislation to build on the JOBS Act of 2012.  This will require a combination of the CfPA demonstrating leadership in these areas and involving key industry participants and thought leaders.

Erin: In terms of advocacy, outreach, establishing best practices and calling out less-than-best-practices, how does the CfPA intend to “nurture” the nascent crowdfunding industry?

Sam: There are many opportunities. Indeed, there are too many opportunities relative to the resources of any single organization, including the CfPA. All of these efforts start with strong, diverse leadership, with recognized industry leaders, something the CfPA has succeeded in accomplishing in 2015. It truly takes multitudes of disciplines, including academic, legal, accounting, and financial, not to mention having expertise in industries which have proven to be a good fit for crowdfunding.  This leadership core must be able to engage with as many industry partners and affiliates as possible, as the industry’s strength, and the strength of the CfPA, will require “crowdsourcing” in the broadest sense. Within this framework, an expanded crowdsourced network with the right partners, anything and everything is possible.  The CfPA is in the process of implementing plans for 2016 in terms of outreach and best practices, fueled by the recent completion of JOBS Act rule making for unaccredited investment crowdfunding and Regulation A+. The CfPA is fortunate to have a wealth of talent on its Board, to energize and implement effective initiatives in the areas most in need of attention as we begin a new era, advocacy, outreach and best practices.

CfPA Board of Directors 2015

Erin: Please take a moment to talk about the dynamic CfPA team, including such notables as Brian Korn, Scott McIntyre, Thell Woods, Joe Bartlett, Jordan Fishfeld, Alon Hillel-Tuch, John Mueller, Rodney Sampson, Richard Swart, Ph.D., Rose Spinelli, Xiaochen Zhang and Crowdfund Insider Senior Contributor Anthony Zeoli.

Sam: We have a wealth of talent who have shown the ability to be industry leaders. We are fortunate to have the leaders in academia, finance, entrepreneurship, marketing, advocacy and other important disciplines. Many of them have international reach. And as a collective group, we have seen great traction in attracting international interest.

Erin: What challenges have you faced as President of CfPA?

Sam: Initially, the biggest challenge for me was how to define the focus of the CfPA. Crowdfunding has become a broad, unwieldy space in a short number of years. And up until now our resources have been limited, both financial resources and the bandwidth of CfPA leaders and membership.  Take our Board, for example. Most of us are already fully committed to activities outside the CfPA.  There is a need for some level of part-time staff to effectively conduct outreach with our membership and prospective membership alone. However, as we approach year end, with an expanded Board, we are beginning to attract industry support, both financially and in terms of actively participating in core CfPA activities. With the JOBS Act now in full swing, I expect this trend to accelerate.  There is now the semblance of a post-JOBS Act industry. If we show leadership, with tangible results, I expect to see growing industry support at the CfPA.

Erin: You recently stated, “I ultimately learned that a single voice can make a difference. But a collective voice – the power of a noisy crowd – is essential to sustained progress.”  What experiences led to learning these lessons?

Patrick McHenry Delivers StatementSam: A collective voice is important, especially when under the umbrella of an industry trade organization such as the CfPA. Let’s face it, there are strong countervailing forces in Washington, D.C., whose priorities are often at odds with necessary legislative and regulatory change.  These forces are well- organized, well-financed and well-staffed, replete with full time executive directors, staff attorneys and paid lobbyists. Proponents of the JOBS Act and post-JOBS Act reform are no match for these forces. It takes not only the continued actions of individuals, but also a permanent, established industry voice.  The time was not right for this back in 2012, but with the JOBS Act now in full swing, the time truly is now.

How did I come to these conclusions? From reviewing the low priority given to our engines of job creation and small business over the past 35 years, and listening to D.C veterans who share the goals of enhancing channels of capital formation for startups and emerging businesses. Some of my biggest influencers in this area have been Congressman Patrick McHenry, the recently retired SEC Commissioner Dan Gallagher, and David Burton, Senior Fellow at The Heritage Foundation.

Daniel Gallagher Title IVAs a veteran securities attorney, one of the conclusions I came to was that small and emerging businesses lacked a strong, effective advocate at the SEC. This led me to publish an article in Crowdfund Insider in February 2014 advocating for a Small Business Advocate at the SEC who reported not only to the Commission but to Congress. Though the need for this new office seemed obvious, I could find nothing in the public record discussing the need for a small business advocate at the SEC prior to my article. This led to a meeting with then SEC Commissioner Dan Gallagher in June 2014 to discuss the efficacy of this idea.

SME Small Medium EnterprisesIn September 2014 Commissioner Gallagher adopted this proposal, appropriately titled “Whatever Happened to Promoting Small Business Capital Formation?” citing me as a proponent. This started a chain of events which ultimately led to an introduced bill in Congress in October 2015, HR 3784, with bi-partisan sponsorship and backed by major industry trade associations, including the U.S. Chamber of Commerce, the National Venture Capital Association, Small Business Investor Alliance, Biotechnology Industry Organization (BIO), Small Business & Entrepreneurship Council (SBEC), and the Crowdfunding Professional Association, of which I am President. The bill is scheduled to be the subject of hearings on December 2 in the House Financial Services Committee and reportedly has yet to face any opposition. I expect that ultimately this bill will become law, helping entrepreneurs in pursuit of capital for many years to come.

What I learned from this experience is that a single voice can be effective, but it takes collective action in Washington to get the ball over the finish line. It took the involvement of not only the public outcry of an SEC Commissioner, but a DC-based small business trade association who heard this call to action, the Small Business Investor Alliance, to help bridge the gap between an idea whose time had come and an introduced bill, by actively pursuing legislation on the Hill.

Erin: Do you believe Title III will fulfill its mission of facilitating access to capital for SMEs?

Washington DC Capitol BuildingSam: Yes, Title III will fulfill its mission. The first step is to take back the ground that Congressman McHenry’s bill lost in the Senate, a victim of special interest groups and partisan politics. I expect that the task will be easier in 2016, with various forms of crowdfinance having a track record, both in the U.S. and abroad.  The ghosts which some saw in Congress in 2012 simply have not appeared. But a stagnant, jobless economic recovery is still with us. Imagine – a legislative fix that does not require increased government expenditures or new taxes. It is as simple as striking a better, wiser balance between protecting investors and the integrity of our capital markets, on the one hand, and allowing efficient access to capital for the smallest of businesses.

Erin: Which dots still need to be connected to make Title III more workable? Many see some challenges regarding the final rules on Title III, i.e. no SPVs and a low limit for a raise and low investor limits. How will Congress act to address these issues?

Cost of RegulationsSam: I am confident that we will see legislation in 2016 to make Title III more efficient and effective. We now have a fixed target, final SEC rules, and a track record for equity crowdfunding. A number of areas which need to be addressed: increasing the offering limit from $1 million to $5 million; limiting portal liability, letting it act more as an independent intermediary, rather than a quality filter; revising issuer liability to remove the strict liability type standard in Title III, replacing it instead with the tried and true “anti-fraud” liability standard applicable to issuers conducting private placements; allowing full use of social media outside the confines of the crowdfunding portal, and allowing Title III companies to “test the waters” similar to what is now allowed under Regulation A+; allowing investors to form special purpose vehicles to group together large groups of investors under a single entity, allowing intermediaries and their affiliates to have a greater economic stake in their issuers; and removing investment limits for accredited investors. Yes, a tall list, but one which will ultimately see fruition, though some of these issues may take some time to resolve.

Erin: Do you think Regulation A+ is living up to its potential?

A +Sam: The correct answer is that it is too early to tell, as this is a new vehicle for capital formation. The informed answer is that it is showing early signs of promise. We are seeing quality underwriters begin to enter this space with filed offerings. And we are also seeing some companies getting strong traction in testing the waters campaigns. I expect this market to show strong incremental growth, simply because there has been a vacuum in the small IPO market for the past two decades, and Regulation A+ seems perfectly poised to fill the gap.

Erin: What are your thoughts about Title II accredited crowdfunding?

Sam: Title II has gotten off to a slow start, as it is new. But it has also shown incremental sustained growth over the past two years. It has proven to be a tremendous fit for the real estate industry, and those seeking financing in the $1.5 -$2.0 million range. I expect that this area will grow as intermediaries develop broader investor bases and the investing public has an opportunity to view the track record of some of the early Title II investments.

Posted in Capital Raising, Corporate Governance, Corporate Law, Crowdfunding, General, Regulation A+ Resource Center | Leave a comment

JOBS ACT CROWDFUNDING IN 2016 – IT’S TIME TO CONNECT THE DOTS IN THIS NEW ERA

For those of you who follow my ramblings on Crowdfund Insider, you know that I do not put out infomercials – nor do I recycle or repackage the ideas of others.  I try to focus instead on broader JOBS Act issues and events which have thus far gone unnoticed – or barely noticed – and which require further thought, analysis and hopefully, action, by louder and more powerful voices.  A lone voice can start a revolution, but history shows that it takes a noisy crowd to get things to the finish line. If you will indulge me for a moment, I suggest that this time history will be no different.

Back in June 2015 I predicted that we would see (finally) JOBS Act Title III rules by year end 2015. But behind that bold, perhaps reckless prediction, was a House Appropriations Bill which quietly moved out of this powerful Congressional committee.  Along with it was a narrative baked into the Bill Report, addressed to the SEC, reminding it that there was to be no free lunch – no requested 10% budget increase for the SEC – at least not in 2015. This Committee said that the SEC must first attend to implementing Title III crowdfunding – in a smart and effective way – calling the then SEC proposed rules “inoperable.” Not apparent to most, the iron fist of the House Appropriations Committee was astutely guided by Congressman Patrick McHenry, now Deputy Whip and Vice Chair of the House Financial Services Committee.

Yet it still took a crowd to move Title III rules to the finish line – hundreds of comment letters – and hundreds of meetings by individuals and organizations in D.C. behind closed doors – both at the SEC and in Congress – with the help of a nascent advocacy group known as CfIRA (Crowdfund Intermediary Regulatory Advocates), headed by DJ Paul, Chris Tyrell and Kim Wales – and under the watchful guidance of veteran New York securities attorney Doug Ellenoff.

Congressman McHenry will be the first person to tell you that things cannot get done in Washington without broad, vocal popular support.  As he reminded 700 people in attendance at the Angel Capital Association at their March 2014 Summit, Washington is not where  business is done – rather, it is a place where business is destroyed. He also reminded this group of the vast capital deserts which lay between the shores of New York City and the San Francisco Bay –  the need to bridge this gap – and the importance of breaking down unnecessary regulatory and legislative barriers.

The statistics don’t lie. Today, more businesses are failing than are being born. And those that are being born, or taking their early steps, are dependent in the first instance not only on human resources and drive – but capital – sometime tiny amounts. Crowdfunding, however one may define it, has at its core the power of the Internet – with its low cost and lightning speed – able to bring together people, ideas and capital.  All that stood in our way was the will to succeed – and a regulatory structure borne out of a bygone era -when telephones were a novelty, and automobiles were a luxury item few could afford.

What a Difference 8 Decades Makes

The Jumpstart Our Business Startups Act of 2012 (the JOBS Act) was the first major federal legislative recognition that it was time for a change for regulatory reform to aid small business capital formation. And the power and low cost of the Internet, a technology driven beast, could be harnessed with small dollars and big ideas. It was simply a matter of breaking down outmoded regulatory barriers. And so, borne out of the JOBS Act was Title II (what I refer to as rich man’s crowdfunding), Title IV (the Regulation A+ “Mini-IPO”), and last but not least, Title III equity crowdfunding (what I sometimes refer to as “real equity crowdfunding”).

With JOBS Act rulemaking finally in the books in 2015, as well as the many pronouncements of either its early demise or unlimited future potential, it is time to sober up and take a good, hard look at the road that must be travelled in 2016 and beyond – and more importantly, how to travel that road – if our entrepreneurs and our economy are to flourish.

Another Missed Headline – Even Giants Need to Organize Together to Break Down the Barriers in the DC Beltway – This Month’s Case in Point.

Whether you are of a mind that today’s outcome of the JOBS Act is a glass half full or half empty, we can all agree on one thing: there is still a vacuum that needs to be filled.

On November 3, 2015, a new voice in Washington was borne. The name was new, but the faces behind it were well known –  arguably the most powerful voices in this new age economy – with seemingly unimaginable and unlimited human and financial resources, and the power that typically accompanies it.  This new collective voice uttered its first public words with a Press Release, remarking:

“This alliance of remarkably innovative companies brings a new voice to Washington’s financial conversations, and we look forward to engaging on a wide range of opportunities. Whether it is protecting consumers, growing small businesses, or promoting financial literacy and savings, [this newly formed group] wants policymakers to understand how new technologies can help solve today’s policy challenges.”

Who was this new voice in Washington? Who were these “remarkably innovative companies.” No, it was not the voice of CfIRA (Crowdfunding Intermediaries Regulatory Advocates). Nor was it the voice of the CfPA (Crowdfunding Professional Association). But it should have been. Instead it was the voice of a new DC based coalition: “Financial Innovation Now (FIN).” And who were its industry supporters: No, it was not  Crowdfunder, CrowdCheck,  SeedInvest,  EarlyShares, CircleUp, AngelList or any of the many other JOBS Act progeny. No, it was not even some of the newcomers, such as StartEngine and FundAmerica, who have waited patiently for Regulation A+ and Title III equity crowdfunding to emerge from the labyrinth of SEC rulemaking.  But to be sure, the companies that initially comprise “FIN” are both innovators and engines of U.S. job creation:  Google, Amazon, Apple, Intuit and PayPal.

So What’s the Point? – The Most Efficient Route from Point A to Point B in Washington Requires Strong Collective Action.

We are truly at the dawn of a new era.  With initial JOBS Act rulemaking in the books, I expect there is nearly universal agreement that the cup of innovation and job creation – whether half full or half empty, is a long ways from running over – and run over it must. The question du jour is how to best achieve this goal?

Since I became actively involved in advancing JOBS Act priorities I ultimately learned that a single voice can make a difference. But a collective voice – the power of a noisy crowd – is essential to sustained progress.

Since I started my sometimes lonely journey of advocating for post-JOBS Act reform back in 2013, and now more than 50 articles, dozens of public speeches, and numerous meetings with federal legislators and regulators later, is the need for, and power of, collective action.

My contributions to date have been important, but certainly not sufficient:

HR 3784 – SEC Small Business AdvocateThis bill was quietly introduced into the House Financial Services Committee on October 21, 2015. My involvement in this endeavor stemmed from a realization that more powerful voices than myself were required in Washington. It started with an article on Crowdfund Insider in February 2014 (believed to be the first public outcry for this new office), continued with a meeting in June 2014 with former SEC Commissioner Daniel M. Gallagher, and making it into prime time in a public address by Commissioner Gallagher in September 2014, appropriately titled “What Ever Happened to Small Business Capital Formation.” This started a chain of events which ultimately led to an introduced bill, HR 3784, backed by major industry trade associations, including the U.S. Chamber of Commerce, the National Venture Capital Association, Small Business Investor Alliance, Biotechnology Industry Organization (BIO), Small Business & Entrepreneurship Council (SBEC), and the “mighty” Crowdfunding Professional Association (CfPA).

What started out as nothing more than a good idea has, through collective action, finally made it to the federal legislative playing field. 

Final Title III Rules – Simplified Disclosure for Equity Crowdfunders – On October 30, 2015, when the SEC Commissioners adopted final Title III crowdfunding rules, my ears perked up when Chair White, in her opening remarks, cited one of two noteworthy improvements to the two year old proposed rules: the availability of a simplified, optional Question and Answer format for a crowdfunding company’s mandatory non-financial disclosure.  This is likely the closest I will ever get to a public shout out from SEC Chair Mary Jo White.

You see, of the hundreds of Title III rulemaking comment letters, only two commentators suggested the need for an alternative, simplified disclosure format for crowdfunding companies, to help soften the edge of a complex maze of regulations without the need for high priced securities lawyers: the SBA Office of Small Business Advocacy and – yours truly. And it was no coincidence that the SBA Office of Advocacy weighed in at all on this issue – done so at the urging of a single small business owner – yours truly. Not insignificantly, the SBA Office of Advocacy had my back, and with it the statutory power of the Regulatory Flexibility Act of 1980, requiring the SEC to either accede to its comments – or explain why not. And respond it did.

What started out as nothing more than a good idea has, through collective action, finally made it into the Federal Register.

Proposed Expanded SEC Rule 147 – The Foundation of Intrastate Crowdfunding – A growing majority of states have either adopted, or are in the process of adopting, intrastate crowdfunding legislation that would allow companies to engage in equity crowdfunding within state borders.  The SEC in April 2014 put a damper on intrastate crowdfunding when the Staff issued an informal pronouncement to the effect that for technical reasons these intrastate crowdfunders could not utilize the Internet to openly engage in intrastate crowdfunding.  Well, crowdfunding without broad Internet solicitation was to me a pointless exercise and, in my opinion, in direct conflict with a series of prior SEC rulings as well as the opinion of a noted academic scholar. I was the first to publicly call attention to this issue and advocate for a change in this SEC policy, in May 2014, and then again in July 2014.  My musings were punctuated by meetings with an SEC Commissioner and the relevant SEC division chiefs – without any apparent success – at least until October 30, 2015, when this issue quietly rose to the top of the SEC’s rulemaking list.

What started out as nothing more than a good idea by a single voice has, through collective action, finally made it into the Federal Register as a proposed rule. But, in my opinion, it will take collective action to get this proposed rule adopted, with greater precision, as a final rule.

This Industry Needs an Elephant in the Room – With a Loud and Strong Voice

Miracles are possible, but we cannot afford to depend upon or wait for miracles when it comes to opening up new and necessary paths for capital formation to fuel entrepreneurial endeavors. This new and developing post-JOBS Act economy requires collective action by strong industry voices.

So back in April 2015, when three brave and lonely souls, Brian Korn, Scott McIntyre and Thell Woods, the then sole directors of the Crowdfunding Professional Association, reached out to me and nine others to join a newly expanded CfPA Board of Directors, and me having little of substance to show at that time from my lone(ly) efforts at SME advocacy, the answer was an emphatic Yes. And when the new Board reached out to me to be their Chair and President, I again said Yes, this time with a bit of reluctance – knowing that I did not have the necessary time. Yet I knew that we all had to find a way to make the time if we were to move the needle in this post-JOBS Act world.  And as I then surveyed the landscape I could not identify a U.S. organization which had as its primary focus post-JOBS act advocacy and outreach – and that could also truly call itself a broad based JOBS Act industry trade association – speaking for all of the key stakeholders.

The CfPA is fortunate to have some of the best, brightest and energetic industry leaders at the helm of the CfPA, including such notables as Richard Swart, Joe Bartlett, Anthony Zeoli and Alon Hillel-Tuch (RocketHub ). And with initial JOBS Act rulemaking in the books in 2015, there is now both a nascent industry to nurture and much work ahead, in terms of advocacy, outreach, establishing best practices, and calling out less than best practices. It is both my  hope and my mission to see the CfPA fill a vacuum in this post-JOBS Act world, much as Apple, Google, Amazon and others last week saw their own vacuum and the need to fill it: with ideas, action, outreach and ultimately further legislation and rulemaking.  But we need more leaders, and more entrepreneurs and industry participants if CfPA is to succeed in its longer term mission.  We need more “dots” to connect.

The CfPA, this “little engine that could,” is in my opinion, in the right place and at the right time – to organize, energize and channel the forces that are necessary to move the post-JOBS Act forward. And most importantly, the CfPA’s most important asset, its Board leadership, is poised to take this industry to the next level. Fortunately, others besides myself are beginning to share my vision – and roll up their sleeves to support it. With a short number of weeks to go until the CfPA’s Annual Summit in Washington, D.C. on December 2, we have gathered more than 40 speakers – representing a broad spectrum of industry leaders, thought leaders, federal and state regulators – to share their time and their minds – and lend their voice to this newly burgeoning industry.  Leading the pack is Keynote Speaker Congressman Patrick McHenry, among other things the father of Title III as passed by the House of Representatives – before it went into the Senate sausage grinder. The CfPA is also fortunate to have as its premier 2016 Sponsor, as well as Summit Sponsor, a new industry entrant, NextGen Crowdfunding, founded by accomplished veteran entrepreneur Aubrey Chernick, who shares the CfPA vision of energizing the startup and entrepreneurial community – and democratizing U.S. investment – through innovation and outreach.

There Will Be Strength in Numbers as We Approach 2016

As even industry giants such as Google, Amazon and Apple recognize, strength in numbers  is essential when it comes to breaking new ground – as new technology collides with an outmoded legislative and regulatory financial structure.  Our economy and our entrepreneurial spirit are on the line. Though CfPA is barely in the shadows of these giants, and their new organization, Financial Innovation Now,  with a somewhat different focus and priorities than the crowdfunding industry, we are all rowing with the same oar and in the same direction.  Unlike these behemoths, however, both the JOBS Act industry and the CfPA need and openly welcome the active engagement of a broad and vocal crowd.

So consider joining the crowd known as the CfPA on December 2 in D.C. – and beyond. We need lots of “dots” – and an effective vehicle to connect them – as we head into 2016. The opportunities are limitless – and the need is endless.

Posted in Capital Raising, Crowdfunding, General, Regulation A+ Resource Center | Leave a comment

Final Title III SEC Crowdfunding Rules – Done (almost)!!! Next Act: The Missing Title VIII (a/k/a H.R. 3784)

[As published on October 28, 2015 in Crowdfund Insider]

Advocate for Small Business Bill

I will not be discouraged by failure; I will not be elated by success.”
Joseph B. Lightfoot

The bigger than life headline yesterday? The long-awaited news that the SEC’s five Commissioners would be convening this coming Friday to vote on, and presumably approve final Title III rules. Yet as we wait with great anticipation to see what the final rules will actually say, I wanted to throw out some thoughts to the crowd – thoughts which I and a growing number of others believe are important.

Gallery of SEC CommissionersFirst, a heartfelt thanks, along with my sympathies, to the Staff at the SEC who despite the media headlines to the contrary have worked tirelessly on the Title III rules to get to this day. Not an easy task to build out an entirely new capital formation ecosystem which brings together the riskiest of companies and the most financially vulnerable investors.  And to make the task that much more difficult, Congress left much, if not most, of the important details to the SEC. And if that were not enough, the Staff at the SEC was saddled with a statutory structure which was not a product of rational legislative deliberation, but instead the final work product of some very ugly and partisan sausage making on the Senate side of Capitol Hill before Congressman Patrick McHenry’s original House bill would make it to the legislative finish line in April 2012

Sebastian GomezAnd I would be remiss in not giving a special thanks to Sebastian Gomez Abero, Chief of the SEC Office of Small Business Policy, who had the herculean task of wrestling with all of the fine details, and assimilating the many views of those inside the walls of the SEC, not to mention the hundreds of persons who took the time to provide the SEC with their brain share in the form of written comments on the proposed rules and meeting personally with the Staff.

But alas, let us not lose perspective – Friday will come and go, like any other day. And regardless of what the final rules say, there will be much important work left to be done.  So the question du jour is how will this work will get done? And how quickly?

Jobs Act 2012 statement redTo answer this question properly, one needs, as their starting point, not the 270-day deadline for Title III rules, set by Congress back in April 2012. Actually, I go back a lot further – 1980 to be exact – to remind everyone that long before the bipartisan JOBS Act of 2012 became part of the legislative landscape, Democrats and Republicans alike came together back in 1980 to forge important legislation with a singular purpose – to strengthen the interests of small and emerging businesses in the legislative and regulatory process.  These were to be important reforms for SME’s, some of which included:

  • Protection of the interests of small business from unduly burdensome requirements in the federal regulatory process (the Regulatory Flexibility Act of 1980)
  • Creation of an annual SEC Government Small Business Forum, to provide a sharper focus on issues directly impacting small business at the SEC and to facilitate communication and cooperation between the SEC, state regulatory agencies, and the other stakeholders in the SME ecosystem.

Though these were important steps, the promise of these measures and measures of similar ilk over the past few decades have not really moved the needle very much – given the amount of time elapsed. In fact, I believe it is fair to say that since 1980 it has pretty much-been business as usual for small business interests in Washington – still lacking strong, effective advocates, both at the SEC and in the halls of Congress.

That is not my opinion alone. Indeed, it would be challenging to find well-grounded opinions to the contrary.

So What is Needed? The Missing Title VIII of the JOBS Act: Creation of a Strong Independent Voice at the SEC – Small Business Advocate.

Well, when it comes to my views on how to ease legislative and regulatory burdens on small business, I first spoke to this issue back in February 2014, in an article first published in Crowdfund Insider: an independent office at the SEC – one whose sole mission was to advocate for the interests of small business capital formation – and with the gravitas to actually have a chance to make a difference. Something more was needed than simply an office in the SEC, dedicated to small business, which has a line of authority on the SEC organizational chart which ends with the Director of the Division of Corporation Finance. What was needed was a strong and independent voice, one that reported directly to not only the full Commission but also to Congress.

Daniel Gallagher Title IVTo me, the need for this new office at the SEC was obvious. Yet I could find nothing in the public literature discussing this idea before I first advocated for it in February 2014. So in the absence of any prior authority on the subject I questioned: was this was really a good idea; would it really make a difference for small business? Or would such a new office perhaps do more harm than good, as some might postulate.  Who would know better the answer to this question than now former SEC Commissioner Daniel M. Gallagher, I thought.  After all, he was not only a sitting SEC Commissioner who was a staunch supporter of small business but one who had headed up the SEC’s Division of Trading and Markets, amongst other SEC Staff positions, in a former life.

Well, I heard Commissioner Gallagher’s answer to my questions in a private meeting with him back in June of 2014. And the public heard his answer in the affirmative in a major address he delivered at The Heritage Foundation in September 2014, aptly titled “What Ever Happened to Promoting Small Business Capital Formation, complete with a shout out to me in a footnote.” You see, from the perspective of Commissioner Gallagher, one of the line items in his personal “to do list” of necessary reforms to enhance the ability of small business to raise capital and to otherwise comply with SEC rules, was to create an entirely new office at the SEC, an Office of Small Business Advocate.

Congressmen Quigley Crenshaw Duffy CarneyHis words proved to be an inspiration for many, including those within the Beltway who are better positioned than most to make things happen. It started with an organization known as the Small Business Investor Alliance.  A stone’s throw from the Hill they took the initiative to garner enough support to have legislation introduced into Congress on October 21, 2015.  They started out by finding a friend in the offices of Representative John Carney (D-Del) and Representative Sean Duffy (R– Wisc). Also lending support as co-sponsors of the bill – Ander Crenshaw (R-FL), and Mike Quigley (D-IL).

What started with what seemed like one lone voice with what seemed like a good idea soon became a bill, introduced into the House of Representatives on October 21, 2015, with bi-partisan backing of four members of the House of Representatives, and  introduced with a letter of support signed onto by major national trade associations:

  • Small Business Investor Alliance
  • U.S. Chamber of Commerce
  • Biotechnology Industry Organization (BIO)
  • Small Business & Entrepreneurship Council (SBEC)
  • Association for Corporate Growth National Small Business Association
  • Crowdfunding Professional Association (CfPA)
  • National Venture Capital Association, and
  • National Development Council

The bill, now officially designated as H.R. 3784, entitled “The SEC Small Business Advocate Act of 2015,” is chocked with details. But suffice it to say that this legislation, which empowers a single individual, the SEC Small Business Advocate, and an office dedicated to the single mission of advocating for promoting capital formation for small business, while also protecting the interests of small business investors, contains the key ingredients. This bill envisions, by legislative fiat, the insertion at the SEC of an individual and an office with a singular focus on small business advocacy, and with the organizational gravitas to get the job done – reporting to the full SEC Commission and to both houses of Congress.

And for those who may think that this legislation is not necessary, all one needs to do is to look at the relatively short shrift that small business has received over the past decades, not to mention the (very) long waits to accomplish tangible reform for small business capital formation.  Indeed, the long wait for final Title III rules – long not by my watch, but by Congress’s watch – a 270 day rulemaking deadline mandated by the 2012 JOBS Act itself, pales in comparison when one looks at the small business regulatory landscape going back to the then highly touted small business reforms instituted back in 1980.

So yes, when the jubilation of the crowd in many corners of the U.S. over the long-awaited final Title III crowdfunding rules subsides, let’s pause and take a brief moment to look back a few decades – to learn from history – and then, look not down, but forward.  There is much work left to be done to facilitate smarter, right sized regulation of small business capital formation – consistent with necessary investor protections. But we need to work at a more efficient pace then we have over at least the past 35 years.

So after the elation from having final Title III rules subsides, please read this new legislative bill – think about how things might be much different – and better – for small business capital formation if this bill were to become law. Perhaps, the final Title III rules might have been even better than the best efforts of the Staff and the Commission could make them, given that they were already hamstrung by defective legislation passed without the involvement of the   Commission. And, perhaps they might have arrived just a tad sooner.

I rest my case.

For a link to the text of H.R. 3784 and the Letter of Support accompanying the bills introduction, it is available for viewing and download here:  bit.ly/1P4Jj00 ]

 

Posted in Business Formation, Capital Raising, Corporate Governance, Corporate Law, Crowdfunding, General, Regulation A+ Resource Center | 2 Comments