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 Advocate – This 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.
