SEC Issues Proposed Guidelines for Title III Unaccredited Equity Crowdfunding

All five SEC commissioners voted unanimouly to approve the proposed rules for equity crowdfunding and is now accepting public comments for the next 90 days

By Robert Hoskins

The Securities and Exchange Commission today voted unanimously to propose rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding. Click here to download the official proposed guidelines: http://www.sec.gov/rules/proposed/2013/33-9470.pdf

SEC Crowdfunding Call for Comments on November 15, 2013

Crowdfunding describes an evolving method of raising capital that has been used outside of the securities arena to raise funds through the Internet for a variety of projects ranging from innovative product ideas to artistic endeavors like movies or music.  Title III of the JOBS Act created an exemption under the securities laws so that this type of funding method can be easily used to offer and sell securities as well.  The JOBS Act also established the foundation for a regulatory structure for this funding method.

SEC Chair Mary Jo White noted that the intent of the JOBS Act is to make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors.

“There is a great deal of excitement in the marketplace about the crowdfunding exemption, and I’m pleased that we’re in a position to seek public comment on a proposal to permit crowdfunding,” said Chair White.  “We want this market to thrive in a safe manner for investors.”

The SEC is seeking public comment on the proposed rules for a 90-day period following their publication in the Federal Register.

Background

Crowdfunding is a term used to describe an evolving method of raising money through the Internet.  For several years, this funding method has been used to generate financial support for such things as artistic endeavors like films and music recordings, typically through small individual contributions from a large number of people.

While crowdfunding can be used to raise funds for many things, it generally has not been used as a means to offer and sell securities.  That is because offering a share of the financial returns or profits from business activities could trigger the application of the federal securities laws, and an offer or sale of securities must be registered with the SEC unless an exemption is available.

Congress created an exemption to permit securities-based crowdfunding when it passed the JOBS Act last year.  Among other things, the JOBS Act was intended to help alleviate the funding gap and accompanying regulatory concerns faced by startups and small businesses in connection with raising capital in relatively low dollar amounts.

Title III of the JOBS Act established the foundation for a regulatory structure that would permit these entities to use crowdfunding, and directed the SEC to write rules implementing the exemption.  It also created a new entity – a funding portal – to allow Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers.  Together these measures were intended to facilitate capital raising by small businesses while providing significant investor protections.

Proposed Rules

Consistent with the JOBS Act, the proposed rules would among other things permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions.

Under the proposed rules:

• A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
• Investors, over the course of a 12-month period, would be permitted to invest up to:
  • $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
  • 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000.  During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.

Certain companies would not be eligible to use the crowdfunding exemption.  Ineligible companies include non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

As mandated by Title III of the JOBS Act, securities purchased in a crowdfunding transaction could not be resold for a period of one year.  Holders of these securities would not count toward the threshold that requires a company to register with the SEC under Section 12(g) of the Exchange Act.

Disclosure by Companies

Consistent with Title III of the JOBS Act, the proposed rules would require companies conducting a crowdfunding offering to file certain information with the SEC, provide it to investors and the relevant intermediary facilitating the crowdfunding offering, and make it available to potential investors.

In its offering documents, among the things the company would be required to disclose:

• Information about officers and directors as well as owners of 20 percent or more of the company.
• A description of the company’s business and the use of proceeds from the offering.
• The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount.
• Certain related-party transactions.
• A description of the financial condition of the company.
• Financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.

Companies would be required to amend the offering document to reflect material changes and provide updates on the company’s progress toward reaching the target offering amount.

Companies relying on the crowdfunding exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.

Crowdfunding Platforms

One of the key investor protections Title III of the JOBS Act provides for crowdfunding is the requirement that crowdfunding transactions take place through an SEC-registered intermediary, either a broker-dealer or a funding portal.  Under the proposed rules, the offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant.

The proposed rules would require these intermediaries to:

• Provide investors with educational materials.
• Take measures to reduce the risk of fraud.
• Make available information about the issuer and the offering.
• Provide communication channels to permit discussions about offerings on the platform.
• Facilitate the offer and sale of crowdfunded securities.

The proposed rules would prohibit funding portals from:

• Offering investment advice or making recommendations.
• Soliciting purchases, sales or offers to buy securities offered or displayed on its website.
• Imposing certain restrictions on compensating people for solicitations.
• Holding, possessing, or handling investor funds or securities.

The proposed rules would provide a safe harbor under which funding portals can engage in certain activities consistent with these restrictions.

What’s Next?

The Commission will seek public comment on the proposed rules for 90 days.  The Commission will then review the comments and determine whether to adopt the proposed rules.

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More news articles on the SEC’s Proposed Rules for Equity Crowdfunding:

• Crowdfunding to take a leap by seeking investors
• SEC moves toward allowing crowdfunding stock offerings
• SEC issues long-awaited equity crowdfunding rules
• SEC to propose monumental crowdfunding rules on Wednesday
• SEC votes to “unleash wisdom of crowds,” approves crowdfunding rule
• SEC releases ‘crowdfunding’ rule
• SEC Proposes Crowdfunding Rules

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SEC Lifts Ban on General Solicitation; Implements First Phase of JOBS Act for Reg. D, Title II Accredited Investors

SEC Lifts 80-Year Ban on the General Solicitation of Private Placement Equity Investments

By Robert Hoskins

Today, the United States finally inched its way toward the full implementation of the JOBS Act passed in April 2012, required by federal law to be in place by January 2013, but still not fully realized as intended by President Obama and the both houses of the U.S. Congress.

SEC Crowdfunding Call for Comments on November 15, 2013

“We want this new market and the private markets in general to thrive in a safe and efficient manner, and these rules we adopted and proposed are designed to facilitate that objective,” said Mary Jo White, Chairwoman of the SEC. “As we fulfill our mission to facilitate capital formation and maintain fair and efficient markets, the Commission must always focus on strong investor protections.”

Until the general solicitation ban was lifted, hedge funds, VCs, and startups had to quietly raise that money, soliciting by word of mouth and other forms of private communication. Now companies can buy ads, launch PR campaigns, leverage social media and openly announce that they’re seeking investors.

The addition of general solicitation is expected to fuel a new cottage industry of investor matching-making websites that aim to broaden the investment pool to financial stalwarts outside the stanchly protected investment circles of Silicon Valley.

“With general solicitation it will be much easier for investors to find companies they are passionate about supporting,” said Mike Norman of crowdfunding website, WeFunder. The new rule will hopefully open up the capital-starved startup market to the majority of investors. According to WeFunder’s website, only 3% of the US’s 8 million accredited investors are active in the tech startup space.

For example, leading startup investing platform, RockThePost, announced last week that its equity crowdfunding website will provide the following equity crowdfunding investment services:

1. Prominent featuring of startups publicly announcing investment rounds
2. Investor verification system that shifts the burden off startups
3. Secure transactions where Escrow accounts act as a safe haven for early committed investors
4. Full transparency – third party identity checks and legal business verification, crowdsourced due diligence, bank-level security
5. Smart matching of investors to startup investments that match their preferences

Equity crowdfunding sites such as Angelist, Circleup, Crowdfunder, FundersClub, RockThePost and Wefunder are important the nascent industry because according to the Center for Venture Research, only 258,000 investors have made an angel investment out of the 8.7 million accredited investor households eligible to invest in the U.S.

The general solicitation ban lift will allow startups to publicly fundraise via methods such as equity crowdfunding, harnessing the power of the internet and social media to reach potential investors in all corners of the country.

According to a Forbes article, many states have decided not to wait on the SEC. Kansas, the first state to enact laws requiring the registration of sales of securities to the general public 100 years ago, turned out to be the first in the U.S. to enact an “intrastate” Invest Kansas Exemption law. The state of Georgia passed the Invest Georgia Exemption that provides even more freedom for crowdfunding than the Kansas exemption. North Carolina’s House passed a crowdfunding bill that is expected to move to the full legislature in an updated form and be signed into law next year. The state of Washington is currently teeing up crowdfunding legislation and other states will likely follow suit.

Tanya Prive, a co-founder of RockthePost, points out that “One of the other issues I’ve seen is that there are plenty of startups with a large customer base that they cannot tap into for capital support under existing regulations. These people are the biggest fans and evangelists of the brand, who might be first in line to invest. Once the user base is able to engage with their beloved company in fundraising mode via an investment crowdfunding platform, the company will be able to capitalize on the crowd’s interest in their success and accelerate the fundraising process by converting customers into investors.”

“So although there are strings attached to the ruling, lifting the ban on general solicitation – an 80-year-old rule – will help investors connect with entrepreneurs, and vice versa. The decision also weighs in the favor of entrepreneurs and investors who live outside places like Silicon Valley, where old-school networking and personal connections are how financing deals typically happen,” said Eric Markowitz, crowdfunding reporter for Inc. Magazine. “By lifting the ban, entrepreneurs living outside traditional tech hubs may find it easier to connect with investors, raise money, and grow their start-ups without having to necessarily relocate.”

Although large players like private equity firms Bain Capital and Blackstone Group LP could take advantage of the chance to use television ad campaigns, many lawyers and regulators close to the industry have said that they expect smaller funds with fewer resources to test the new rule first.

“By allowing issuers to solicit to a broader group of potential investors, the SEC has showed its commitment to democratizing the investing process and putting an end to yesterday’s ‘old boy’ investor networks,” said Barry Silbert, founder and chief executive of SecondMarket Inc., a marketplace for private shares.

The next important date to watch for is October 31, 2013, when the 2nd wave of SEC crowdfunding guidelines are expected to be issued for Title III investors that will allow unaccredited investors to participate in private placement investments.

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More News on the SEC’s New General Solicitation Rules:

1. SEC Lifts Ban On General Solicitation, Allowing Startups

2. SEC Approves JOBS Act Requirement to Lift General Solicitation Ban

3. Starting Today, Startups Can Broadcast Their Fundraising From the Rooftops

4. The General Solicitation Ban Lift Can Change Startup Investing Forever

5. Crowdfunding Will Flourish Regardless Of What The SEC Does

6. Game Changer: SEC Lifts General Solicitation Ban

7. Boon for Start-ups: SEC Lifts Ban on General Solicitation

8. SEC lifts longtime advertising ban for hedge funds, others

9. SEC Lifts Ban on General Solicitation in Certain Private Placements

10. S.E.C. Lifts Advertising Ban on Private Investments

11. SEC Votes to Ease 80-Year-Old Ban on Private-Investment Ads

12. SEC Lifts Ban on Hedge Fund Ads

13. SEC Lifts 80-year-Old Ban on Advertisements for Private Investors

14. SEC lifts advertising ban on private investments: How it affects you

15. SEC Votes to Lift Ban on Hedge Fund Advertising

RockthePost Predicts Legalization of General Solicitation Will Change Startup Investing Forever

The SEC general solicitation rule change washes away some limitations on promotion of fundraising campaigns that have been in place for 80 years

By Robert Hoskins

Many changes are going to take place in the startup investment industry as the SEC lifts its ban on general solicitation on Monday, September 23.  With this implementation, the startup ecosystem will see an 80-year-old securities law modified for modern times, allowing private companies – startups in particular – to publicly advertise that they are seeking investments.

Alejandro Cremades launches crowdfunding project as a solution to help save the U.S. economy.

Among the exciting developments, leading startup investing platform RockThePost will unveil the following, in conjunction with Title II of the JOBS Act taking effect on Monday:

1. Prominent featuring of startups publicly announcing investment rounds
2. Investor verification system that shifts the burden off startups
3. Secure transactions where Escrow accounts act as a safe haven for early committed investors
4. Full transparency – third party identity checks and legal business verification, crowdsourced due diligence, bank-level security
5. Smart matching of investors to startup investments that match their preferences

RockThePost CEO, Alejandro Cremades, notes that “our startups have had mixed feelings on general solicitation, but the ones who are planning to take advantage of it are really excited about the exponential exposure from which they can benefit tremendously.”

According to the Center for Venture Research, only 258,000 investors have made an angel investment out of the 8.7 million accredited investor households eligible to invest in the U.S. The general solicitation ban lift will allow startups to publicly fundraise via methods such as equity crowdfunding, harnessing the power of the internet and social media to reach potential investors in all corners of the country. We expect a large jump in angel activity in the coming years as individual investors seek higher returns on investment and feel more comfortable investing in startups.

The nature of startup investing is risky, but to grow the nest egg, investor money has to be put to work. With a financial shift underway in which low yields and high interest rates are prevalent, investors are forced to look beyond traditional investment avenues to reach their financial goals.

A 2013 UBS report, Investment Strategy Guide, recommends that 7 to 11% of any given investment portfolio be allocated to new alternative investments, which includes buying equity in early stage companies (note that only accredited investors may participate in private offerings).

Startup investing involves high risk. However, investing early in startups has the potential of yielding high returns as seen below.

• $1,000 in Facebook in 2005 = $624,500 today
• $1,000 in Airbnb in 2009 = $589,667 today
• $1,000 in Dropbox in 2008 = $391,500 today

RockThePost does believe that openly fundraising in the startup investing world could significantly help startups gain access to capital in an economic environment in which investors are more readily looking for high-return investments.

General solicitation will potentially increase the number of transactions happening between investors and startups. RockThePost expects these changes to drive the U.S. economy as small businesses have created almost 65% of the net new jobs for the past 17 years.

By democratizing access to startup capital for entrepreneurs and bringing startup investment opportunities to a new investor demographic, RockThePost aims to be the go-to destination for both startups and investors.

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More News on the SEC 80-Year Ban on General Solicitation:

• Mary Jo White, SEC Approves JOBS Act Requirement to Lift General Solicitation Ban on Crowdfunding for Accredited Investors

• SEC Issues Call for Crowdfunding Suggestions to Promote Small Business Capital Formation

• BlazeFund Launches New Innovative Equity Crowdfunding Platform

• Front Page PR Offers Broker Dealers General Solicitation Campaigns to Market the Oncoming Wave of Equity Crowdfunding Investment Opportunities to the Next Generation of U.S. Accredited Investors

• Jeff Pulver’s Zula Equity Crowdfunding Campaign Pushes Israel’s OurCrowd into the Worldwide Lead of Broker/Dealer Crowdfunding Deals

• Wowcher Selects BankToTheFuture.com as Equity Crowdfunding platform for Fabfob fundraising campaign

• New Equity Crowdfunding Portal VentureHealth Launches to Provide Life Science Crowdfunding Investment Opportunities for Accredited Investors in United States

• Equity Crowdfunding Investments Surpass $16 Million on MicroVentures Broker/Dealer Crowdfunding Platform

• Ingenious Britain in the UK offers 25% Stake in New Equity Crowdfunding Platform on Crowdcube

Mary Jo White, SEC Approves JOBS Act Requirement to Lift General Solicitation Ban on Crowdfunding for Accredited Investors

SEC Eliminates the Prohibition on General Solicitation and General Advertising in Certain Crowdfunding Fundraising Offerings

By Robert Hoskins

The Securities and Exchange Commission today adopted a new rule to implement a JOBS Act requirement to lift the ban on general solicitation or general advertising for certain private securities offerings.

SEC Approves JOBS Act Requirement to Lift General Solicitation Ban

New SEC Rulemaking on Crowdfunding Guidelines for General Solicitation for Accredited Investors

Rule 506

The final rule approved today makes changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that:

• The issuer takes reasonable steps to verify that the investors are accredited investors.
• All purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D) or the issuer reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.

Under existing Rule 501, a person qualifies as an accredited investor if he or she has either:

• An individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence.
• An individual annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

The determination of the reasonableness of the steps taken to verify an accredited investor is an objective assessment by an issuer. An issuer is required to consider the facts and circumstances of each purchaser and the transaction. Nevertheless, in response to commenters’ requests, the final rule provides a non-exclusive list of methods that issuers may use to satisfy the verification requirement for individual investors.

The methods described in the final rule include the following:

• Reviewing copies of any IRS form that reports the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year.
• Receiving a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser’s accredited status.

The existing provisions of Rule 506 as a separate exemption are not affected by the final rule. Issuers conducting Rule 506 offerings without the use of general solicitation or general advertising can continue to conduct securities offerings in the same manner and aren’t subject to the new verification rule.

Rule 144A

Under the final rule, securities sold pursuant to Rule 144A can be offered to persons other than QIBs, including by means of general solicitation, provided that the securities are sold only to persons whom the seller and any person acting on behalf of the seller reasonably believe to be QIBs.

Form D

The final rule amends Form D, which is the notice that issuers must file with the SEC when they sell securities under Regulation D. The revised form adds a separate box for issuers to check if they are claiming the new Rule 506 exemption that would permit general solicitation or general advertising.

What’s Next

The rule amendments become effective 60 days after publication in the Federal Register.

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Related Crowdfunding News Articles:

• SEC: Startups can now advertise they are fundraising; crowdfunding has to wait
• SEC Lifts Ban Against General Solicitation, Allowing Startups To Advertise That They’re Fundraising
• SEC Adopts Title II Rules, CrowdBouncer Positioned to Satisfy Verification Mandate
• SEC votes to end decades old general solicitation ban
• Finally: SEC Lifts Ban on Advertising Fundraising Rounds
• Hello Private Equity Marketing
• SEC Lifts Historic Ban on General Solicitation and Advertising in Rule 506 and 144A Offerings
• The Deal: SEC to Consider ‘Bad Actor’ Rule under JOBS Act
• SEC Clears Way for Blogging Business Owners
• SEC lifts 80-year ban: Startups can tell the world they are raising money

CrowdBouncer Beta Trials Title III Crowdfunding Compliance Database

By Robert Hoskins

CrowdBouncer a beta trial of its first centralized, API-driven repository of Title III investor information to help Equity Crowdfunding sites ensure compliance with section 302(a) of the Jumpstart Our Businesses Act (JOBS Act). CrowdBouncer is one of the many growing Crowdfunding Service Providers (CSPs) that are rising to the occasion to develop and introduce high technology tools to serve as back-end transactional solutions that will allow Crowdfunding portals to suffice the SEC regulatory requirement to stay within legal compliance of future Crowdfunding guidelines.

CrowdBouncer Beta Trials Title III Crowdfunding Compliance Database

CrowdBouncer’s business focuses on compliance and other back-end services to help equity crowdfunding portals create compliant user experiences and closing processes that are competitive with broker-dealer operated sites.  The company has filed for patent protection on its proprietary technology and has several follow-on product offerings on its development roadmap, including the ability to generate closing documents and deliver escrow services through a licensed escrow agent on an automated basis through its API.  It has begun partnering with key industry and technology leaders to deliver these services through its API.

Bob Carbone, CrowdBouncer’s founder and CEO, commented: “The JOBS Act is a tremendous potential boon for very early stage companies seeking capital.  However, it impacts crowdfunding portals in a number of ways that constrains their ability to create compliant, uninterrupted user experiences from beginning-to-end of an offering.  Our goal is to provide portals with the necessary tools to compliantly create a 4-click subscription process for investors: create account, review disclosures, sign documents and consents, and fund/checkout. Over the course of the next several weeks, CrowdBouncer will be launching these transactional services to complement the compliance resources of the API.”

Brian Fending, technical co-founder and CTO, commented: “Crowdfunding portals serve both investors and issuers, and can do so with relative ease using our platform in a single API implementation. Providing the right tool at the right time to everyone involved in a transaction is a real challenge – ours are the tools that will enable the market and help to ensure its stability.”

The JOBS Act, which was enacted in 2012, made radical changes to the regulatory environment for private placements so as to allow equity crowdfunding under a new exception, as well as authorizing the use of general solicitation in offerings that continue to rely on Rule 506 of the Regulation D exemption.  As a result, the landscape for private placements will be much more democratized, allowing ordinary investors to participate in private placements and providing entrepreneurs with expanded and more cost effective options for raising capital.

Mary Jo White Senate Hearing Testimony Lists JOBS Act Crowdfunding Rules as 1st on SEC Agenda

Testimony of Mary Jo White

Nominee for Chair of the U.S. Securities and Exchange Commission

Before the United States Senate Committee on

Banking, Housing, and Urban Affairs

March 12, 2013

Chairman Johnson, Ranking Member Crapo, and Members of the Committee:

It is my privilege to appear before you today as President Obama’s nominee to be the thirty-first Chair of the Securities and Exchange Commission.

Mary Jo White Confirmation Hearing Chair of the U.S. Securities and Exchange Commission Before the United States Senate Committee on Banking, Housing, and Urban Affairs

There is no higher calling than public service. As the United States Attorney for the Southern District of New York for almost nine years, I worked very hard on behalf of the American people investigating, prosecuting, and punishing those who committed crimes. From white collar criminals to terrorists – regardless of the complexity of the case or the identity of the defendant – we always strove to do the right thing and to vigorously enforce the law. Today, I am honored by the prospect of potentially returning to public service as the Chair of the SEC to help carry out its essential mission.

While I served as United States Attorney, our office worked closely with the SEC investigating and prosecuting violations of the federal securities laws by both companies and individuals. Through that experience, I became a strong admirer of the expertise, independence, and commitment of the Commission and its staff. I fully appreciate the critical role the SEC plays as the primary regulator of our capital markets and as a strong advocate on behalf of investors. Today, in the wake of the financial crisis and in the midst of implementing the substantial legislative mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the Jumpstart Our Business Startups Act (JOBS Act), the SEC’s importance and scope of responsibilities are greater than ever.

If confirmed, I will vigorously embrace and carry out the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC’s mission has a tri-partite mandate, but the component parts should not be viewed as in conflict with each other. It is the responsibility of the Chair and the Commission to take the long-term view, balance the objectives when necessary, and seek to fulfill all parts of its critical mission. Then, our markets can thrive and investors will be protected and benefit.

As was true when Chairman Schapiro was first before this Committee in 2009, this too is a crucial time for the SEC. Although the worst of the recent financial crisis may be behind us, none of us can be complacent – least of all the SEC, which has faced a number of its own challenges. Under the leadership of Chairman Schapiro and Chairman Walter, the SEC has made significant strides to strengthen its examination and enforcement functions, improve its capacity to assess risks, and enhance its technology.

Our markets, however, are continuously evolving, and the technology of today is most certainly not the technology of tomorrow. Fast-paced and constantly changing markets require constant monitoring and analysis, and when issues are identified, the investing public deserves appropriate and timely regulatory and enforcement responses.

I am acutely aware that the position of Chair of the SEC carries with it heavy responsibilities and many challenges. But I commit to this Committee and the American public that, if confirmed, I will work tirelessly and do everything in my power to effectively lead the SEC in fulfilling its mission. Let me very briefly highlight a few early priorities were I to be confirmed.

First, I would work with the staff and my fellow Commissioners to finish, in as timely and smart a way as possible, the rulemaking mandates contained in the Dodd-Frank Act and JOBS Act. The SEC needs to get the rules right, but it also needs to get them done. To complete these legislative mandates expeditiously must be an immediate imperative for the SEC.

With respect to rulemaking, rigorous economic analysis is important and should inform and guide the decisions that are made. Although challenging – particularly in the quantification of benefits – in my view, the SEC should seek to assess, from the outset, the economic impacts of its contemplated rulemaking. Such transparent and robust analysis, including consideration of the costs and benefits, will help ensure that effective and optimal solutions are achieved without unnecessary burdens or competitive harm. If confirmed, I would continue the efforts of the Commission to ensure that the SEC  performs robust analysis in connection with its rules and in a manner that does not undermine the SEC’s ability to carry out its mandate to protect investors and our capital markets.

Second, if confirmed, it will be a high priority throughout my tenure to further strengthen the enforcement function of the SEC – it must be fair, but it also must be bold and unrelenting. Investors and all market participants need to know that the playing field of our markets is level and that all wrongdoers – individual and institutional, of whatever position or size – will be aggressively and successfully pursued by the SEC. Strong enforcement is necessary for investor confidence and is essential to the integrity of our financial markets. Proceeding aggressively against wrongdoers is not only the right thing to do, but it also will serve to deter the sharp and unlawful practices of others who must be made to think twice – and stop in their tracks – rather than risk discovery, pursuit, and punishment by the SEC.

Third, the SEC needs to be in a position to fully understand all aspects of today’s high-speed, high-tech, and dispersed marketplace so that it can be wisely and optimally regulated, which means without undue cost and without undermining its vitality. High frequency trading, complex trading algorithms, dark pools, and intricate new order types raise many questions and concerns. Are they problematic for retail and non-institutional investors? Do they result in unnecessary volatility, or create an uneven playing field? Or do these modern-day features bring benefits such as efficiency, price reduction, and healthy competition to our markets? Do they do all of these things? The experts and studies to date have not been consistent or definitive in their observations and findings about whether and to what extent harm is caused by the current market structure and practices. There must be a sense of urgency brought to addressing these issues to understand their impact on investors and the quality of our markets so that the appropriate regulatory responses can be made. If confirmed, I will work not only to ensure that the SEC has the cutting-edge technology and expertise necessary to enable it to keep pace with the markets and its responsibilities to monitor, regulate, and enforce the securities laws, but also to see around the corner and anticipate issues.

There are, of course, many other important areas within the jurisdiction of the Commission: from money market funds to private fund advisers, from credit rating agencies to clearing agencies, from the appropriate standards and regulations governing the conduct of broker-dealers and investment advisers when providing investment advice to retail customers to how to make public issuer disclosures more meaningful and understandable to investors, to name just a few. If confirmed, I would focus on these and the many other challenges facing the SEC.

In conclusion, it would be my privilege and honor to work with the men and women of the Commission and this Committee to help carry out the SEC’s mission. Thank you for considering me to serve in this capacity and for the opportunity to appear before you today. I would be happy to answer your questions.

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Crowdfunding Press Center Encourages Small Businesses to Sign White House Crowdfunding Petition

By Robert Hoskins

Please join small businesses across America in signing the White House Crowdfunding Petition (http://wh.gov/vjao) to respectfully insist that the Securities Exchange Commission (SEC) expedite issuing Title II and III Crowdfunding guidelines.  The Crowdfunding rules will provide access to investment startup capital, which is needed desperately by millions of entrepreneurs and small businesses that want to create new jobs.  These businesses are ready, willing and perfectly positioned to create millions of new American jobs, but cannot get a bank loan to expand operations.

Only 150 more signatures are needed to place the Crowdfunding Petition on the official White House website where millions of Americans can add their names a show support for the provisions signed into law last year by the JOBS Act on April 5, 2012.

The number one priority for President Obama, the U.S. Congress and the SEC is to create millions of new jobs, end to the economic crisis and generate hundreds of billions of dollars in new tax revenue needed to end Sequestration.  The main roadblock that is preventing America’s recovery is the SEC’s failure to issue Crowdfunding guidelines, which were due, by law, on January 1, 2013.

“All small business associations need to join together and sign the White House Crowdfunding Petition to motivate the U.S Government to do what is right from our country,” said Robert Hoskins, Crowdfunding Press Center. “As soon as the Crowdfunding guidelines are issued, 98% more Americans can invest up to $2,000 per year in local businesses they know and trust in return for a payback from a portion of future profits. Please help us get America back on track!”

The Crowdfunding Press Center urges members of the Association of Small Business Development Centers (ASBDC), National Business Association (NBA), National Federation of Independent Business (NFIB), National Association for the Self-Employed (NASE), National Small Business Association (NSBA), Service Corps of Retired Executives (SCORE), Small Business Administration (SBA), and the Small Business Technology Council (SBTC) to sign the White House Crowdfunding Petition.

White House Crowdfunding Petition

Click Here to Add Your Initials to the White House Crowdfunding Petition

By Robert Hoskins 

On April 5, 2012, President Obama signed the JOBS Act into law with full bipartisan support from the U.S. Congress. It was one of America’s most promising pieces of legislation to jumpstart America’s economy by providing a new pool of investment capital for startups and small businesses through a process known as Equity Crowdfunding.

Send a Clear Message to Washington, America Needs Crowdfunding Now

The law allows 98% more Americans to begin investing in small local businesses they know and trust in return for an equity position that will provide a return on investment if the business becomes successful.

Right now there are approximately 260 million Americans that are 18 years or older. The JOBS Act will allow unaccredited investors to invest up to $2,000 per year in small businesses that promise to provide products and services they want to see introduced into their community.  If a mere 10% of unaccredited investors invested $2,000 it would inject $52,000,000,000 into the local economy.

Instead of incurring more tax payer debt, Americans for the first time in history would be able to steer the economy with their hard earned dollars.  They would invest in products they actually want to buy.  There would be zero red tape, pork barrel spending, or financial roadblocks that to date have preventing small businesses from getting access to the badly needed investment capital they need to startup or expand operations.  Crowdfunding is a financial tool that will create millions of jobs at zero expense to the U.S. Government or its taxpayers.

And since Crowdfunding investments are financing the creation of hundreds of thousands of small businesses that will not only create new jobs, but buying new tools, vehicles, office equipment, office space rentals, and of course, paying more taxes to the U.S. Government, why not make all Crowdfunding investments tax deductible?

This would be a great way to adjust the financial hardships that are now facing Americans in light of recent government failures to get America back on track.

Per the Small Business Administration small businesses accounted for:

• 65 percent (or 9.8 million) of the 15 million net new jobs created between 1993 and 2009.
• Represent 99.7 percent of all employer firms.
• Employ about half of all private sector employees.
• Pay 43 percent of total U.S. private payroll.
• Have generated 65 percent of net new jobs over the past 17 years.
• Create more than half of the nonfarm private GDP.
• Hire 43 percent of high tech workers (scientists, engi­neers, computer programmers, and others).
• Made up 97.5 percent of all identified exporters.
• Pro­duced 31 percent of export value in FY 2008.
• Produced 16.5 times more patents per employee than large patenting firms.

Why not make it possible for average Americans to fund the creation of more small businesses?

When the U.S. Congress passes a bill and the President of the United States signs it into law, all Americans are expected to abide by the law regardless of whether they feel it is right or wrong. Why then are the executives the Securities Exchange Commission (SEC) allowed to break the JOBS Act law that clearly states that Crowdfunding guidelines be issued by January 1, 2013?

President Obama’s second term inauguration speech promised to help small businesses and get America back on its feet and recapture the #1 position of worldwide leadership.  Is it true the SEC has more power and clout on Capitol Hill than the President of the United States or the U.S. Congress?

It makes one wonder where is the current administration’s will power to do what America needs most, create new jobs and instill a sense of national pride that we are the still the best country in the world?

Crowdfunding naysayers point to the potential for fraud, but in reality this is just a political excuse not to shift the financial power from Wall Street to the average American for wealth creation. Why not give the average American a chance to make a good profit from wise, well-thought investment in local companies they know and trust?

If Australia and the United Kingdom have been doing Crowdfunding for years with zero cases of fraud, why is our government allowing our country to fall behind in the race for worldwide economic recovery? Soon Equity Crowdfunding will be legal in France, Belgium, Germany, Ireland, Finland, Italy, Hong Kong and South Africa, but not the United States.

Have America’s leaders lost the ability to think straight and put innovative policies in place that are clearly working in other countries successfully? If we are not smart enough to create our own rules, why not copy another country’s rules that are working well?

America used to be recognized as leader and a worldwide power, but our reputation is fading and the American public is sick and tired of politicians not doing what is right for the general population.  We need jobs right now, not several years from now.

The U.S. Government has done their job to put a law in place that will empower our nation to become great again.  It is now time for the SEC to follow suit and get the Title II and Title III guidelines issued as soon as soon as possible so that America  can get back to work.

Sign the White House Crowdfunding Petition

If you support the Crowdfunding industry and would like to send a message to the White House that America needs more jobs now, not in a year or two, but right now please add your name to this White House Crowdfunding Petition by March 30, 2013.

How to Contact the SEC Directly

1. Via Email:

TBD, SEC Chairman
chairmanoffice@sec.gov

Luis A. Aguilar, Commissioner
aguilarl@sec.org or aguilarlu@sec.org

Daniel M. Gallagher, SEC Commissioner
gallagherd@sec.gov

Troy A. Paredes. SEC Commissioner
paredest@sec.gov

David Marsh, SEC Staff
marshd@sec.gov

2. Via Postal Mail:

Securities Exchange Commission (SEC)
Attn.: JOBS ACT/Crowdfunding Guidelines
100 F Street NE
Washington, 20549

3. Via Phone:

Tel: (202) 942-8088

4. Online Comment Form:

https://tts.sec.gov/oiea/QuestionsAndComments.html

Congress Getting Fed Up with SEC Delays, Introduces New Crowdfunding Legislation to Speed Up JOBS Act Implementation

By Robert Hoskins

Today, Congressman Patrick McHenry (R-NC), Chairman of the Financial Services Subcommittee on Oversight and Investigations, joined bipartisan leaders in Congress to introduce H.R. 701 legislation providing the U.S. Securities and Exchange Commission (SEC)  with an October 31^st deadline to finalize Regulation A rules.

Rep. Patrick McHenry Introduces H.R. 701 to Speed Up SEC Implementation Guidelines, legislation providing the U.S. Securities and Exchange Commission (SEC)  with an October 31^st deadline to finalize Regulation A rules.

Congressman McHenry announced, “This legislation simply codifies an intended deadline for Regulation A as part of the JOBS Act.  The target date is reasonable, nearly 19 months after the JOBS Act was signed into law and 5 months before the official Reg A review would need to occur. Our economy needs efficient, vibrant capital markets to thrive and this legislation is a step in the right direction.”

Congressman Schweikert said, “It was a big win for the American people when we passed the Reg A bill to help small businesses go public. It will be an even bigger success if we can put Washington on a deadline to relieve small businesses from expensive underwriting costs as soon as possible.”

Congressman Eshoo said, “This bill puts the SEC on deadline to finalize new Regulation A rules so that startup businesses can have access to additional capital. When Congress raised the SEC Regulation A offering limit, we did so because it was essential in meeting the capital formation needs of startup businesses in our country. It will create jobs, strengthen our economy, and promote the high-tech, sustainable energy, and life science sectors. Now, it’s the SEC’s turn to follow through.”

Congressman Garrett said, “Congress took bipartisan action to pass the JOBS Act nearly a year ago.  The SEC has yet to finalize its rules.  This abject failure to implement key components – like Regulation A – stands in the way of economic growth and harms our capital markets.  I thank Congressman McHenry for his hard work on this bill, and I look forward to its swift passage.”

Congressman Scott said, “This bill is an important step in providing small businesses an exemption from burdensome requirements by offering a reasonable but firm deadline for finalizing the rules for Regulation A.  The JOBS Act passed with strong support in the House, and this legislation builds on that progress by putting the release of the final rules in sight.”

Regulation A offers small businesses an exemption from the registration requirements of the Securities Act of 1933. The JOBS Act requires the SEC to amend Regulation A by raising its threshold to $50 million and enact new regulations resolving issues that have made Regulation A unfeasible to date.

Injecting Credibility and Accountability into the Equity Crowdfunding Industry

How a Crowdfunding Audit Bureau Could Give the Crowdfunding Industry Instant Transparency

By Robert Hoskins, Crowdfunding Press Center

While most of the Crowdfunding industry is waiting to see what type of guidelines the Securities Exchange Commission (SEC) will issue for Title II, Reg. D accredited investors, it would be a good time for the Crowdfunding industry to start discussing a list of recommended solutions that would make it easier for the SEC to roll out some proposed rules for Title III unaccredited investors.

The Crowdfunding industry needs to start sharing their thoughts on exactly what hurdles are preventing the SEC from issuing the Crowdfunding guidelines in the news media so that everyone in the industry can put their heads together and come up with a creative solution that will make everyone happy.

The average American has no idea how to look up items placed on a Government docket, much less get involved in filing public comments with the SEC to help steer the public policy decisions that will be made soon for the Crowdfunding industry. One thing that would be helpful in bringing the general public up to speed on Crowdfunding is to begin holding open meetings that include journalists, industry analysts and industry experts from other industries that have well established sales, distribution and venture capital investment channels.

There are many venture capitalists and angel investors that have been working in the high-technology industries such as security, application development, data mining, data warehousing, wireless mobility and social networking channels that would make great speakers for these events and could provide a wealth of information that would benefit up and coming Crowdfunding Service Providers (CSPs).  Not only would these types of events be good for networking, but they would generate lots of positive news coverage.

The more informative new articles that are shared via mass media outlets, the quicker the momentum will begin to  pick up for the Crowdfunding industry.  The Crowdfunding industry really needs to work closer with experts in the information technology and computer networking hardware industries to start publicizing how various flavors of technology can be harnessed to resolve many of the industry’s concerns.

For example, most people, including the media, seem to think that the SEC is extremely worried about the opportunity for fraudsters, but in reality, they are probably a lot more worried about how much money and how many employees they will need to police 10,000 Crowdfunding portals.  Or how will they regulate the 226 million potential investors that are 18 years or older in the United States that are only allowed to donate a maximum of $2,000 per year to Equity Crowdfunding platforms?

Some great ideas that have already popped up on the radar screen for consideration include crowdfunding credit checks, credit bureaus and accreditation credentials.  The problem is that most of the technical details for how these ancillary businesses will conduct their operations has not been made public or talked about in the industry trade press. Portals and eCommerce centers have been around for a long time and the technology to automate and ensure security is very mature.

Another tool  that has not been talked about yet, but has served as a very useful role in the advertising industry might include establishing a Crowdfunding Audit Bureau that audits a Crowdfunding Intermediary’s subscribers.  Audit statements have been used by print media buyers for decades to determine whether or not a publication was worth investing $25,000 to buy an advertisement to reach a specified target audience of potential buyers. Why not audit a Crowdfunding intermediary’s investors?

Audit statements served as a very useful tool because they broke down the publication’s subscriber’s demographics and presented the information in a standardized format that made it very easy to compare one publication’s subscribers versus all of their competitors on an apples to apples comparison. Crowdfunding Audit Statements would hold Crowdfunding sites and their investors accountable for the integrity of their data and put the burden of monitoring 10,000 Crowdfunding industry portals on a non-profit organization, not the SEC.

Using Crowdfunding Audit Rules each intermediary would publish a Crowdfunding Audit Statement, which is then audited by a non-profit, third-party vendor.  This process would make it fairly easy to keep track of the industry and its players. Audit statements would allow new intermediaries and the SEC to analyze in great detail what type of investors and investments each portal was generating by looking at the demographic, psychographic and financial characteristics reported for its subscriber base via the audits.

There are several auditing organizations that have been around for many years such as the Alliance for Audited Media or Business Publications Audits (BPA) Worldwide that were originally setup to audit statements from newspapers and magazines so that advertising agencies could analyze that value of a publication’s target audience before investing millions of dollars to advertise to reach their respective readers.

Audit statements were not required by the government, but they served a very useful purpose. Without an audit statement a media buyer always knew immediately that buying advertising in that publication would not be worth the risk. So why not implement a Crowdfunding audit system what that would allow investors and Crowdfunding campaign managers to select Crowdfunding intermediaries based on their audit statements?

Using qualification forms similar to old-school business reply cards, all Crowdfunding intermediary members should be required to fill out in-depth qualification forms that ask many questions related to what type of investor they are, what types of investments they are seeking and how much investment capital they are authorized to make during a given calendar year.  Other questions could probe into what type of company they work for, what vertical business segments they have experience with,  their job function and title,  yearly salaries, etc.  Call centers using data warehouses and financial data mining techniques could then verify the validity of this information.

Crowdfunding sites like Kickstarter are already doing a good job at reporting what industry segments are using their sites, what industries are receiving the largest Crowdfunding donations, as well as what industries have the highest success rates, but they really don’t provide much information on the pool of Crowdfunding donors/investors their site retains. With Kickstarter this is not really an issue, but for the hundreds of smaller Crowdfunding sites knowing for sure what pool of donors/investors they have in their subscriber databases would be great information to have in order to make a wise Crowdfunding campaign decision.

In addition, audit statements should go into great detail about how a Crowdfunding site generates their investor base.  Did investors sign up because the site is a leading Crowdfunding platform, or did the site offer them a free tablet to join their ranks?  A site with 20,000 serious investors that are there to invest will provide a much better return-on-investment than a site with 1,000,000 amateur investors that only signed up to get a free prize.

Among other things this process would shine a light on the rise and fall of registered investors per site, the platform’s success rate for Crowdfunding campaigns as well the growth rate by industry, average investment size and percentage of accredited investors versus unaccredited investors.  Perhaps Crowdfunding intermediaries should be required to exceed a 50-percent or better success rate for their campaigns by providing Business Partner Programs to provide professional assistance and improve investment performance ratios.

Using an audit statement process also would make it easy to educate investors and Crowdfunders to always ask Crowdfunding intermediaries for their Crowdfunding Audit Statement in a similar manner to how car buyers have been trained by the media to request a CarFax before buying a used car. Not having a CrowdFax Audit Statement would be a very easy way for inexperienced investors and Crowdfunding campaign managers to recognize sub-standard Crowdfunding platforms.

Everyone seems to have a general consensus that Crowdfunding will be extremely beneficial for the America economy because it will provide startup capital to millions of new and existing businesses where none has been available for the last five years. So it would be in the Crowdfunding industry’s best interest to do a better job at publishing whitepapers and industry research reports that detail how leading technology and standard operating procedures can be used effectively to protect all entities from fraud.  Instead of blaming the SEC for moving slowly, we should make their job easier by recommending relaxed, but fair rules that facilitate the ability for 98% more Americans to start investing in our future by placing well-thought-out Crowdfunding investments and receiving a good return-on-investment.