We at Ethical Markets Media (USA and Brazil) applaud this creative initiative.
There is a solution to the nation’s poor growth and anemic state of job creation. However, it requires updating Security and Exchange Commission (SEC) regulations regarding general solicitation and accreditation so average Americans can choose to invest in local small businesses. It is called Crowdfund Investing (CFI) — a common sense idea that has attracted the interest and support of President Barack Obama. Republican House member Patrick McHenry (NC) recently introduced H.R. 2930, the Entrepreneur Access to Capital Act, legislation that aligns with the general framework supported by the President. So here we have a “common ground” idea where both sides of the political aisle agree on many key details. There is no excuse to not move quickly with crowdfund investing as it will help thousands of small businesses and add fuel to our gasping economy.
Nascent entrepreneurs and growth oriented firms continue to have a difficult time finding capital to expand, innovate and grow. Of course, our nation has counted on the job-creating prowess of small businesses to lead us out of difficult economic periods. This time around, unfortunately, the uncertainties have become too great. New start-ups, which have fueled job creation after previous recessions, have not taken root at the same pace as in the past.
Weak demand, tight capital and credit markets, and policy uncertainties continue to erode confidence.
The CFI solution is one leg of the stool that will help entrepreneurs identify new sources of capital, thus providing optimism and much needed resources for investment and growth.
America, the land of the entrepreneur, is being out innovated. Other countries like the UK and France with similar capital constraints have already made CFI legal. The crowd is vetting the ideas of entrepreneurs, and backing only those they deem worthy. Fraud – a key issue of concern for regulators and legislators alike — hasn’t reared its nasty head thanks to hundreds if not thousands of prospective investors picking apart the idea, the business model or the execution plan of the entrepreneur for bringing products or services to market. These discussions and vetting occur in open dialogs on Internet platforms.
While currently not allowable under existing U.S. securities laws, CFI can provide a way for Micro-Angel Investors, both accredited and unaccredited, to pool their individual small investments to support entrepreneurs and businesses that have merit. If changes are made in U.S. laws, the funding rounds will occur via SEC-regulated platforms (websites). These platforms will provide transparency, open communication, accountability and reporting between the investors, entrepreneurs and the SEC. This is an expanded version of “friends and family” fundraising that utilizes an individual’s or business owner’s social networks (LinkedIn, Facebook, Twitter, etc.) to create jobs and grow the economy.
The CFI framework, which was outlined in my written testimony before Chairman Henry’s subcommittee on September 15, includes:
- The creation of a “funding window” of up to $1 million for startups and small businesses.
- Investors take a brief online course on Crowd Fund Investing and review a series of disclosures that demonstrate they are familiar with the basics of investing and understand the risks.
- Individuals who do the above can choose to invest in a small business; but investments via this funding window are limited to $10,000 or 10% of their gross income per individual.
- A project is not funded until it meets its minimum target. It is an all-or-nothing proposition. Only if the target is reached is money withdrawn from donor accounts.
- Because of the size of the crowd and the anticipated small dollar amounts invested ($80 is the current average on other platforms), we propose eliminating the 500-investor rule as well as broker/dealer license requirements due to its inhibitive ongoing and upfront costs.
- Due to their limited size, these offerings should be exempt from costly state law registration.
- General solicitation should be allowed only on registered Internet platforms where entrepreneurs and investors can meet and the crowd can vet in an open and transparent manner. Standards-based reporting will be submitted to the SEC by small businesses utilizing the platform.
- This framework ensures that the risk level to investors is on par with risk for similar classes of investments.
The reforms to existing law are modest and follow the spirit of the Securities Act of 1933 and the Exchange Act of 1934. The modifications include anti-fraud safeguards and create a peer-to-peer system where communities become the de facto seed and early-stage funders to entrepreneurs. There is wisdom in crowds. They are massively diverse and have a better collective intelligence. Every investor contributes to the crowd’s knowledge. An interconnected, knowledgeable crowd brings more experience. Together they will fund ideas that help small businesses, and the investors themselves, succeed.
A crowd-funding model, of sorts, has been successfully taking place online for the past five years. The current model allows a group of people to pool their money and “donate” it to fund an idea. Over $300 million has been donated to more than 500,000 artists, musicians and developing world entrepreneurs. Imagine what we could accomplish if those same dollars were devoted to spurring entrepreneurs and jobs.
Now it’s time to take action. Americans need to be allowed to do what they do best: come together as one to out innovate, out produce, and out work the rest of the world. The only question: how long with it take for our government to let us?
Sherwood Neiss is a successful entrepreneur, founder of “Startup Exemption” and member of the Small Business and Entrepreneurship Council.