Washington, DC (PRESS RELEASE – May 17, 2011) – On May 10th, the House Oversight and Government Reform committee held a hearing on “The Future of Capital Formation” to review issues related to investor protection and fraud. Namely, they meet to review aspects of the nation’s securities laws that inhibit capital formation. One of the most important aspects of the hearing focused on access to capital for startups and community-based businesses.
Sherwood Neiss, a successful entrepreneur and Small Business & Entrepreneurship Council (SBE Council) member, in conjunction with the organization’s President, Karen Kerrigan, crafted a framework called Crowd Fund Investing (CFI) that was presented to the SEC for review and is building support among Americans.
Even though Crowd Fund Investing (CFI) is taking place in the U.K., Holland, India and China, it is not permitted in the United States because it breaks the Security and Exchange Commission’s (SEC’s) accreditation and solicitation rules.
“These rules were written at a time when only 4% of Americans invested in the markets. Today we have technology that has leveled the playing field and increased investor sophistication making these rules outdated,” said Neiss.
Kerrigan argues that at a time when entrepreneurs and small businesses have limited sources for accessing capital, the nation needs to reform archaic rules that are hurting U.S. competitiveness and entrepreneurship. “We need to revisit these rules to allow Americans to invest in their communities thru SEC monitored frameworks,” said Kerrigan.
Under the proposed framework, groups of people will come together to invest in startups and provide valuable knowledge and experience to help an entrepreneur succeed. It will provide a way for unaccredited investors to pool their individual small contributions (likely between $50 – $500 each), and invest in companies and entrepreneurs they believe in. The funding rounds will occur on Internet platforms, which provide an added level of transparency and communication between the investors and the entrepreneurs. And “Micro-Angel Investors” will support people and businesses they believe in and in turn, help create jobs and grow the economy.
The proposed framework includes:
- The creation of a “funding window” of up to $1 million for startups and small businesses.
- Investors take an online primer on Crowd Fund Investing and review a series of disclosures that demonstrate they are familiar with the basics of investing and understand the risks.
- Any individual that passes the above step can choose to invest in a small business or entrepreneur; however investments via this funding window are limited to $10,000 per individual.
- A project is not funded until it meets its minimum target. It is an all-or-nothing proposition. Only when the minimum target is reached is money withdrawn from donor accounts and projects start. If the entrepreneur/small business does not raise the minimum target, then no money is withdrawn.
- Because of the size of the crowd and the anticipated small dollar amounts invested ($80 is the current average on other crowd funding platforms), they proposed eliminating the 500-investor rule as well as broker/dealer license requirements.
- 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 businesses 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.
Neiss believes that the SEC’s two main concerns anti-fraud and investor protection will be addressed. “Under this framework entrepreneurs will raise capital in rounds on Internet platforms where they will have to submit to rigorous background checks. The crowd will openly discuss information about the entrepreneur, their idea and capital requirements. As an all-or-nothing platform, entrepreneurs won’t be funded if the crowd doesn’t feel they or their idea is worthy enough. And if funded, both the entrepreneur and the crowd become part of an online community where the crowd comes together to share knowledge, experience and marketing power to help the entrepreneur succeed,” says Neiss.
“Committing fraud when you have a million eyes watching you will be nearly impossible,” says Neiss. “And limiting the investment amount that any one person can risk to a maximum of $10,000 will protect the investor from losing their savings.”
The goal of the petition they started at www.startupexemption.com is to get the SEC to use its exemptive authority to make a change to the security laws without legislative action.
At a time when capital isn’t flowing, and solutions are few, it would seem that what is working elsewhere in the world could easily work within our borders in a manner where the community acts as a peer-to-peer financing system. And if you think about it, says Neiss, “who is better to decide if you are worthy of investment than your friends, family and community?”
About Startup Exemption
Startup Exemption is an initiative spearheaded by Sherwood Neiss and a group of entrepreneurs. Mr. Neiss came across the problem when trying to help crowdfund one of his startups. The lawyers made it clear that the rules for raising capital where complicated and required costly compliance measures. Understanding the importance of startup capital, as well as the need to focus on the idea, he set about to change the way the law oversees investing in Startups. Their goal is to add an exemption to the Securities & Exchange laws based on ‘Crowd Fund Investing.’
About the Small Business & Entrepreneurship Council (SBE Council)
SBE Council is a national, nonprofit advocacy, research and training organization dedicated to protecting small business and promoting entrepreneurship.