The Sweet Smell of Progress

Cover Story WSJ - April 8, 2011

It has been just over 1 month since we launched this initiative and today we take heart in the fact that the SEC is listening to our concerns.  Without directly mentioning our names, Startup Exemption was part of today’s (April 8, 2011) Wall Street Journal cover story: U.S. Eyes New Stock Rules – Regulators Move Toward Relaxing Limits on Shareholders in Private Companies ( – subscription required)

On March 22nd a Congressman we have been working with sent a letter to the SEC asking them to explain if there is a correlation between the decrease in capital formation in the U.S. since 1996 and antiquated U.S. Regulations.  In that letter we contributed six questions that asked the SEC to respond to our crowd fund investing solution that could immediately get capital flowing to entrepreneurs but is hindered by regulation.

In particular we asked:

1)   Does the SEC agree that startup/early state entities suffer a disproportionate impact from the substantial costs arising from the regulatory, legal, compliance and accounting burdens of SEC registration, when compared to mature companies?

2)   Does the SEC agree that small startups, e.g., those seeking $1 million or less, are generally not capable of considering SEC registration given the large share of cash flow that would be directed to compliance with requirements to publicly registered companies?

3)   Has the SEC considered creating exemptions that would enable unaccredited but sophisticated investors in the U.S. to invest with reasonable limitation, in unregistered securities issued by small start-ups under what is being called “crowd fund investing” via entities similar to

4)   Given the growth of the unaccredited investor sophistication, would the SEC consider an exemption targeted to funding small startups by unaccredited investors that prove sophistication through examinations of investment knowledge while limiting the size of their investments relative to their income?

5)   Does the SEC agree that a natural diversification of risk results from the crowd funding of small entities?  [Compare the decision of a single equity investor’s investment of $1 million in a business to that of 1,000 investors investing $1,000 each.  Does the SEC expect different levels of risk aversion to apply across these two scenarios?  Does the SEC agree that the latter possibility may have dramatic effects for capital formation?]

6)   Does the SEC agree that the United Kingdom and other jurisdictions may gain a competitive advantage over the U.S. and improve their economic growth through advancements in their regulatory structure that enable crowd fund investing?

The end result is we believe today we saw light at the end of the tunnel that “Federal securities regulators are moving toward easing decades-old constraints on share issue by private companies, in a sweeping review that could remake the way American startups raise capital.”  Now there’s a positive comment for all our nation’s current and future entrepreneurs!



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