Sherwood Neiss, Chief Advocate of the Startup Exemption testifies September 15, 2001 in front of a Congressional Committee on the ways in which we can get capital flowing to entrepreneurs, spur innovation & create over 500,000 companies and 1.5M net new jobs over the next 5 years.
1) Sherwood Neiss’ testimony:Â http://1.usa.gov/oHrFy5
2) Video of Crowdfunding hearing:Â http://bit.ly/raknZY
3) List of panelists including their respective testimonies:Â http://1.usa.gov/oVD9OX
Sherwood Neiss being Interviewed by Dylan Ratigan
On September 14, 2011, Dylan Ratigan interviewed Startup Exemption Chief Advocate, Sherwood Neiss. Â The interview took place in advance of the 9:30am hearing on September 15th on Capitol Hill regarding Crowdfund Investing.
Sherwood spoke to Dylan about the importance of young businesses asjob creators, the need for capital to help fund these companies and how the Startup Exemption is a framework under which the SEC can allow equity-based crowdfunding to take place.
Sherwood discussed how under the Startup Exemption framework entrepreneurs that pass the muster of the crowd can raise equity capital. Â How the model accounts for investor protection and how by working together not only can we get capital flowing but we can help those entrepreneurs with the best ideas succeed.
The Startup Exemption was just endorsed in President Obama’s American Jobs Act and it has been promoted by Republican leaders of Congress as a way to promote business and capital formation for our nation’s net job creators.
The framework for the Startup Exemption has the ability to create 500,000 new companies over the next 5 years employing over 1.5M Americans.
To watch the interview click here.
Last night President Obama delivered a speech to the nation in front of both houses of Congress. During his speech he laid out his plan to create jobs and jumpstart our economy.
He had the following to say: “Everyone here knows that small businesses are where most new jobs begin.  And while corporate profits have come roaring back smaller companies haven’t.” “Ultimately our recovery will be driven not by Washington but our businesses and our workers.  We can help.” “I agree there are some rules and regulations that do put an unnecessary burden on businesses at a time when they can least afford it.” So “we are … planning to cut away the red tape that prevents too many rapidly growing startup companies from raising capital and going public.” “We should have no more regulation than the health, safety and security of the American people required.  And every rule should meet that commonsense test.” “We should be in a race to the top and I believe we can win that race.” “And it has been the drive and initiative of our workers and entrepreneurs that has made this economy the engine and envy of the world.”  “Members of congress it is time for us to meet our responsibilities”
Today his Jobs Act was released with the following paragraph pursuant to his speech.
Reducing Regulatory Burdens on Small Business Capital Formation: As part of the President’s Startup America initiative, the Administration will pursue efforts to reduce the regulatory burdens on small business capital formation in ways that are consistent with investor protection. This includes working with the SEC to explore ways to address the costs that small and new firms face in complying with Sarbanes-Oxley disclosure and auditing requirements. The administration also supports establishing a “crowdfunding” exemption from SEC registration requirements for firms raising less than $1 million (with individual investments limited to $10,000 or 10% of investors’ annual income) …. This will make it easier for entrepreneurs to raise capital and create jobs.
The bolded line comes directly from what the Startup Exemption has been advocating within its networks in Washington, DC!  Sherwood Neiss, the entrepreneur and Chief Advocate for the Startup Exemption said, “It is AMAZING to see Washington come together over this issue.  Crowdfund Investing (CFI) is an AMERICAN opportunity.  It has the ability to get capital flowing to our nation’s struggling entrepreneurs so that they can grow and hire.  Our zero-cost government initiative has the ability to create over 500,000 companies and 1.5M net new jobs over the next 5 years.â€
President Obama is pushing congress to enact the Jobs Act. If passed, the crowdfunding changes advocated by the Startup Exemption will be the first changes to the security laws in the past 20 years.
Next week President Obama will be talking about a plan to create jobs in America. Finally a subject both parties should be able to agree upon; jobs! The premise behind his action is correct, however his focus is not.
While we are in favor of improvements that advance our education system and infrastructure to keep us competitive in the world, the real long-term opportunity to pull us out of this recession lies in the hands of our nation’s entrepreneurs and the confidence we as a nation have to help them succeed.
Both the SBA and the Kauffman Foundation for Entrepreneurship will tell you that the bulk of net new jobs (those jobs created less jobs lost) during prior recessions came from small businesses and entrepreneurs.
So logically, helping foster the entrepreneurial engine in the USA will foster innovation, businesses and jobs; undoubtedly in a multiple of what our government can do through public stimulus.
However, the traditional capital that our nation’s entrepreneurs used prior to the financial meltdown has disappeared – I know I tried to raise capital for 2 ideas I have and I’m a seasoned three-time INC500 entrepreneur.
There’s a solution gathering support and it only exists today because of advances in the Internet and Technology. It is based on Crowdfunding where entrepreneurs pitch their ideas to average Americans and let them decide which ideas they would back with a few dollars in exchange for an equity stake in the company.
This form of investment is illegal in the USA because it breaks 80 year-old Security Laws on public solicitation and accreditation. However, American’s today are more sophisticated than they were 80 years ago, they have seen the financial crisis firsthand and are more skeptical than ever before freely giving away their hard earned cash. Go ahead, try and ask a group of 1,000 people for $50 each and see how successful you are.
If we can update the security laws to make equity-based Crowdfunding (aka Crowdfund Investing) legal, then we can put the power in the hands of the American people to decide which of their community entrepreneurs they want to back and those that they do not. The ones that rise to the top will not only have access to a small amount of critical seed capital that doesn’t exist in the markets, but knowledge, experience and marketing power from their supporters. Think about it. If you own Apple stock chances are you have an iPhone and rave about it. Subsequently, if you want to back your friends Korean BBQ Food Truck or Internet Startup, chances are you will not only be a consumer but an advisor and marketing agent for them as well.
Direct ownership will not only increase the chance of success (as social networks have time and again shown the ability of the crowd to rally behind an idea) but first-hand ownership will help entrepreneurs succeed thru shared knowledge and experience. More small successes will lead to an increase in consumer confidence, which is a direct economic indicator.
We are on the verge of a double dip recession. No one trusts our government. Let’s put something on the table that is good for the country that both side should be able to agree upon; a zero-cost framework that provides a limited amount of capital flow to entrepreneurs that has the ability to stimulate innovation and jobs, in a fashion that both mitigates risk and provides for investor protection.
The following are some of the academic reports written about the current SEC rules and why they prohibit access to capital for small businesses & entrepreneurs:
Proceed at Your Peril: Crowdfunding and the Securities Act of 1933, Tennessee Law Review. Joan MacLeod Heminway & Shelden Ryan Hoffman, August, 2011
Crowdfunding Microstartups: It’s Time for the Securities and Exchange Commission to Approve a Small Offering Exemption, University of Pennsylvania Journal of Business Law.  Nikki D. Pope, August, 2011
Petition for Rulemaking: Exempt Securities Offerings up to $100,000 with $100 Maximum per Investor from Registration. Sustainable Economies Law Center. Jenny Kassan, July, 2010
SEC Regulations Barricade The Crowdfunding Floodgates, The Crowdfunding Revolution. Â Kevin Lawton, November, 2010
Capital Offense: The SEC’s Continuing Failure to Address Small Business Financing Concerns, New York University Journal of Law and Business. Â Stuart R. Cohn & Gregory C. Yadley – Fall, 2007
Security Regulations and Their Effects on Small Businesses, California Research Bureau. Rosa Maria Moller, Ph.D. - April, 2000
In a July, 2011 posting on crowdsourcing.org, Professor of Law Joan MacLeod Heminway and MBA Candidate Shelden Ryan Hoffman discuss the costly SEC compliance measures related to capital formation especially as it relates to startups and entrepreneurs. Â In their thesis they make reference (p.3 & 4) to the letter and questions that we, the Startup Exemption, submitted to the SEC in conjunction with Chairman Darrell Issa. Â They also refer to SEC Chairman Mary Schapiro’s response to the question at the hearing we participated in on May 10th in front of the Government Oversight and Reform Committee.
Both their 71 page academic brief as well as our experience as entrepreneurs living the capital crunch prove there is a need for change. Â Their framework on page 60 mimics much of what is in the framework for the Startup Exemption. Â A sigh of relief where academic thought mimics real-life experience.
Posted in Sherwood Neiss
Tagged crowd fund, crowd fund investing, entrepreneurs, SEC regulations
The White House and The SBA launched the Startup America website with the goal of promoting entrepreneurship in the USA. Â To help them understand the problems and issues facing entrepreneurs, they asked this simple question:
To date there have been over 200 replies. Â Over 25% of those replies have to do with capital formation! Â No other issue adds up to as high a percent as that. Â And the suggestions range from access to capital to tax credits to regulatory changes.
Obviously small businesses and entrepreneurs need access to capital to grow their businesses, innovate and hire Americans. Â Our suggestion:Â Have the SEC create a $1M exemption for Crowd Fund Investing, as voted by the users, is the #1 idea on Startup America’s website!Â
Now is the time! Â Our idea is part of the solution! Â Thank you all for your support and let’s tell Washington to make it legal for the average American to take a few dollars and invest it in our community entrepreneurs!Â
Every week we see further proof of the ability of crowd funding to get cash flowing and our economy growing.  The SEC, however, has yet to make any changes that would make equity-based crowd funding (aka Crowd Fund Investing) legal.  The latest proof came when Michael Migliozzi II and Brian William Flatow started a crowd funding campaign to purchase Pabst Brewing Co. They created an online campaign and used the their social media channels, Facebook and Twitter, to spread the word.  Amazingly, they were able to get 5 million people to agree to pony up $200 million!
The SEC found out about the money raise and put a stop to it. Â According to reports, Migliozzi and Flatow neglected to register the offering with the SEC. Â They also targeted unaccredited investors and did so in a public fashion. Â And 5 million people is a tad bit more than the 35 unaccredited investors the SEC currently allows under its existing exemptions.
Granted, what these gentlemen were doing was in excess but it proves a point. Â There is an interest on the part of the average American to support ideas they believe in. Â Not only that, they are willing to part with a few dollars to make it happen. Â While raising $300 million on the Internet isn’t probably the most smartest thing, allowing entrepreneurs to raise a limited about of seed or growth capital via crowdfunding platforms is.
That is what the Startup Exemption is all about.  We have developed a framework that will allow entrepreneurs to raise up to $1 million from their community.  The Pabst campaign while worthy would not be allowed under our framework because of the size.  Our goal is to help fund the ideas that will lead to great companies and use the collaborative know-how of the crowd to not only provide financial support but critical knowledge and experience.
It is important to note that the SEC was able to easily stop this campaign because of the transparency of the media and the internet.  The more information (aka transparency) there is out there the less chance there is for fraud.  By design, the internet is open for all to see.  Fraud will never be eradicated but with transparency it will be greatly reduced.  When the SEC puts our framework in place Crowd Fund Investing platforms will have safeguards to ensure the danger of fraud is kept on par with similar classes of investment.
With the interest from the masses, the time is ripe for the SEC to implement our suggested framework.
The Initial Pitch
On May 20th Sherwood Neiss, Chief Advocate for The Startup Exemption decided to test the basis for Crowd Fund Investing by pitching the idea to approximately 150 people at Startup Weekend Miami.
Startup Weekend (funded by the Kauffman Foundation – American’s largest Entrepreneurial Foundation) is a 54-hour event that takes place in 100 cities around the world. It is designed to provide superior experiential education for technical and non-technical entrepreneurs. The weekend events that have launched over 2,000 businesses, are centered on action, innovation, and education. Beginning with Friday night pitches and continuing through testing, business model development, and basic prototype creation, Startup Weekends culminate in Sunday night demos to a panel of potential investors, experts and local entrepreneurs.  Participants are challenged with building functional startups during the event and are able to collaborate with like-minded individuals outside of their daily networks.
Friday Night Crowd Voting
There were 60 ideas pitched by the attendees and the crowd voted. Crowd Fund Investing received the 4th highest number of votes. The Top 15 ideas formed teams and started working on their prototypes for the next 50 hours.  Neiss’ team consisted of students; front and back end web developers, and business people. They divided the work into functional groups and by Sunday had a Minimum Value Proposition “MVP†to present to the judges.
Neiss’ presentation began by congratulating to all the finalists with a reminder that while great ideas are sparked at this event, no one would go very far without funding. And that’s where their idea came in. With only 5 minutes to explain and demonstrate their proof of concept, Neiss was able to win over the 5 industry experts and VC judges. Winning comes with a variety of prizes that include a month of free social media support and 3 months of free office space at a Miami incubator.
After Winning Startup Weekend Challenge
Maris McEdwards Community Manager for Startup Weekend Corporate had the following to say, “Startup Weekend’s mission is to empower entrepreneurs to create new and innovative solutions to real-world problems.  We encourage teams to incorporate customer validation and feedback at every stage of development.  Personal experience provided Sherwood years to think about and perfect this funding and investment option for entrepreneurs. Their win at Startup Weekend Miami was not simply due to a great solution; a large part of their success can be attributed to a thorough knowledge of the problem they were tackling. Given the positive response from the Startup Weekend Miami judges and attendees, they have clearly defined entrepreneurs’ needs and are building some serious momentum for Crowd Fund Investing.â€
With 3rd party validation about the business model, Neiss will be using this as further evidence that the time is ripe for the SEC to update the Security Laws to include an exemption based on the framework in The Startup Exemption.
Posted in Crowd Fund Investing, Funding Gap, Investment, Jason Best, Petition, Sherwood Neiss, Woodie Neiss, Zak Cassady-Dorion
Tagged crowd fund investing, crowd funding, crowd sourcing, crowdfunding, entrepreneurs, private equity, SEC regulations, Startup America, startup exemption, venture capital, woodie neiss