Tag Archives: crowd sourcing

Crowdfund Investing ITSELF Is an Investor Risk Mitigation Strategy

There has been a lot of progress to date in our effort to make Crowdfund Investing (CFI) legal. The proponents, including the President who included our framework in the American Jobs Act as well as leading Republicans on the Hill who introduced HR 2930, otherwise known as the Crowdfund Investing Act, get it.

  • Capital is hard to come by.
  • Wall St isn’t focused on entrepreneurs.
  • The banks aren’t lending and private money is only for a select few.
  • Since donation-based crowdfunding is working, let’s apply those tenants to equity-based crowdfunding and get capital flowing to entrepreneurs; also known as our nation’s net job creators.

The model we propose is itself, a self-vetting mechanism that utilizes the Internet, and the wisdom of crowds to help mitigate risk for investors. CFI isn’t free money. In a time of recession folks are even more cautious about their money and no one is going to look at this as a way to make a quick buck, entrepreneur, investor or crook. The crowd is more skeptical than ever before. And only those entrepreneurs that are transparent and accountable will be successful in raising capital, forming businesses and hiring Americans.

However the naysayers are surfacing.

  • A number of them can be dismissed because they do not want another competitor in the capital markets. (Our response to them is, step up to the plate and fund our nation’s entrepreneurs at the same degree or better than prior to the financial meltdown).
  • Another group are just naysayers with no solution, just vague fear mongering with little data.
  • And the final group is the conspiracy theorists that believe (with no hard data) it will open the floodgates to fraud. We adamantly refute this.

First, naysayers need to understand the framework and rules under which we are proposing CFI to take place. An entrepreneur wishing to raise capital would have to:

  • Submit to a background/fraud check (name, address, social security and date of birth) to ensure he hasn’t committed fraud.
  • He would have to pitch his idea on SEC-registered Crowdfund Investing platforms.
  • These platforms will be required to perform the fraud checks and contain an investor education component.
  • Investor education and terms of service will warn investors to only invest in people they know, products or services they believe in, entrepreneurs whom they can talk to about the idea and only those ideas that have the greatest number of 1st degree connections. eg: You can feel confident backing an entrepreneur with 89% first degree (meaning they know him personally) investors that represent at least 89% of the committed capital. However, you should be skeptical of an entrepreneur that only has 24% first-degree backers and they have only ponied up 10% of the amount needed. All of this is easily tracked and graphically displayed with standard web tools.
  • The platforms will enable open dialog where potential investors can pick apart the idea, the entrepreneur’s experience, the business model and the amount of equity offered. The entrepreneur will have to respond to each of the comments to the satisfaction of the crowd. The crowd will vote on the answers by using the “like” button. A higher number of likes the more confidence investors will have again. If an entrepreneur doesn’t answer the questions to the satisfaction of the crowd he/she won’t be funded, period. Again all of this can be tracked and graphically displayed for potential investors to see.
  • Our proposal is an all or nothing financing window. If a fraudster is trying to bilk people out of $1M and he hits a funding target of $999,999.00 he won’t be funded and no money will be exchanged. Anyone who is trying to raise capital will have to set small milestones and raise smaller amounts of capital, hit their milestones and go back for more with proof that they’ve achieved what they said they were going to do.
  • Of course, they will have to be transparent and communicate with their investors or again they won’t have the confidence going forward to raise additional money.
  • Another trigger will be the percent of 1st round investors that come back for a second round. The higher that percent the more confidence. The lower, the less likely they will raise additional funds.

So still think fraud can take place with all these triggers? If so, give us the example and let’s work it thru the model.

ps – Remember, this exemption is not be available to foreign issuers, investment companies, and public companies.

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Crowd Fund Investing Wins Startup Weekend Miami Challenge

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.”

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.

 

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Our Congressional Testimony: Reversing the Decline in Capital Formation

“Reversing the Decline in Capital Formation”

 

Testimony of

 

Sherwood Neiss

Entrepreneur

Sherwood Speaks, LLC

Miami Beach, Florida

May 10, 2011

Before the

Committee on Oversight and Government Reform

United States House of Representatives

The Honorable Darrell Issa, Chairman

The Honorable Elijah Cummings, Ranking Member

Introduction:

 

Chairman Issa, Ranking Member Cummings and members of the Committee, thank you for holding this hearing today and allowing me to share an entrepreneur’s perspective on improving capital formation through regulatory modernization.  My intention is to explain why outdated securities laws — put in place before the Internet age — need to be modernized and overhauled, and how these reforms can boost our struggling economy.  By revamping the Security and Exchange Commission’s (SEC’s) position on solicitation and accreditation, we can open the doors to small business growth and prosperity.  Allowing for an exemption for Crowd Fund Investing, which includes protections for investors, will spur innovation among your constituents, create jobs, increase consumer spending, and reinvigorate our economy. Continue reading

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Peer-to-Peer Community Investment Presented as a Solution to the Capital Crunch for Startups & Small Businesses

Washington, DC –On May 10th the Government Oversight and Reform committee is meeting to discuss Capital Formation and Investor Protection.  Namely, they are meeting to review aspects of our country’s securities laws that inhibit capital formation.  One of the most important aspects of the meeting will focus on access to capital for startups and community-based businesses.

Sherwood Neiss a Small Business and Entrepreneurship Council member in conjunction with SBEC’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 & China, in the U.S. it is not permitted because it breaks the Security & Exchanges’ accreditation and solicitation rules. According to Neiss, “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.” Continue reading

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O’Reilley’ Radar Blogs About Crowd Fund Investing

** From http://radar.oreilly.com/2011/05/crowdfunding-exemption.html **

Improving the landscape for organic startups

A congressional committee will hear a “crowdfunding exemption” proposal next week.

by: Paul Spinrad

Next Tuesday, May 10, entrepreneur Sherwood Neiss will be testifying before U.S. Congressman Darrell Issa and the House Committee on Oversight and Government Reform to advocate a regulatory change that I have been working to support: a small offering exemption, aka “crowdfunding exemption.” It’s a simple change that the SEC has the authority to make, and which I believe would spur grassroots innovation and empowerment the way the NSF’s revision of the internet backbone’s Acceptable Use Policy did back in the early 1990s. (Remember that one?)

The background (which I didn’t know until fairly recently), is that any investment where the return does not depend on the investor’s active, day-to-day involvement is considered a security. And securities, no matter how small, are either regulated by the SEC or state securities departments. There are no de minimis exceptions; shares in a lemonade stand would require registration, which I’m told costs $50,000-$100,000 or more (federal) or $20,000-$50,000 (state), mostly legal fees. For VC-free startups based on people doing things that they care about, these costs are prohibitive. Continue reading

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In the News: Startups seek new form of microfinance

The Startup Exemption was highlighted again in the April 28th edition of the Washington Times: http://www.washingtontimes.com/news/2011/apr/26/startups-seek-new-form-of-microfinance/

We will be testifying at a hearing on Capitol Hill in Washington, DC on May 10th!

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In the News: Crowdfunding Promoted to Help Small Businesses

An April 17, 2011 article in the Fiscal Times (Crowdfunding Promoted to Help Small Businesses) did a good job explaining the current problem facing startups and small businesses when they are trying to raise money.  As this article points out, everyone in government is hoping that small businesses will lead our country out of this recession.  However, in order to grow and expand, small businesses need capital.  According to the Federal Deposit Insurance Corporation (FDIC) outstanding lending to small businesses continues to fall steadily.  It peaked  at $336 trillion in 2008 and has steadily fallen to $291 trillion at the end of last year.

This fall in lending to small businesses also coincides with the fall in job creation by newly formed businesses over the last 2 years.  Government officials have proposed providing $1.5 billion in funding for small businesses.  This is good in the sense that it gets more money into the hands of businesses that will use it to improve the economy.  However, this government spending only worsens our huge deficit that we are currently dealing with.  If the government could pass this startup exemption it would get money into the hands of the people who can create jobs while not having the government spend anymore taxpayer money.

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How to Provide Investor Protection in Crowd Fund Investing

Creating prudent investor safeguards is an important part of enabling a vibrant and effective crowd fund investing ecosystem.  With this in mind, we propose a series of steps to increase transparency and accountability while limiting the opportunity for fraud and abuse.

How to Provide Investor Protection in Crowd Fund Investing

 

Creating prudent investor safeguards is an important part of enabling a vibrant and effective crowd fund investing ecosystem.  With this in mind, we propose a series of steps to increase transparency and accountability while limiting the opportunity for fraud and abuse.

 

Investor Risk Proposed Rules to Mitigate Investor Risk
How do you prevent large scale fraud? Limit the maximum amount any one entrepreneur/company can raise via crowd fund investing platforms to an aggregate of $1 million
How do you keep large corporations from using this as a loophole for cheaper financing? Limit the types of companies that can utilize the platform to those that are less than 50 employees (and not a majority owned or wholly owned subsidiary of another entity) with less than $5 million in revenue in the previous calendar year
How do you prevent someone from swindling all of Grandma’s retirement? Limit the amount that anyone can invest to either $10,000 or 10% of their prior year’s Adjusted Gross Income (whichever is lower)
How do you prevent limited disclosure requirements from increasing risk? Have the crowd vet the entrepreneur.  Create a standards based set of data that each entrepreneur must complete in order to attempt to seek funding.  Then enable a communication channel for investors and entrepreneurs to communicate about their questions, ideas and solutions.  Investors only invest in entrepreneurs that have complete information and a product or service that the investor believes in.  Connecting this service to social media groups whereby the entrepreneur and investors are part of the same group, the investors can ask questions of the entrepreneur and the entrepreneur can solicit the investors for help, experience, contacts, etc.  Investors can rate the entrepreneur following their investment and entrepreneurs can rate investors.
How do you protect against professional scam artists? Just like when financing a major purchase or renting an apartment, Crowd Fund Investing entrepreneurs must agree to credit checks that match their name, social security number and receive a credit score that the crowd can view.  Make the initial money loans that the entrepreneur is personally responsible for.  If he/she defaults it appears on their credit report.
How do you prevent someone from attempting to raise funds without proper planning? Crowd Fund Investing must be an all or nothing platform.  If the entrepreneur doesn’t raise all the requested funds within the specified timeframe, the funding round closes and the investors keep their money.  By limiting the amount of money individuals can contribute, an entrepreneur has to be careful about how much money he is asking for (if he asks for too much and doesn’t reach his funding target, he doesn’t get funded).
What about nondisclosure/lack of transparency? Make the entrepreneurs fill out standards based information about themselves and how they will use the capital.  Have them attach links to their “social proof” from various online communities (LinkedIn, eBay, Amazon, Facebook, etc) profiles that show how the “crowd” views them.  Most of these investments will be made to individuals that are already known to the investors via social media platforms.  Investors will be provided with standards based agreements and this information will be stored within the community, and a data set of relevant investor and entrepreneur data will be transferred to the SEC on a quarterly basis. Examples of this dataset might include:  company name, entrepreneur name, funding rounds attempted, funding rounds successful, number of investors, total investment raised, investor names, etc.
How do you prevent people from “underwriting” & “reselling” the securities? Restrict the shares and mandate that shares must be held a minimum of 1 year by the acquirer.  Let people know that they are buying restricted shares and there is no secondary market to them.  Make sure they understand that unless the company is sold, merges or goes public they will not see a return. (Shares can be transferred to family)

 

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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 (http://on.wsj.com/eBJC52 – 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: Continue reading

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How risky is Crowd Fund Investing (CFI)? Capital Flow & Investor Protection

Crowd Fund Investing is probably less risky than public companies because the crowd has access to more, and easier to understand, information about the entrepreneur and his company.  In CFI, no one is forced to make an investment.  Quite the contrary, people typically won’t make an investment unless they feel comfortable about an idea and the entrepreneur behind the idea. His executive summary will discuss the idea, how it will make money and why people should invest in him.  Since CFI is an “all or nothing” platform, if an entrepreneur doesn’t hit his funding goal because he didn’t have a winning idea or he asked for too much money, then the investors don’t fork over their cash.

Doing nothing isn’t an option because if we don’t get capital flowing to entrepreneurs/startups, then they won’t create the jobs that will spur the economy. Since the banks aren’t lending, credit cards are charging exorbitant interest rates and the private equity folks are only concerned about the next Facebook, someone has to help the little guy.

Crowd Fund Investing is based on groups of individuals giving small amounts of money, $50, $100, $500, to entrepreneurs to help them start their businesses.  While we suggest a $10,000 limit to each investor, based on the way crowd funding works, we highly doubt individuals will be making singular, large investments like that.  Another way, we reduce risk by limiting exposure. Continue reading

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