This article was originally published on crowdsourcing.org.
A year ago, Jason Best, Zak Cassady-Dorion and I were deep in the trenches either trying to launch, grow or expand our entrepreneurial endeavors. There was a common thread to all our stories: capital was scarce. The trickle-down effect of the global recession was having a negative impact on our ability to innovate. Without access to capital, how could we grow and hire? If jobs were the economic stimulus needed to lift our nation out of the recession, then someone needed to address the capital crisis facing entrepreneurs and small businesses, our nationâ€™s job creators.
With that, we sat down and crafted a framework to allow an entrepreneur to raise a limited amount of equity capital from his friends, family or community using the tenants of crowdfunding. We then embarked upon changing outdated security laws, which were written for a period in time that did not reflect todayâ€™s technology, the internet or the flow of information. We further vetted our framework at a symposium we held in San Francisco attended by security lawyers, academics, investors, crowdfunding platforms and entrepreneurs. Buy-in was building from the community at large.
With the help of Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council, Washington started to listen. President Obama came out in favor of our proposal to make equity-based crowdfunding legal, then the House drafted the first bill â€” H.R. 2930, the Entrepreneur Access to Capital Act â€” and, in a rare burst of bipartisan support, passed it 407-17. Now there are two bills in front of the Senate. All signs are pointing to some version of crowdfunding for entrepreneurs being legal the beginning of 2012.
While we arenâ€™t done yet, our story is one of trial and perseverance, of old vs. new. Many people have asked us what weâ€™ve learned along the way, so here are 13 lessons from our journey to get this legislation passed…
1) Giving up is not an option.
2) When youâ€™re in a recession and you have a solution to the jobs crisis, people listen.
3) There is power in a few voices. Showing up in Washington is more than half the battle. Making your voice heard does resonate and people on Capitol Hill can and have been incredibly gracious with their time, experience and knowledge.
4) The people trying to run the government arenâ€™t bad people. As a matter of fact, the majority of people there work insanely hard for the good of our nation, but the bureaucracy makes it difficult to understand and the media spins public perception of our elected officials.
5) On the Hill, both sides need to feel like they are winning. In order to get to the end goal, you need to present Washington with 100% of something that will be reduced to 25%, whereby each party can add back bits and pieces, bringing it up to 85% or so. We might not get 100% of what we want, but both parties will feel satisfied that they did their job.
6) Fear is the enemy of progress. The special interests have spent countless hours and dollars to derail the discussion from entrepreneurship, opportunity and jobs to focus on fraud. Fraud sells like sex and their message resonates with the media even though it defies logic. We havenâ€™t shut down the markets because of fraud.
7) It is true, money and special interests (lobbies) control Washington in an unhealthy way and eerily so. They donâ€™t try too hard to hide who they represent. You quickly come to understand how the special interests can be nice to your face and stab you in the back. If only you could have been present for some of the nice chats weâ€™ve had with the special interests only to see what they espouse in the media.
8) Believe it or not, there is logic to some of what the opposition has to say. Fraud is an important point. Social media and crowd vetting has shown how we can mitigate this.
9) It is easier for the opposition to focus on the past than craft a working solution for the future. The opposition isnâ€™t focused on helping the American economy and creating jobs. They donâ€™t claim to be. And yet no one asks them, if you see the problems in the capital markets firsthand, why donâ€™t you see the solutions as well?
10) In America, oneâ€™s right to use oneâ€™s money as he see fit is trumped by the governmentâ€™s right to tell you how you can invest it. Isnâ€™t there a first amendment case here?
11) Lobbying is exhausting; it takes a lot of patience and you have to get comfortable educating and repeating the same information over and over.
12) Nothing in life is free. This has cost us a lot of personal time, energy and money. We are grateful to people that have supported our struggle and are dismayed by those who stand to benefit the most but not participated materially or financially. It is no wonder why special interests succeed with the endless flow of capital to their coiffeurs. Couch surfing â€” thank you various D.C. friends â€” is exhausting and eating up your own financial resources is painful.
13) And once more: giving up is not an option.
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One word …. AMAZING! Â The debate was amazing and the vote was AWESOME – 407 to 17! Â I can’t believe in only 9 short months we went from “hey we’ve got a framework and a solution” to a bill that just passed the US House of Representatives!
We owe a HUGE debt of gratitude to the AMAZING group of people who made this a reality thus far:
1) Karen Kerrigan at the Small Business & Entrepreneurship Council, for listening to me and putting up with my nonsense!
2) Whoopi Goldberg and Tom Leonardis who first publicly spoke out in favor of our idea and got slammed for it. … Guess 96% of Congress agrees with you/us! 😉
3) Angus Loten at the Wall Street Journal for deciding the subject was newsworthy enough in our early days to write about it in the WSJ?!?!
4) Kevin Lawton who wrote The Crowdfunding Revolution and provided major contributions to my testimonies and the Startup Exemption framework.
5) Paul Â Spinrad, Jenny Kassan & Danae Ringelmann (of IndieGoGo) who wrote the first petition to the SEC to make equity-based crowdfunding legal. Â Paul also provided incredible input in the testimonies and framework.
6) Chairman Darrell Issa who so graciously took 20 minutes after the May hearing to talk one-on-one with me about crowdfunding as a solution. Â Peter Haller & Hudson Hollister for pushing the idea forward.
7) Doug Rand from the White House who reached out to us and included our proposal as part of the President’s Jobs Act. Â That’s bipartisan support!
8) And the AMAZING Chairman Patrick McHenry for calling the Crowdfunding hearing, writing the legislation, entering it into record, deliberating over TWO committee hearings, bringing together ideas from both sides, passionately debating it on the floor today and pulling off a 96% bipartisan win in the US House of Representatives!!! Â Also a shout out to Dana Mauriello for her awesome testimony at the September Crowdfunding hearing!
And most importantly to my cohorts JASON BEST and ZAK CASSADY-DORION without whom NONE OF THIS WOULD HAVE happened! Â As Jason said, “we were naive enough to think we could challenge the status quo and make a difference. Â Look at what happened?”
WE AREN’T DONE! … Off to the SENATE … Stay tuned because we have our own big news on this front coming out in the next 24 hours!!
THANK YOU EVERYONE!
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
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.
Every week we see further proof of the ability of crowd funding to get cash flowing and our economy growing. Â The SEC, however, has yet to make any changes that would make equity-based crowd funding (aka Crowd Fund Investing) legal. Â The latest proof came whenÂ Michael Migliozzi II and Brian William Flatow started a crowd funding campaign to purchase Pabst Brewing Co. They created anÂ online campaign and used the their social media channels, Facebook and Twitter, to spread the word. Â 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. Â We have developed a framework that will allow entrepreneurs to raise up to $1 million from their community. Â The PabstÂ campaign while worthy would not be allowed under our framework because of the size. Â 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. Â The more information (aka transparency) there is out there the less chance there is for fraud. Â By design, the internet is open for all to see. Â Fraud will never beÂ eradicatedÂ but with transparency it will be greatly reduced. Â 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.
â€œReversing the Decline in Capital Formationâ€
Sherwood Speaks, LLC
Miami Beach, Florida
May 10, 2011
Committee on Oversight and Government Reform
United States House of Representatives
The Honorable Darrell Issa, Chairman
The Honorable Elijah Cummings, Ranking Member
Chairman Issa, Ranking Member Cummings and members of the Committee, thank you for holding this hearing today and allowing me to share an entrepreneurâ€™s perspective on improving capital formation through regulatory modernization.Â 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.Â By revamping the Security and Exchange Commissionâ€™s (SECâ€™s) position on solicitation and accreditation, we can open the doors to small business growth and prosperity.Â 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
Techcrunch reported today that 83% of startups are planning on hiring in the next 12 months to keep up with expected growth. This is great news for these industries and for job seekers alike. Â However, once again we see the same problem emerge. Â According to the survey by Silicon Valley Bank that the article was based on, the number one thingÂ holding these startups and small businesses from growth is access to capital. The traditional means of financing startups (e.g. bank loans & credit cards) are not working. Â Trying to fix that problem will take more than bureaucracy and a campaign. Â The solution is simple and is right in front of our eyes. Â Regulatory changes need to take place to get capital flowing from the people that have it to the people who can use it to build their businesses, employ more people, and get our economy back on track. Angels and VCs do a great job but there simply aren’t enough of them to inject capital in all the companies that need it. Creating a new class of micro-angles is one way to get this capital flowing and the economy growing. Â Believe it or not, they are already doing this on websites like Kickstarter and Indiegogo, we should continue to encourage this behavior by allowing the average American to invest in entrepreneurs rather than just donate their money.
American companies are having a very difficult time raising the money they need to grow their businesses. It’s not because the money is not there but rather because it is not flowing from the people who have it to the people that can use it to grow our economy. One of the things that has always made America great is our ability to innovate. Unfortunately, innovation is currently being stifled by overly strict SEC regulations. These regulations however are not stoping other countries from innovating and riding off the coat tails of US entrepreneurs.
GrowVC, a Chinese company, has now launched with its intention to fill this funding void by collecting money from investors (including Americans). Â They already have successful cases of US Startups raising capital from them. Â What does this mean? First, by being offshore they just worked around the entire SEC process. Â And second, the future success stories of the USA as well as their technology, Intellectual Property and future profits will be owned/shipped overseas. Â The one major loophole in these regulations is that if you are not an American or an American company, you are not regulated by these security laws. Clearly, these outcomes were not the intention of the Securities law however it is exactly what is happening. I personally don’t feel that selling our nation’s entrepreneurs to foreign countries is in anyone’s best interest.
By making common sense amendments to the 1933 and 1934 Securities laws we can stop this mass export of US entrepreneurs and get back on track to recovery and innovation.