Log in
updated 2:54 PM CDT, Jul 28, 2018

FlynnsHarp logo 042016

State crowdfunding legislation moves toward the implementation date despite SEC uncertainties

As criticism of the Securities and Exchange Commission's dawdling with its charge from Congress to implement crowdfunding through the federal JOBS Act grows to a chorus, there's now criticism emerging that the agency is seeking to disrupt the process for states like Washington that are creating intrastate crowdfunding.

The SEC critics, with increasing plausibility, contend that the agency has done its best to ensure that the federal JOBS Act won't come about as Congress intended.

And now that some states have given up waiting for SEC action, it seems that the federal agency is trying to put roadblocks in the way of frustrated state legislatures that have sought to find ways to have crowdfunding for startups work at the state level through selling shares to large numbers of people, typically via the Internet.

Washington is one of a dozen states that have decided nothing meaningful will come out of SEC machinations, prompting the Legislature last spring, after a year of preparation, to pass a bill that will permit entrepreneurs who are state residents to raise up to $1 million a year in small amounts from in-state investors.

The Legislature gave the State Department of Financial Institutions (DFI) until October 1 to put in place the rules and the process under which crowdfunding can be carried out and Bill Beatty, Director of Securities for DFI, says the agency "remains on track" to meet that deadline.

 

The department will have a hearing Thursday on the proposed rules and "will proceed to adopt the rules shortly after that unless we determine we need to make significant changes to the rules as currently proposed," Beatty said.

 

Joe Wallin, an attorney for Seattle-based law firm Davis Wright, predicts that entrepreneurs who are state residents will be able to begin selling shares to large numbers of Washington resident by the end of the year.

 

The legislation in this state and others was in reaction to what has transpired, or failed to transpire, at the federal level after Congress,

with an election-year flourish in the spring of 2012, passed the so-called JOBS Act, officially the Jumpstart Our Business Startups Act.

 

Then Congress turned it over to the SEC to enact rules to implement the law and gave the agency 180 days to put together the process for how entrepreneurs could fund their start-up companies, primarily via the internet, by selling equity to large numbers of average investors.

 

 

It soon became obvious to all but the most myopic, with one delay following another, that SEC Chairman Mary Schapiro had little interest in seeing the law come about, possibly because she was more concerned about protecting average investors than following the law's guidance toward funding entrepreneurs.

 

Now the SEC has a new chairman but there is a growing sense that the details of compliance, if and when the SEC finally acts, will be so onerous on entrepreneurs that the costs of starting to raise capital on the Internet will deter many if not most would-be entrepreneurs. Indeed the latest deadline for the rules to be established has passed and the regulators have not provided a new timeframe, now almost two years after the launch date Congress intended.

And now there is also a sense on the part of many crowdfunding supporters, including Wallin, that Congress, unless it has lost interest, may have to intervene to keep the SEC from removing or changing a number of securities rules that stand to burden in-state entrepreneurs who hope to raise funds in their states to launch businesses.

Wallin, who proposed the wording of the original state legislation and whose blog is viewed by many as the final word on what's happening with federal as well as state crowdfunding, worries that the SEC is trying to make it harder for states to do what Congress intended the federal government to do.

 

 

An example is in the fact that the state laws are not subject to the federal crowdfunding law because the companies raising the money are incorporated in those states and raising money solely from investors in those states. Congress created that specific exemption from federal law for intrastate offerings when it enacted the Securities Act of 1933.

However, the SEC has recently issued interpretive guidance on the intrastate exemption that says that if the company uses the internet to promote or discuss its offering then the offering is not an intrastate offering even if a company is incorporated in a particular state and all investors are in that state.

"This is nonsense and it needs to be corrected," says Wallin, who is seeking to stir an outcry from start-up supporters to demand that Congress get involved. "It's nearly impossible not 

 to use the internet to communicate any fundraising or community organizing event that involves these start-up businesses."

"Section 201 of the JOBS Act was a big help to entrepreneurs in that it allowed startups to talk publicly about their efforts to raise money, a process known as General Solicitation," Wallin notes."Unfortunately, the SEC put rules in place that discourage most companies from taking advantage of this new opportunity and Congress needs to restore the intent of its own legislation."

Wallin offers the following suggestion that can be forwarded to members of Congress by those seeking to use the Internet for crowdfunding of their startup:

"Please either pass a simple piece of legislation to fix this or direct the SEC to clarify or fix its intrastate crowdfunding decisions. Otherwise, by prohibiting the use of the internet in intrastate crowdfunding, the SEC is tamping down a nascent but important opportunity to cultivate local funding and entrepreneurship ecosystems before they even have an opportunity to develop."

It may well be time, in these final weeks of an election season in which most members of Congress are on the November ballot, to send a message that indifference and ineptitude on the issues of innovation and job creation won't be taken well by those who understand the role entrepreneurs play in economic health.

Continue reading
  1283 Hits
  0 Comments
1283 Hits
0 Comments

SEC's struggle with rules for start-up fundraising troubles some angel investors

The federal JOBS Act aimed at opening the door for entrepreneurs to reach out to crowds of potential investors on the internet appears, ironically, to be hung up at the Securities and Exchange Commission (SEC) on the issue of tighter restrictions on entrepreneurs who seek more sophisticated investors.

 

In fact, angel-investor leaders are concerned that the SEC's deliberations may produce rules that make it harder for entrepreneurs to raise money from those wealthier individuals, referred to as "accredited" investors. 

 

Liz Marchi
Liz Marchi

The reason is that Congress decided that entrepreneurs would have to validate investor accreditation, rather than being able to take the word of investors that they were "accredited," as has been the case until now. But the lawmakers left it to the SEC to figure out how to impose rules for such "validation."

 

"I don't think anyone in Congress was thinking about the actual impact the change would have on accredited-investor rules," said Liz Marchi, whose Frontier Angel Fund, Montana's first angel fund, has become one of the nation's most successful angel-investor groups. "That's why I think you see basically nothing being done at the SEC."

 

The legislation, officially the Jumpstart Our Business Startups Act, was passed by Congress in April and was designed to be a job creator by making it easier for entrepreneurs to raise capital and thus launch companies and create jobs. The first part of the bill would ease raising start-up capital through "crowdfunding" on the Internet and the second part to eliminate the prohibition against advertising and soliciting traditional "accredited" investors.

 

The SEC was given until yearend to determine the rules that would govern operation of crowd-funding efforts. But the portion dealing with accredited investors called for the SEC to figure out by July 4 how to implement rules to eliminate the prohibition against general solicitation and advertising in securities offerings.

 

The regulatory body missed that deadline but SEC chairman Mary Shapiro told Congress the agency would have the rules in place by end of summer. That target has now become year end, and the betting is that it'll be sometime in the new year before the rules are put forth.

 

The Angel Capital Association and angel investors like Seattle's Dan Rosen, who are closely involved in following the SEC deliberations and seeking to influence them, are hoping to get final SEC rules simple enough that entrepreneurs "don't have to jump through enormous hoops to prove investor accreditation."

 

The phrase angel leaders are using to indicate what's needed for those entrepreneurs seeking accredited investors is "safe harbor," meaning a safeguard for entrepreneurs that they have actually done some due diligence on the investors.

 

Rosen, a leader of Seattle's Alliance of Angels, says "we've been working with the SEC to come up with a compromise that will ensure there is a safe harbor. But if they come out with a rule that is not acceptable, we will go back to Congress and seek changes there."

 

What's causing much of the teeth-gnashing for entrepreneurs and those like ACA and Rosen looking out for their interests is the apparent difficulty the SEC is having figuring out just what are the "reasonable steps," that will be required of entrepreneurs.

 

The irony of, in essence, tightening the screws on entrepreneurs seeking funds from qualified investors is that those entrepreneurs, rather than the ones seeking limited amounts of money from crowds of small investors, are the ones most likely to be job creators.

 

Bill Payne, viewed by many as the dean of angel investors and a member of Marchi's Kalispell-based Frontier Angels, is critical of how Congress packaged the JOBS Act.

 

"The legislation does not appear to have been well thought-out and seems to be our Congress simply finding something upon which they could agree," said Payne, who was Entrepreneur in Residence at the Kauffman Foundation and was named angel investor of the year in both the U.S. and New Zealand.

 

In fact, the JOBS Act brought the best example of bipartisan support evidenced by Congress in the past four years.

 

"Congress was motivated on this legislation because the lawmakers finally figured out that entrepreneurs are at the heart of this country's future and there were few tools by which Congress could feel like it was playing a role in the country's economic future," said Marchi.

 

Marchi's angel fund has been proving recently that angel investing can be profitable for the angels as well as important for jobs and the economy.

 

Two of the fund's investments, Coeur d'Alene-based Pacinian, a maker of wafer-thin keyboards, and Bozeman-based LigoCyte Pharmateuticals Inc., were acquired by major companies in the past few months. Frontier had substantial stakes in both and thus got substantial rewards.

 

Pacinian, which represented 10 percent of Frontier's total fund, was sold to Silicon Valley tech firm Synaptics this summer for an initial $15 million plus a substantial additional amount in the future based on various factors.

 

And a substantial bridge-round investment Frontier made about four years ago in LigoCyte Pharmateuticals Inc. paid off big last month with the announcement that Japan's Takeda Pharmaceuticals' wholly-owned U. S. subsidiary was buying the Montana vaccine maker. The agreement provided for an upfront payment of $60 million and "future contingent considerations" for LigoCyte, whose lead product, a vaccine to prevent norovirus gastroenteritis, is in clinical development.

 

Marchi declined to discuss specifics of Frontier's multiples from the two sales. But she noted that the two exits will have returned the original investment capital to her members, "and perhaps even some profit. So every one of our other 10 investments can produce profits."

Continue reading
  1281 Hits
  0 Comments
1281 Hits
0 Comments

52°F

Seattle

Mostly Cloudy

Humidity: 63%

Wind: 14 mph

  • 24 Mar 2016 52°F 42°F
  • 25 Mar 2016 54°F 40°F
Banner 468 x 60 px