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updated 2:54 PM CDT, Jul 28, 2018

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Long wait for SEC's crowd-funding rules stirs legislature to consider state-level measures

It's now been a year since Congress, with a bipartisan display remarkable for this politically dysfunctional era, passed the JOBS Act that was touted as a breakthrough for funding entrepreneurial start-ups and thus eventually creating jobs.

 

Well, the entrepreneurs are still waiting for the rules that would let them proceed to launch businesses by using internet websites to gather small amounts of money from large numbers of people online.

 

 The rules are to be written by the Securities and Exchange Commission where, despite repeated pressure from some members of Congress who really care about the issue rather than merely having voted for a JOBS bill in an election year, there's been no action.

 

But some states, including Washington, have decided they're tired of waiting and are seeking to proceed on their own. In fact, two bills that would allow Washington entrepreneurs to raise up to $1 million a year from Washington residents on the Internet have been filed in the state House of Representatives, one of the measure described as "democratizing venture capital."
  
And sponsors of the measures filed in this state say they are needed regardless of what kind of rules the SEC finally brings forth. The key sponsor of one of the bills, Rep. Cyrus Habib, D-Bellevue, frankly makes clear details of his bill (HB2023) are being worked on to groom the measure for serious consideration in the 2014 session.
Rep. cyrus habib
Rep. Cyrus Habib

 

The measure Congress passed last May was officially called the Jumpstart Our Business Startups (JOBS) Act by the clever bill drafters who attach can't-oppose names and acronyms to legislation to help ensure that balky lawmakers will find it difficult to vote against. Few lawmakers wanted to vote against JOBS in an election year.

 

Despite the congressionally mandated 180-day timeframe to the SEC, whose then-chair had large misgivings about the legislation, that time passed, as did a promised end-of-year date. Now the SEC has a new chairman, Mary Jo White, who has promised Congress she will make issuing the rules a priority.

 

If there's any doubt that there's a queuing up of entrepreneurs and those who would be involved in crowd funding, consider that the LinkedIn group "CrowdSourcing and CrowdFunding" has over 19,000 members.

 

Both supporters, who view the legislation as a major breakthrough for funding startups, and critics, who are convinced it's a funding disaster in the making, are awaiting the opportunity to be proven right once the rules allow the process to begin.

Tom simpson

Tom Simpson,

angel supporter

 

Tom Simpson, the long-time venture capitalist who now runs the Spokane Angel Alliance, thinks if the rules are "effectively drafted and supported, we would see large amounts of liquid capital flowing into emerging companies, in amounts even greater than during the pre-Sarbanes-Oxley, IPO glory days."

 

"Current regulations are chocking our nation's entrepreneurial fuel tanks," he added.

 

Bill Payne, generally regarded as the Dean of Angel Investors because of the role he plays in providing guidance to angel groups both in this country and internationally, sees a possibility that the regulations to be issues by the SEC "will be so restrictive that crowd funding will be viewed as not worth the effort."  

 

Bill Payne

   Bill Payne,

not a fan

 

Payne, who summers in Montana and winters in the Las Vegas area and who has launched four angel-investor groups around the West, has been a critic of the crowd-funding legislation from the outlet and says "I am less excited about crowd funding now than I was when it was passed."

 

"My guess is that entrepreneurs' advisors have suggested they seek angel capital instead of crowd funding," added Payne, who told me for a column I did a year ago that he viewed crowd funding "as a trainwreck waiting to happen" because he felt "a lot of investors will get scammed."

 

An issue that may further delay SEC action, and provide an added challenge for the internet masses to begin buying shares in companies via the Internet, is the potential sales tax liability in a crowd-funding project.

 

The U.S. Senate this week approved giving the 45 states that currently charge sales taxes the right to require large online retailers to collect tax on purchases made by their residents. The legislation must still clear the House, but political observers give it a good chance for passage and while it would only apply to online sellers that have sales of at least $1 million in states where they don't have physical operations, the SEC may decide to wait final determination on the bill.

 

Habib's bill would impose an excise tax of somewhere between 3 and 5 percent on investors, which Habib explains as necessary to cover costs the state would incur in things like more consumer protection for investors and added costs for state oversight of the crowd-funding activity.

  

"We can't go to the legislature in this financial environment ask for legislation to try something new and not cover the fiscal impact," habib added.

  

Rep. Frank Morris, D-Mount Vernon, who filed the other Washington state bill (HB2054)also a Democrat, said the state proposal is important regardless of SEC rules.

Rep. Frank Morris
Rep. Frank Morris

 

"The federal crowdfunding law, even once rules are in place, is going to require companies to work through an intermediary and is likely to have compliance costs that are cost-prohibitive for many start-ups," Morris said.

 

"The intent of the state legislation is to facilitate crowdfunding for Washington investors in Washington companies, with regulation that is protective of consumers, but less cost-prohibitive."

  

Bill Beatty, Securities Administrator for the state Department of Financial Institutions, points out that any offerings under state legislation would be "intrastate only, that is, limited to Washington Companies offering to Washington investors," adding such legislation at the state level doesn't require SEC approval.

 

Meanwhile, interest on the part of entrepreneurs and businesses that hope to be a part of the process continues to grow.

 

A business called Crowdfund Productions LLC is putting on Pro and Contra Conferences around the West, including one last week and Denver.

 

 

A Pro and Contra Conference is schedule for Seattle in September, by which time the SEC rules may be out, opening the door for a lot more pros and cons to be aimed by entrepreneurs and support groups.

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Spokane mom's autistic children provided lessons that prepared her for new venture

With her three autistic children as her "classroom" for the past decade, Laura Kasbar learned the unique ways autistic kids learn. Now she is ready to launch a business whose video-based web platform will offer parents, schools and health therapists a new tool to harness that process of learning for a dramatically growing number of kids with autism.

 

Kasbar, a Spokane mother of six, including twins Max, who was severely autistic, and Anastasia, who was moderately so, says the new company, called GemIIni (named for the twins), will launch in the first quarter of 2012.

 

Funding for the launch has come from the Spokane Angel Alliance and its leader, Tom Simpson, and an unusual commitment by Spokane's Inland Imaging and its CEO.

 

It was 11 years ago, Kasbar recalls, "that I walked into the tv room and saw all my kids lined up on the couch watching television and I couldn't really tell which were the autistic ones."

 

"At that time, the conventional wisdom was that the television should be off if autistic kids were around. But that experience was the catalyst that made me realize I should be using video to teach them," she said.

 

So over the next decade, with the help of her oldest son, Nicolas, who was on the autism spectrum as Asburgers, she developed the method embodied in the video. Her special focus was to help Max, who doctors told her, when he was four, would never talk.  She says he is now mainstreamed in school and excels in class without an aide. 

 

Now 14 and featured on a GemIIni video, Max has recently tested as having a college-level reading ability, a dramatic advance from his original diagnosis of being a lifelong non-verbal autistic. 

 

Kasbar says all three of her once-autistic children have now been removed from the autism diagnosis.

 

When Kasbar decided earlier this year she and her husband, Brian, were ready to launch the company, she was introduced to Simpson, who formerly guided a Spokane-based venture fund and now oversees the Spokane angel group.

 

Simpson set up a presentation for the start-up company a few months ago and wound up investing, as did some of the angel-group members. The presentation also drew the interest of Steve Duvoisin, Inland Imaging's CEO, who personally invested as well as bringing his company aboard. 

 

"I briefed our 60 physicians after the presentation and their attitude was: 'You mean we can make an investment that will help a lot of kids and could also provide a return on the investment?'," Duvoisin recalled. "It was an easy decision, but I emphasize their focus was on how much help this would be to the kids."

 

The number of children on the autistic spectrum and who thus need the learning help amounts to one in 38, and is growing at an amazing 17 percent per year.

 

"Autism is a very genetic disorder with an environmental trigger," she explained. "There are things in the environment that are the triggers for those genetically predisposed to autism."

 

The range of the autism spectrum, she says, "suggests a range of susceptibility to the triggers."

 

Explaining the role of video as a learning tool for autistic kids, Kasbar noted that the autistic avoid looking directly at a speaker's face and thus lose much of the normal learning process of mimicking articulation in speech. But, she says, they are not uncomfortable looking on-screen personalities in the eye and watching their faces.

 

"I've spent thousands of hours working with families in Europe and in the U.S. over the past three years to perfect the method," she said.

 

She says Nicolas, now 24, and a salsa instructor, as well as a coach of sales teams, helped with actual interaction between the program and the child, adding:"It was very helpful having someone on the autism spectrum work to refine the program."

 

Materials prepared for the marketing of GemIIni indicate it will use a subscription-based model with online computer-based training platform that Kasbar hopes to sell to families with autistic children, but also school districts, independent therapists and treatment centers and health insurance companies.

 

The business model provides for a charge of  $36 per student monthly, a fee that she says testing and surveys indicate is acceptable to parents, who would thus have a way to leverage home-time into therapy time at a reasonable cost.

 

She estimates the total special-needs market, including children with language-related disorders, at 7.8 million. Her target is to reach 50,000 families the first year.

 

"I expect that the company will become a leading provider of therapies for children with autism and other learning disorders," said Simpson, who is providing office space and consults with the Kasbars on marketing and development issues.

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Crowd funding for start-up companies is an idea that concerns angel investors

A year ago Congress had to be talked out of doubling the amount of wealth required for individuals to invest in start-up companies. Now the lawmakers are considering the idea of removing basically all qualifications so that crowds of small investors might provide capital for entrepreneurial ventures.

 

What has stirred support among lawmakers and others for using the Internet and social media for crowd-fund investing is the challenge faced by many start-up companies to find funding in this struggling economy and the promise of the jobs such companies could create.

 

It was angel-investor groups who convinced Congress of the potential disaster for start-up companies in a provision that, for a time, was included in the so-called Dodd-Frank bill passed last year. The provision would have doubled the assets required for an investor to be "qualified."

 

It wasn't that difficult to make the obvious case to lawmakers to kill that section before a vote on the Dodd-Frank bill, since most lawmakers hadn't even been aware it was in the bill.

 

Now angel-group leaders are raising an alarm about the implications of the crowd-funding idea. But they may face a greater challenge because of the arguments of supporters, which include not just key lawmakers but the Obama Administration as well.

 

The proposal, which has already had a hearing in the House, is to allow exemption from SEC registration requirements for those trying to raise up to $5 million. As with a similar effort to tone down requirements for small public companies, the goal is to find new job-creation engines.

 

A high-visibility proponent of crowd-fund investing is an evangelical entrepreneur named Sherwood Neise of Miami, who told a Congressional subcommittee a couple of weeks ago that crowd funding could bring in as much as $500 million and lead to creation of 1.5 million new jobs over the next five years.

 
 

 

"What we are proposing is a jobs initiative that everyone should like since small businesses and entrepreneurs are the long-term engines of our economy," Neise said. "However, they need capital to grow and that has dried up since the 2008 financial meltdown."

 

Comments like that resonate with many, including the Obama Administration.

 

But not everyone likes his plan, specifically leaders of angel-investor groups, a number of whom I traded e-mails with to seek their thoughts. Angels have traditionally been the sources of capital for entrepreneur and start-up companies that need funding beyond what's called the "friends and family" initial source of money.

 

Bill Payne, viewed by many as the dean of angel investors, says "I find Neise's claims laughable," offering statistics that could cause pause if they reach the same ears as those who heard Neise's pitch.

 

Payne noted that Kauffman Foundation statistics suggest that about $100 billion from all sources, angels and VCs and friends and family, flows into start-up companies and they create 3 million new jobs a year.

 

"That computes to $33,333 per job," Payne said. "Now along comes Mr. Neise claiming that his idea would create jobs for $333 each. Are you kidding me?"

 

 


Payne, who has been an angel investor in a number of startups in the Northwest and elsewhere, added: "It's very simple from where I sit: I am not in favor of any investment vehicle that allows unaccredited investors to fund startup companies.  It is very high risk and the invested dollars are totally illiquid." 

 

Tom Simpson, who guided one of the Northwest's most successful venture-capital firms and now oversees a couple of angel-investor groups in Spokane, said it's important for "faster, cheaper and easier processes to attract investors to both young private and public companies."

 
 

 

But he said "any new regulations or processes to reduce the time and cost of raising money still need to provide prospective investors with sufficient product, market and management information, comprehensive financial data and specific risk factors to make an educated, informed investment decision."

 

Villette Nolon, chair of the Seattle-based women-angel group Seraphs and founder of the internet-based business Homesavvi.com, says that "while the intent of this idea is good, the outcomes would be disastrous."

 

"Legitimate businesses who would try this route would be extremely disappointed in the result, as truly sophisticated investors are highly unlikely to fund companies sight unseen, even at low amounts," she said. "That leaves only speculators who would be attracted by the idea of making a quick buck, and who could get very, very burned."

 

Gary Ritner, founder and heads the Seattle-based Puget Sound Venture Club, says the $10,000 proposed as maximum investment by a crowd-source investor "is too small" and the $5 million proposed maximum for the entrepreneurial startup "is too large, and not necessary."

 

But he added "we have to get capital flowing and, in concept, I like the idea of crowd funding."

 

Perhaps the major concern shared by angel investors and others is that a backlash could occur down the road if Congress hears of abuses and horror stories and decides crowd funding was a bad idea and things need to be made tighter to protect investors.

 

The concern is summed up by one who noted that "when the pendulum swings back, lawmakers always have it swing too far."

 

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