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SEC Commissioner Says Concern over Fraud Delays JOB Act Rules

Washington – April 17, 2013. Securities and Exchange Commissioner Elisse Walter told the House Committee on Financial Services today that concern about fraud has delayed rules for general solicitations for securities under Title II of the JOBS Act. The committee called the hearing to investigate what it perceives as an unreasonable delay by the SEC in formulating rules under Title II of the Act, which were due last July 4, 2012.

SEC Commissioner Elisse Walter. Library of Congress.

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act) on April 5, 2012, which would open the door for general solicitation for certain securities offerings and crowdfund investing. The Act required the Securities and Exchange Commission to issue rules by the end of 2012, which SEC has yet to do. In a statement, Committee majority members scheduled a hearing today The Finance Committee held a hearing today to examine “the failure of the U.S. Securities and Exchange Commission (SEC) to meet the statutorily [sec] required deadline for implementing Title II of the Jumpstart Our Business Startups Act (JOBS Act).”

“Title II of the JOBS Act is a top priority of the Commission,” Commissioner Walter assured the committee. “I am committed to finalizing the rules with my colleagues as expeditiously as possible.” Ms. Walter did not commit to a specific date when the SEC may disclose rules.

Under the proposed rules, companies issuing securities in an offering conducted under Rule 506 of Regulation D would be permitted to use general solicitation or general advertising to offer securities, provided that the issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors. Commissioner Walter said public commentary raised concerns about fraudulent securities offerings that could be made through general advertising, which prompted the commission to take a closer look at rules for Title II. “If we don’t take care of investors, they won’t invest,” Ms. Walter testified.

“Commenters on the proposal were sharply divided in their views,” testified Ms. Walter, noting that the SEC is reviewing more than 220 comments. “Some of these commenters stated that the proposed rules, if adopted, would result in an increase in fraudulent securities offerings, with a number recommending that the Commission consider additional safeguards, such as those recommended in certain pre-proposing release comment letter.”

“In addition, several supporters recommended that the proposed framework for verifying accredited investor status be supplemented in the final rule by including a non-exclusive list of specific verification methods that could be relied upon by issuers seeking greater certainty that they are satisfying the verification requirement,” Commissioner Walter said.

“Currently, staff in the Divisions of Corporation Finance and Risk, Strategy, and Financial Innovation are developing recommendations for the Commission’s consideration as to how best to move forward with implementation of Title II,” Ms. Walter assured the committee. In response to questioning by the Committee members, Ms. Walter said the SEC would need additional resources to enforce the new rules under Title II.

“I hope the SEC finalizes the rule about Title II,” said Committee Member Rep. Patrick McHenry (R-NC). ”The jobs act can have a major impact in getting the eonomy moving again.”

New Studies Show 81% Jump in Crowdfunding

April 8, 2013 – New studies show that funds raised through crowdfunding jumped 81% from 2011 to 2012, and that the equity and debt based crowdfunding could be a $3.98 Billion market per year.

Today, massolution, a research firm specializing in the crowdsourcing and crowdfunding industires, released its annual Crowdfunding Industry Report, finding that crowdfunding platforms raised $2.7 Billion worldwide for more than one million campaigns. These numbers show an 81% jump in funds raised through crowdfunding from 2011 to 2012.

The report discloses that North America and Europe accounted for over 95% of the total crowdfunding market. “Consistent with our 2012 forecast, total crowdfunding volume nearly doubled last year, and with regulatory bodies continuing to pave the way, we expect global crowdfunding volumes to exceed $5 billion in 2013,” said CEO of massolution, Carl Esposti. The study estimates that total global corwdfunding may reach $5.1 Billion in 2013.

Although crowdfunding offers a growing number of countries opportunities to access funds, North America and Europe raised much more capital than platforms in other regions.

North America: crowdfunding volumes grew 105% to $1.6 billion
Europe: crowdfunding volumes grew 65% to $945 million
In total, all other markets grew close to 125%

On April 2, 2013, the University of California, Berkeley’s Fung Institute for Engineering Leadership released a study estimating the size of the equity and debt based crowdfunding market to hit $3.98 Billion per year. The Program for Innovation in Entrepreneurial and Social Finance, part of the Fung Institute, co-authored the study.

“While estimating the size of the future and currently non-existent market is a hazardous endeavor at best, we have presented a set of data, assumptions, and estimations that may prove useful,” said Lee Fleming, Faculty Director of the Fung Institute and a contributing author of the study. “From the lenses of Angels, VCs and Small business lending we believe a market as large as $3.98B per year could rapidly evolve.”

President Obama signed into law on April 5, 2012 the Jumpstart Our Business Startups Act, which will enable small businesses to raise up to $ 1 Million per year from small investors through crowdfunding. The Securities and Exchange Commission is expected to release for public review regulations to govern crowdfund investing by the end of 2013.

New Crowdfund Investing Book Prepares Start-ups

April 5, 2013 – Although regulations permitting equity crowdfunding are months away, now is the time for investors and start-ups to prepare for equity crowdfunding, according to Sherwood Neiss, co-author of the new book “Crowdfund Investing for Dummies. ” “I think the book’s timing is perfect,” said Neiss said. “This gives entrepreneurs ample time to read and prepare.” John Wiley & Sons released the new paperback on March 15, 2013 as part of its popular “Dummies” series.

Exactly one year ago, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law. The act paves the way for small businesses to raise up to $ 1 Million per year from small investors through online crowdfunding portals. Under the Act, the Securities and Exchange Commission must formulate rules to regulate crowdfund investing. The SEC is expected to propose rules for public comment later this year. The crowdfund investing market could reach $3.8 Billion per year, according to a study by UC Berkeley’s Fung Institute for Engineering Leadership.

Neiss, along with co-authors Jason W. Best and Zak Cassady-Dorion are founders of of Startup Exemption (developers of the crowdfund investing framework used in the 2012 Jobs Act) and startupexemption.com. Neiss explained that the primary goal of the book is to educate investors or entrepreneurs about the “newest big thing on Wall Street.” The book walks investors and entrepreneurs through the new crowdfund investing experience.

“For entrepreneurs it explains everything one needs to know about crowdfund investing including how to present a solid business plan, define your financial needs, and prepare for a crowdfund investing campaign,” Neiss pointed out. The book’s pointers include how to market a pitch, tap into social networks, prepare for potential problems related to a campaign, and successfully complete a crowdfund investing campaign and how to manage the crowd after a campaign is successful. For investors, the book provides guidance on the risks and rewards of crowdfunding, how to review offerings through “crowd diligence” and the role investors play in preventing fraud.

Jason Best, Zak Cassady-Dorion and Sherwood Neiss, co-authors of Crowdfund Investing for Dummies.

“I believe that it is equally weighed between what entrepreneurs need to know to get started and investors need to know about investing in this new asset class,” Neiss said. “I think the biggest selling point is, this is written by entrepreneurs who have raised over $80 Million in the private capital markets and hence understand things from the point of view of the entrepreneur, investor and regulator. We also wrote the framework so are intimately close to the way it which it can operate.”

Although regulations for crowdfund equity are months away, Neiss said the timing of the book is perfect. “If it were to come out after the rule then people would be rushing to catch up,” Neiss said. “This gives them ample time to read and prepare. Prepare is the most important thing and it won’t happen overnight. The book explains just all the work that needs to be done so getting it now will allow entrepreneurs to have the time they need to put the best fundable pitch together.”

The book is available through online resources such as Amazon and Barnes & Noble. Book cover courtesy of John Wiley & Sons.

Article By A. Brian Dengler, CfPA.org blog editor.

White Promises Priority for JOBS Act

Washington, DC – Mary Jo White, President Obama’s nominee to chair the Securities and Exchange Commission, promised the Senate Banking, Housing and Urban Affairs Committee to meet the mandate for rules under the JOBS Act. The SEC missed a deadline last December 2012 to formulate rules that would regulate rules to implement equity crowdfunding under the Jumpstart Our Business Startups Act.

President Obama nominates Mary Jo White to SEC. White House video.

The New York Times reported that the Senate Committee cleared Ms. White’s appointment 21 to 1 on March 19, 2012. “First, I would work with the staff and my fellow Commissioners to finish, in as timely and smart a way as possible, the rulemaking mandates contained in theDodd-Frank Act and JOBS Act,” Ms. White testified before the committee. “The SEC needs to get the rules right, but it also needs to get them done. To complete these legislative mandates expeditiously must be an immediate imperative for the SEC.”

“If confirmed, I will vigorously embrace and carry out the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation,” Ms. White added. “The SEC’s mission has a tri-partite mandate, but the component parts should not be viewed as in conflict with each other.”

“This is a critical time in the SEC’s history, as it works on a range of rules and policy issues,” Senator Tim Johnson (D-SD) said at Ms. White’s confirmation hearing. “These include the Volcker Rule, derivatives, credit rating agencies, hedge funds, standards for broker-dealers and investment advisers, corporate disclosures, market structure, the JOBS Act and money market funds, to name just a few. “

Article by A. Brian Dengler

Crowdfunding Professional Association Hosts Key Industry Event

Expert insights unlock new markets through finance, technology and social media

NEW YORK (March 20, 2013) – The Crowdfunding Professional Association (CfPA) will host its 2^nd Annual Crowdfund Investing Innovation Forum on August 8-9, 2013 in Orlando, FL. The forum has established itself as the must-attend conference for leaders, entrepreneurs, investors and policy makers who are committed to fostering capital formation and job creation. Presented by top crowdfunding pioneers, expert financial services professionals, and innovative services providers, current issues will be addressed through intimate discussions and breakout sessions.

The CfPA is the industry’s pioneering, nonprofit trade organization established by the thought leaders who founded the crowdfund investing movement in the United States, those who wrote the framework for President Obama’s Jumpstart Our Business Startup Act (JOBS Act) and the dedicated individuals who lobbied for its passage, which was signed into law on April 5^th, 2012.

The Forum, sponsored by CrowdClear and Ellenoff Grossman & Schole LLP, will address key topics through a unique and interactive format, including crowd investing and Wall Street, the legal and regulatory environment and the crowdfunding ecosystem and innovative technologies. Luan Cox, CfPA Governing Board Member and Founder of Crowdnetic, states, “Our vision is simple, yet ambitious—we want to educate the crowd on how to raise capital, spurring job growth for startup and emerging companies. We are committed to redefining success for businesses and the economy through a dynamic crowdfunding community that flourishes globally.”

CfPA’s 2^nd Annual Crowdfund Investing Innovation Forum will spark change, challenge and debate conventional thinking and unleash new perspectives in the pursuit of real solutions. A full list of presenters can be seen at http://events.cfpa.org/.

Location:

Caribe Royale Orlando

Orlando, Florida

Date:

August 8 – 9, 2013

Price:

$395 – Early Bird Special for the first 200 attendees

$489 – Post Early Bird

About the Crowdfunding Professional Association

The Crowdfunding Professional Association (CfPA) is dedicated to facilitating a vibrant, credible and growing Crowdfunding community while advocating for an industry view versus a single company perspective. Uniting a broad-based coalition of industry participants, the association is committed to ensuring the credible development of the industry, including a commitment to the highest ethical standards. To learn more visit www.cfpa.org.

# # #

Attention Media:

To Schedule on-site or phone interviews with forum presenters, contact:

Doreen Clark

(763) 458-9923 or DoreenClarkPR@hotmail.com

Who Can Invest Once the Solicitation Ban is Lifted

Who Can Invest Once the Solicitation Ban is Lifted?

Who can invest in start-ups once the general solicitation ban is lifted? That’s the 64,000 dollar question – or to be more “inflationary precise”, the 540,963.63 dollar question.

I’d gladly relinquish the half million+ dollars for a different answer. Because even though the removal of the restrictive solicitation ban helps smaller issuers raise capital, it does absolutely nothing to benefit smaller investors. Once the new law is implemented, private companies will be permitted to advertise to the general population so long as they only accept money from accredited investors. Soon, non-accredited investors will be able to view a television commercial for a hot private growth stock. Too bad they won’t have the capability of investing in it until after it goes public at an over-inflated valuation. This is about as cruel as forcing diabetics to watch Hostess Twinkie ads.

While the unions are helping to ensure that Hostess won’t be around to tease any more diabetics, who’s looking out for America’s retail investor? Frankly, no one is. That’s why it is up to “We the People” to make sure that the investing public receives its fair share of growth opportunities. It is more than our responsibility, it is our right as U.S. citizens to voice our discontent and help effect legislative change. The accredited investor rule is not only unjust; it is exacerbating America’s wealth divide and impeding economic growth. Thus, it needs to be repealed immediately. Below is an excerpt from a recent article I published on the subject. The complete piece which be found at http://nowstreetjournal.com/2012/11/26/todays-america-nothing-ventured-everything-gained-at-least-for-some/.

While America has made great progress eradicating religious, gender and racial persecution, it continues to allow discrimination based on net worth and income levels. Presently, only “accredited investors” – those persons possessing a net worth of at least $1M excluding the value of one’s primary residence or have annual income of at least $200,000 (or $300,000 together with his or her spouse) – are legally permitted to invest in private companies. Unaccredited investors are forced to wait until companies register with the SEC and begin trading on public stock exchanges.

20 years ago when companies went public as young emerging businesses, smaller investors weren’t put at a disadvantage by having to wait for an IPO in order to invest. In fact, 99% of Microsoft’s stock appreciation was realized after it had gone public. Conversely, by the time most of today’s companies go public, the bulk of their growth is long behind them. Case in point, 100% of Facebook’s stock appreciation was realized in the private markets prior to its IPO where only accredited investors were afforded the opportunity to partake in its dramatic climb.

Because new issue upside has been dramatically curtailed, today’s average public market investor is left assuming more capital appreciation risk than ever before. It sickens me to think about all of the middle class wealth that might have been created from September 2004 to May 2012 when Facebook grew from a mere $5M in market capitalization to its IPO valuation of $104B.

America desperately needs to reopen its financial markets and allow capital to flow back to its smaller investors and issuers. This is precisely what the Jumpstart Our Business Startups Act (the “JOBS Act”) was designed to accomplish. Even though it is one of the most economic restorative pieces of legislation in modern history, if you’re not reading political or financial trade publications, you’ve probably never even heard of it. And because it passed with an overwhelmingly bipartisan majority; the JOBS Act received limited main street media coverage. It is utterly shameful that the policies which divide us get more attention than the legislation that unites us.

The JOBS Act helps emerging businesses access capital by improving the “on-ramp” and making it easier for smaller companies to go public. And since, according to Forbes, small businesses generated over 65% of new jobs during the past 17 years, it is imperative that America’s capital markets serve as a conduit to small-cap funding, not as a barrier.

Unfortunately, facilitating the IPO entrance is simply not enough. The truth is, it is far less challenging for companies to become public than it is for them to stay public, particularly in a marketplace dominated by high frequency traders and inadequate aftermarket support. According to research conducted by David Weild IV, Head of Capital Markets at Grant Thornton and CEO of Capital Markets Advisory Partners, U.S. stock markets have lost 43.5% of all listed companies since 1997.

Without re-establishing an ecosystem to support companies being public at smaller valuations by enthusiastic investors as opposed to detached traders, the demand will never be strong enough to meet the supply in the marketplace. Hence, unless the “highway” is completely renovated, the public markets will remain dysfunctional.

The “Crowdfunding” component of the JOBS Act provides the most viable and democratic solution. Its community-style, social investing methodologies furnish built-in aftermarket support. “Crowdfund Investing” not only grants the 99% with the same investing freedoms as the 1%, it fortifies the relationship between investor and investment, encourages longer term investing principles and ultimately helps restore appropriate risk/reward ratios.

Although it was signed into law on April 5th, “Crowdfund investing” won’t be officially legal until the SEC implements the new rules (currently in the 270 day rulemaking period). Given its history of failing to meet deadlines, it is most likely that the SEC will far exceed its Government mandated January 1, 2013 deadline. We simply cannot allow this to happen, for as long as one class of citizens continues to receive superior investment opportunities and better investing odds, there will never be true equality in the United States.

Our nation will never collectively prosper if our capital markets remain prejudiced. I urge you to write your local legislators and insist that they hold the SEC accountable for implementing the overwhelmingly bipartisan JOBS Act in a timely fashion. Demand that legislation be introduced to remove the unconstitutional Accredited Investor Rule 501(a) of Regulation D under the Securities Act of 1933. The future of America is at stake. Don’t let it go down with the Twinkie.

Together we can bring equality to the capital markets and return them to the lifeblood of our economy: America’s small businesses and retail investors.

Dara Albright

Founder, Now Street Journal

Valuation, What is it? How to calculate it?

Valuation, What is it? How to calculate it?

So do you think that your company is the next LuLu Lemon, Skype, LinkedIn? I know, you have an idea that is so unique and no one else will ever think of it or be able to compete! We have all been there but when seeking capital to make your fantastic idea real, convincing the angel groups, venture capital firms that their money will be well spent is a big challenge that most entrepreneurs face.

The investment trail can lead to a series of questions but the one question that seems to stump the most well thought out entrepreneur is, What is your companies valuation? First, the entrepreneur gives a look like the deer caught in the headlights syndrome, then the laser quick $10m, $20m or the lean back in the chair “let me get back to you later” gurgles humbly from the lips.

The short answer to the question should be a reply from the entrepreneur to the investor, “What is the investor asking about, pre-money or post money valuation?” The truth is, knowing this answer will allow you the opportunity to provide the possible best answer because the answer differ based on the timing of valuation. Both pre-money and post-money are valuation measures of companies. Pre-money refers to a company's value before it receives outside financing or the latest round of financing, while post-money refers to its value after it gets outside funds or its latest capital injection. Pre-money valuation refers to the value of a company not including external funding or the latest round of funding. Post money valuation, then, includes outside financing or the latest injection. It is important to know which is being referred to as they are critical concepts in valuation.

Let's explain the difference by using an example. Suppose that an investor is looking to invest in a hi-tech startup. The entrepreneur and the investor both agree that the company is worth $1 million and the investor will put in $250,000.

The ownership percentages will depend on whether this is a $1 million pre-money or post-money valuation. If the $1 million valuation is pre-money, the company is valued at $1 million before the investment and after investment will be valued at $1.25 million. If the $1 million valuation takes into consideration the $250,000 investment, it is referred to as post-money.

As you can see, the valuation method used can affect the ownership percentages in a big way. This is due to the amount of value being placed on the company before the investment. If a company is valued at $1 million, it is worth more if the valuation is pre-money compared to post-money because the pre-money valuation does not include the $250,000 invested. While this ends up affecting the entrepreneur's ownership by a small percentage of 5%, it can represent millions of dollars if the company goes public.

This topic gets very important in situations where an entrepreneur has a good idea but few assets. In such cases, it's very hard to determine what the company is actually worth and valuation becomes a subject of negotiation between the entrepreneur and the investors.

Usually, a company receives many rounds of financing (conventionally named Round A, Round B, Round C, etc.) rather than a big lump sum in order to decrease the risk for investors and to motivate entrepreneurs. Pre- and post-money valuation concepts apply to each round.

Crowdfunding, I Have Invested, What’s Next?

Crowdfunding, I Have Invested, What’s Next?

It’s 2013. The crowdfunding regulations are finalized and effective. You have invested in your first crowdfunded company and you are now officially an owner of that company. What’s next?

Traditionally, an investor’s role after they have invested in a company is determined by the amount and type of ownership the investor has in that company. Equity-based crowdfunding will likely change this, but not how you would expect. In most cases, crowdfunding investors will contribute collectively to fund up to twenty percent of a crowdfunded company. That fact coupled with the investment limitations set forth in the JOBS Act (the greater of $2,000 or 5% of the investor’s annual income or net worth if either the investor’s annual income or net worth is less than $100,000) will limit the size of each crowdfunding investor’s ownership in companies that utilize the exemption. By traditional standards, that would tend to indicate that the role of the investor will be quite limited. It’s a good thing that equity crowdfunding unshackles traditional investor roles!

Equity crowdfunding thrives on every crowdfunding investor playing a critical role in the success of a company regardless of how small the investor’s ownership amount may be. The role is not just a financial role, but also a spirited role that injects adrenaline into the crowdfunded company’s brand. Crowdfunding investors realize that they are playing a substantial part in jumpstarting a business. They aren’t investing $100 into a blue chip company like IBM or Coca-Cola. Their investment is quite different because the crowdfunded company depends on their support. Further, the investors’ vigor and representation of the brand will strengthen the crowdfunded company’s chances of becoming that blue chip company.

Another way for a crowdfunding investor to contribute to their new company’s success is to let the company’s employees work hard to get them a return on their investment. Investors want the entrepreneurs to be busy driving their business forward as opposed to managing hundreds and hundreds of crowdfunding investors. The best way for a crowdfunding investor to participate in generating a return on their investment is by actively promoting the companies that they have invested in. The communication from crowdfunded company and investor will come from the market (or perhaps the Securities and Exchange Commission “SEC”) ironing out the process. For example, if a funding portal requires that companies seeking funding through their site must provide crowdfunding investors a quarterly update on how things are going and that requirement is favorable to all parties involved then that standard could be adopted by the industry. This will hold true for other investor roles as well.

As far as the law goes on what an investor’s role is post funding, the JOBS Act is virtually silent. However, one thing that investors can count on is reports of the results of operations and financial statements of the company they funded at least once a year. The content of those reports is up to the SEC to decide; so that leaves the investor hardly any information at this moment in time on what to expect post funding. Like many other parts of the JOBS Act, the rules by the SEC will shed light on how an investor’s role after a successful funding campaign. Additionally, market participants will also play a large part in the idiosyncrasies of the relationship between crowdfunding investors and crowdfunded companies.

Jason Burmer, JD
VC Relations

EarlyShares.com
Mobile: (813) 690 4804

Office: (786) 565 3344
Fax: (786) 565 3346

Crowdfunding is Here and so is the Infrastructure

CROWDFUNDING IS HERE AND SO IS THE INFRASTRUCTURE

The language of crowd funding technology, capital formation, the requirements and the rules and regulations has been centered on Funding Platforms for the Intermediaries (Brokers and Register Funding Portals). However, some thought leaders in the industry have been listening and speaking a different language and realized that in order for crowd fund investing to be sustainable, the physical components of interrelated systems that provide the framework, commodities and services to the market place is essential to enable, sustain, and enhance the physical and organization structures for the crowd funding ecosystem to function properly.

Companies like the Funding Roadmap, Crowdnetic, CrowdBureau, Gate Technologies and CrowdCheck have banded together to create solutions that span the life of a company, from idea to sustainability. Viewed functionally, the crowdfunding infrastructure facilitates the production and maintenance of compliant equity and debt based offerings that will eventually list on registered funding portal platforms that will serve as conduits of salient information for the investors. These services cover reporting, real-time market data, ratings, research, anti-money laundering, compliance, escrow services, clearing and settlement.

Infrastructure companies play a significant part in evolving the crowd fund ecosystem, both in terms of where the interconnections are placed, made accessible and in terms of how much information can be carried and how quickly. As required in crowd investing, security, transparency and information will be required in order to help investors, “the Crowd,” make informed decisions. Crowd intelligence along with aggregated data and research services that track the lifespan of an issuer’s capital raising efforts make the provision of these services unique and absolutely necessary to the long-term health and sustainability of the crowd investing industry.

Every day debt and equity raises are being conducted on pioneering sites like TheFundersClub and CircleUp that allow investors to invest relatively small amounts in start-ups and operating companies, alike. While these sites cater to accredited investors, defined by the Securities and Exchange Commission as anyone making over $200,000, individually, or $300,000 jointly per year, or who have a net worth (minus their primary residence) of $1 million, that’s a lot of individuals. The JOBS Act, Title III caters to the non-accredited investor making the landscape that much larger. The reality is the JOBS Act, even if the SEC delays their rulemaking, opened America’s eyes to the fact that laws already existed that allowed emerging companies to gather investments from a large group of investors. The use of the internet for this activity is now a means to reach more investors efficiently.

It is critical to observe that equity and debt based crowdfunding is not the Kickstarter model, which is reward/ donor based and allows ideas like video games and gadgets to be pre-sold to the masses. Equity and debt based crowdfunding, allows for shares of a company to be sold to non-accredited investors whereby transactions are facilitated on a funding portal and will be a welcome and new critical component to the traditional capital markets. What self-directed investing, vis a vis online brokers like eEtrade and Schwab, did for the masses in the ‘90s crowd investing will do for the private placement market.

With 2013 quickly approaching, it is important for the ears of the “Crowd” to become fine tuned to the language that the crowdfunding industry speaks. Realizing that this new way to create capital formation is not solely dependent on having a great idea or the Funding Portals, but rather the infrastructure, information and ancillary services that will enrich the end-to-end experience of the entrepreneurs and the investors. Third party service providers like the Funding RoadMap, Crowdnetic, CrowdBureau, Gate Technologies and Crowdcheck to name a few will continue to make steady strides in developing a healthy ecosystem that will support capital formation, lend a helping hand towards education and further advance the crowd investing industry.

Luan Cox

Kim Wales,

Why Fraud Won’t be an Issue in Crowdfund Investing

When Crowdfund Investing starts in 2013, some regulators would have you believe that the Wild West of securities fraud will be perpetrated on the American people. Give the regulators a break. All they see, all day long, is securities fraud. They don’t understand that 99.9% of the markets function just fine. That fraud is a minute part of any efficient market and that markets don’t stop operating because there are bad actors. Remember, people still invest in the public markets despite Worldcom, Enron, Bernie Madoff and even Facebook. People still use credit cards despite identity theft. eBay never went out of business because of a few bad deals but introduced rating systems to provide clarity and credibility based on reviews.

Here are the steps a perpetrator will have to take to commit fraud within the Crowdfund Investing legislation and framework. Please note, fraud committed outside of the legislation and framework is fraud. It isn’t “crowdfunding fraud.” Just fraud. With that said, here’s what conniving fraudsters need to know.

1) Stay Hidden & Stay Situated: I asked an FBI securities fraud agent at a self-direct IRA conference in Scottsdale, AZ recently how many fraudsters self identify themselves. He said “none.” Unfortunately within Crowdfund Investing before anyone begins he has to submit to a background check. What does this mean? Well it means validating that he is an actual person at a valid address and he don’t have a checkered past. Know how else to prevent fraud? Look for people who have resided at an address for over 4 years. Fraudsters are on the move, average Joes aren’t.

2) Come up With a Brilliant Idea with a Great Revenue Model: Be creative here and realistic. This pitch is going up on a SEC-registered websites and it really needs to engage the crowd. All of this will be overseen by portals, regulators and the crowd. At the end of the day a fraudster’s idea needs to entice people to come to his pitch page and then he will need to defend why this is such a good investment to people who are going to be posting comments like, “This is a scam.” The backbone of crowdfunding is the dialog that takes place between the entrepreneur and investor. That dialog either builds confidence and trust or not. If a fraudster can’t win over the crowd in this open, many-to-many dialog then he won’t get funded.

3) Build a Large and Strong Social Network of People You Wish to Swindle: For Crowdfund Investing to efficiently operate one’s social network will be the center point of success. After a fraudster has loaded his amazing idea up to that SEC-registered website, he will connect his Facebook, LinkedIn, Twitter, Google+, etc friends. This is how he will market his pitch within the Crowdfund Investing regime. So make he needs to have lots of friends that believe in him AND his idea. Because those first-degree people are the ones he will need to take advantage of. That’s correct, those closest to him! And finally,

4) AIM for 100%: The legislation requires that a shyster hit 100% of his funding target or no money is exchanged. So he will need to aim low. He doesn’t want to put a pitch up there for $250,000 and only get commitments for $249,000 and fail. It is mandatory that in this open platform users win over the confidence of their community, get them to commit funds that go into an escrow account (the funds don’t get released until 100% of the target is reached and, if the target is reached in less than 21 days since the pitch went live, the issuer MUST WAIT 21 days to get his money. So let’s hope no one blows his cover).

And there you have it! If a shyster has a lot of time to waste building a real social network and has the ability to develop a smart business idea that will garner lots of small dollar investments from those people who trust him, and he can convince all of them to help him hit 100% of his funding target, AND no one blows his cover as has been shown with pretty much every fraud that’s been perpetrated on crowdfunding platforms to date, then voila he’s done it! Seem like a lot of work for probably a little amount of money? It is. In reality fraudsters look for quick and easy ways to make a buck. Crowdfund investing won’t be that for fraudsters and unfortunately either for sincere entrepreneurs who aren’t prepared to use this powerful tool.

The way to prevent fraud is not by preventing people from investing but educating them. Our job (everyone’s job that is) is to make sure that people understand if something sounds too good, it probably is too good. Our government needs to start a nationwide campaign featuring the Nigerian Prince, the Abducted Nephew and the Securities Fraudster saying, “if you don’t know me, don’t believe me.” It will cost both our nation and our economy far less money then the amount of money gullible people currently lose to these shysters.

Conclusion, “Just say NO, to people you don’t KNOW!” This doesn’t just go for investing in crowdfund securities down the road but people who randomly call you on the phone telling you about the next Facebook and how you can invest through them. Or asking you for donations or to bail your nephew out of jail. Or just investing in something you don’t know or understand. Heck it goes back to what our parents taught us as children, “ don’t taking rides from strangers or trust candy from that suspicious people!”

Sherwood Neiss is a Principal at Crowdfund Capital Advisors. CCA is a strategy and technology advisory firm that works with Governments and NGO on implementing a CFI infrastructure.