Sen. John Thune

Washington, D.C. - May 13, 2013 - Senators John Thune (R-S.D.) and Pat Toomey (R-Pa.), and Representatives Kevin McCarthy (R-Calif.) and Patrick McHenry (R-N.C.) today sent a letter to the Chairman of the U.S. Securities and Exchange Commission (SEC), Mary Jo White, urging the SEC to move forward with the proposed rule to implement Section 201 of the bipartisan Jumpstart Our Business Startups (JOBS) Act.  President Obama signed the JOBS Act into law on April 5, 2012.  The JOBS Act originally called for rules by July 4, 2012.

Section 201 of the JOBS Act removes a SEC provision that currently prevents small businesses from attracting capital from accredited investors nationwide by allowing the use of general advertisements to solicit capital to accredited investors.  The letter reads as follows:

May 13, 2013 

The Honorable Mary Jo White, Chairman                                                           
U.S. Securities and Exchange Commission   
100 F Street, Northeast
Washington, D.C. 20549                                                  

Dear Chairman White:

As you settle into your new role as Chairman of the Securities and Exchange Commission (SEC), we write to urge the Commission to take prompt action in issuing a final rule to implement Section 201 of the Jumpstart Our Business Startups (JOBS) Act. As you know, it has been more than a year since Congress passed – with broad bipartisan support – and the president signed into law the JOBS Act. We were encouraged by the commitment that you demonstrated during your confirmation process to see that the Commission completes these important rulemakings and hope that you will take steps to do so expeditiously.

The overall purpose of the JOBS Act was to facilitate capital formation to help small businesses and entrepreneurs invest, expand and create jobs. As proponents of the JOBS Act, we believe that the rule proposed by the Commission last August accomplishes this goal. The proposed rule properly implements Congress’ intent to remove the general solicitation ban in a consistent manner for all types of issuers conducting private offerings under Rule 506.

Paragraph (b) of Section 201 clearly effectuates this by providing that all issuers subject to other federal securities laws will be able to conduct private offerings pursuant to amended Rule 506. The proposed rule ensures that all purchasers of securities under Rule 506 are accredited investors, and follows Congress’ policy objectives to require that issuers take reasonable steps to verify that the purchasers are accredited investors. Adding additional or more prescriptive requirements would overturn Congress’ intent and we strongly urge the Commission not to do so.

Again, we were encouraged by your demonstrated commitment to completing the JOBS Act rulemakings and respectfully urge the commission to move forward with the proposed rule and implement a final rule in the near future.

Sincerely,

Senator John Thune
Senator Pat Toomey
Representative Kevin McCarthy
Representative Patrick McHenry

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According to Professor Mollick’s recent paper, “Swept Away by the Crowd? Crowdfunding, Venture Capital and the Selection of Entrepreneurs,” a draft of which was published in March, entrepreneurial quality is being examined in similar ways by donors on Kickstarter and also by venture capital firms. “Despite the radical differences in selection environments, I find that entrepreneurial quality is assessed in similar ways by both VCs and crowdfunders, but that crowdfunding alleviates some of geographic and gender biases associated with the way that VCs look for signals of quality,” Prof. Mollick reported. ”They are looking for similar signs of quality.”

Prof. Mollick examined 2,101 crowdfunded projects on Kickstarter that match characteristics of more traditional VC-backed seed ventures, such as technology related projects. Prof. Mallick’s research team reviewed factors such as the history of success of a project, the influence of endorsements on a crowdfund project, the level of preparation demonstrated by an entrepreneur, quality, social networks, geographic outcomes and gender. Prof. Mollick discovered that crowdfunders act like venture capitalists or other tranditional sources of capital.  He found that crowdfund funders and venture capitalists focus on the following, similar factors:

• The quality of the product.
• The Team.
• The likelihood of success.

Since some projects are better than others, they receive funding, according to Prof. Mollick, and lower-quality projects receive little to no backers. “{T]he finding suggest that the signals of quality that are used by VCs to assess the viability of new ventures are also used by crowdfunders,” he observed. “This bolsters the validity of these signals as indicators of start-up potential, but also suggests that crowdfunding has the ability to distinguish quality potential projects from less promising ones.”

President Obama signs JOBS Act into law on April 5, 2012.

Prof. Mollick also found that crowdfunding seems to avoid some of the biases that are, in his words, pervasive in VC selections. “Crowdfunding is more democratically distributed than VC funding,” he wrote. “The proportion of crowdfunded start-ups with female founders was larger by an order of magnitude than that of VC- backed firms.”

“In his 2012 remarks upon signing the JOBS Act to legalize equity crowdfunding, President Obama stated that ‘for start-ups and small businesses, this bill is a potential game changer,’” Prof. Mollick wrote in his conclusion. “Crowdfunding does represent a major shift — a ‘game changer’ — in the way that start-ups receive vital resources.”

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Mr. Trump said he plans to help crowdfund worthy projects on the Fundanything.com site. “I’m taking a stand, and am putting my money where my mouth is to help get people back on their feet,” said Mr. Trump during the event. “That’s where FundAnything comes in. It’s the first website that actually lets anyone, anywhere raise money for ANYTHING. And that’s why I support it.”

Screen shot courtesy FundAnything.com

“I believe the private sector is the real engine for growth and success,” added Mr. Trump. “So, I’ve decided to give away money at the grass roots level….my money is and will be going directly into the hands of real people.” Mr. Trump is Chairman and President of Trump Organization.

Mr. Trump’s partner, Bill Zanker, is the founder of The Learning Annex, the iconic company that changed adult education in America. “I’m so excited about FundAnything,” said Mr. Zanker in a prepared statement. “Money is a huge worry for people. You only need a minute on the site to see this is a real game changer! Mr. Trump and I are going to help millions of people.”

This website reported earlier this week that major investors also have funded two other platforms, CircleUp and Lending Club, showing an emerging interest in crowdfunding as a viable funding platform for startups.

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Crowd photo by James Cridland

New York – May 7, 2013 – Google Ventures as well as other high profile venture capitalists are showing their faith in crowdfunding’s future by fundingplatforms such as CircleUp and Lending Club. Today, CircleUp, an equity-based crowdfunding platform, announced today it has closed a $7.5 million Series A financing, the largest raise for an equity-based crowdfunding site. With the new funding, CircleUp plans to hire engineers and designers to build out the technology to serve more independent investors and small businesses. Last week, Google Ventures invested $125 Million into crowdfunding site Lending Club.

Union Square Ventures led the investment round in CircleUp. Google Ventures and existing seed round investors Rose Park Advisors, a firm led by disruptive technology innovator Clayton Christensen, Maveron, and financial services veteran David Topper, also participated in the Series A round. Andy Weissman, Managing Partner at Union Square Ventures will join CircleUp’s Board of Directors. In a statement posted on Union Venture Squares’ site, Mr. Weissman believes that the technology-enabled marketplace for funding has created an entirely new system of allocating capital and expertise. “This kind of peer-funding network has the potential to expand the types of investors and entrepreneurs that can participate in private investing,” said Mr. Weissman.

Mr. Weisman sees crowdfunding as a viable fundraising strategy for consumer products. “One of the most vibrant verticals is consumer products, with over 50,000 new consumer and retail companies started every year. These businesses are drivers of economic growth,” Mr. Weissman said. “CircleUp has created an equity crowdfunding marketplace, enabling investors to own pieces of small but fast-growing consumer and retail businesses.”

On May 2, 2013, Lending Club announced that Google ventures invested $125 Million into the crowdfunding personal loan site. ”Lending Club is using the Internet to reshape the financial system and profoundly transform the way people think of credit and investment,” said Google’s David Lawee. “We are excited to be a part of it.”  According to press reports,  investors are valuing Lending club at $1.55 Billion.

Article by A. Brian Dengler. Photograph by James Cridland under Creative Commons license.

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SEC Chair Mary Jo White. Courtesy Securities and Exchange Commission

In her testimony, Ms. White said rules under the JOBS Act and the Dodd-Frank Act are a priority. “First, the SEC must complete, swiftly and thoughtfully, the rulemaking mandates contained in the Dodd-Frank Act and JOBS Act, ” said Ms. White. “The JOBS Act requires significant Commission rulemaking which has not yet been completed.  To fulfill these legislative mandates expeditiously must be an immediate imperative for the commission.  In connection with those rules, I will continue the Commission’s efforts to ensure that the SEC performs robust economic analysis, as rigorous economic analysis is important and should inform and help guide our decisions.”

“As you know, the SEC has a broad, three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation,” Ms. White testified before the committee. A copy of her testimony can be reviewed here.

Ms. White said the budget request would enable the SEC to bring in more economists to perform economic and risk analyses to assist in all of our rulemaking decisions, as well as support new technology for a municipal advisor registration system. ”The FY 2014 budget request – all of which would be fully offset by matching collections of fees on securities transactions and thus will not increase the Federal budget deficit – seeks to address these challenges directly, to better position the agency to provide the kind of market oversight that the public expects and deserves.”

Article by A. Brian Dengler. Mr. Dengler is an information technology and digital media attorney and instructor at Kent State University.

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But crowdfunding advocates say not to worry. The public nature of the investing model should help investors quickly identify and put a stop to bad behavior.

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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.”

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