Sherwood Neiss is passionate about entrepreneurship. And he has helped lead the charge to change nearly 80-year-old federal securities laws about investing, so that entrepreneurs can gain access to capital.
Called crowdfunding, the changes will allow small investors to fund start-up businesses, hopefully creating jobs and boosting the economy in the process.
Earlier this month, while Neiss was in Dubai speaking at the Global Entrepreneurship Summit, we emailed him questions. Here are his edited responses.Q. Please tell me about your entrepreneurial background.
I’ve always been an entrepreneur at heart. I was the kid selling lollipops in elementary school, mowing lawns in high school and selling T-shirts to get through grad school. I learned early on that input drives output and nothing happens of its own accord.
I helped co-found a company, FLAVORx, based in Washington, D.C. FLAVORx solved the problem of getting kids to take yucky tasting medicine. By the time we sold the company in 2007, we’d gone from two to 50 employees and one to 40,000 pharmacies, including the nation’s biggest retail chains like CVS, Walgreens and Walmart.
Q. Please explain what crowdfunding is and how you became involved.
Crowdfunding is where a group of people pool money together to help fund someone with an idea. As a concept it isn’t new. Prior to 1900, Savings and Building Associations allowed communities to come together to finance home purchases. Charity events and political contributions are also forms of crowdfunding.
Kickstarter launched the current crowdfunding movement in the past five years. I became involved because, with the collapse of the financial markets in 2008 and the recession, everyone was talking about jobs.
My peers Jason Best, Zak Cassady-Dorion and I (all entrepreneurs) understood that the only way out of the recession was to create jobs. Jobs provide wages, and people use those wages to buy goods and services. Money flowing through the system will improve the economy.
However, in order to create jobs, businesses need access to capital. And with the financial meltdown this capital evaporated. We understood that we needed to get capital flowing to small businesses.
Frustration also helps. I won a startup weekend event here in Miami. A crowd of people thought I had a winning idea for a company – using smart phones for instant polling. I went out to raise money for it and couldn’t find it. Jason, Zak and I couldn’t understand why it was OK to ask people to give money to worthy causes but it was illegal to ask those same people to invest in a worthy business.
Q. What was the law previously and when was it created?
Seeking investment capital from the public is illegal unless you go through a costly registration process with the Securities & Exchange Commission. One of the reasons for the Great Depression was shysters selling fictitious shares of worthless companies to unsuspecting investors. The SEC was formed with a mandate to protect investors, and also to promote the efficient use of capital.
So in 1933 and 1934 they passed laws to prohibit people (issuers) from publicly soliciting money from people (investors) who are essentially not millionaires (accredited). We’ve lived under these laws with a few exemptions for the past 80 years. The exemptions worked just fine until the collapse of the financial markets in 2007, because the private markets were providing the capital necessary for startups and small businesses to hire and grow. As the capital markets dried up, small businesses suffered disproportionately.