The old rules needed to change. However, it required updating the security laws to the Internet Age, something regulators were opposed to. Our job was to show our legislators that the advances in technology (the Internet) and social media could allow us to do what the regulators couldn’t on their own, patrol the markets.
Our 10-point framework, called the Startup Exemption would allow communities of people to come together on SEC-registered websites, vet an entrepreneur, business idea, financial model and investment opportunity and decide if it is worthy of funding. Since it was investing instead of donating, we called it Crowdfund Investing.
Q.You succeeded in changing the law. What about the legislative process you went through?
We took this framework to Washington, D.C. in January 2011 and started our grassroots lobbying efforts. We were naïve enough to think that we could make a difference. We used our network to identify some key supporters like Karen Kerrigan of the Small Business and Entrepreneurship Council and she helped us get in front of some influential people like Darryl Issa (R-CA) who is the powerful chair of the Government Oversight and Reform Committee in the House.
He sent a letter to the SEC which included questions from us about why we couldn’t leverage advances in the Internet and technology to help startups and small businesses crowdfund capital. This started the legislative engine. He called the first hearing on Capital formation (here’s my testimony) in May, 2011.
The White House reached out shortly thereafter and we provided them a two-page summary of the problem with the security laws, how our framework will solve the problem and create jobs. President Obama then endorsed Crowdfund Investing and Patrick McHenry (R-NC) called the second hearing (here’s that testimony) and drafted the first crowdfunding legislation based on our framework.
HR2930 was the bill and it ended up passing the U.S. House of Representatives 407-17! It was one of the highest bipartisan bills to come out of the House. It went over to the Senate where it was grouped together with several other capital formation bills into the JOBS Act (Jumpstart Our Business Startups). It passed the Senate 73-26. We were there as President Obama signed our Bill into law on April 5th.
Q. What is the new law that passed in April?
A company seeking money from “the crowd” may sell up to $1 million of securities in any 12month period to an unlimited number of investors. The law is designed to facilitate small investments by many people.
The SEC limits investment amounts by individuals based on annual income or net worth, because the idea is for a lot of people to contribute small amounts of capital and to collectively create a larger pool of cash for use by entrepreneurs.
Q. When does the new law go into effect and what is the next step for crowdfunding?
The law gave the SEC 270 days, until Dec. 31, to come up with the rules under which the industry will develop. We don’t expect the rules to be issued by year-end, but are hoping it will happen in the first quarter of 2013. Then the SEC will consider public comments and come out with the final rules, hopefully by the end of the second quarter of 2013.
The next steps are already taking place. A robust crowdfunding ecosystem is already developing. Funding portals are being built, third party providers like background check services are launching and an International Trade Association called Crowdfunding Professionals has launched. CfPA already has over 800 members, 12 percent of which are global. Jason and I are founding board members.