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Eureeca Funding Platform Issued a Cease and Desist Order by SEC

By: Kim Wales, 11/13/14  —

An unfortunate yet necessary “Cease and Desist” action was taken by the Securities and Exchange Commission (SEC) against a crowdfunding platform, Eureeca, which is domiciled in Dubai and doing business in the Cayman Islands.

As a platform conducting private placements using Title II of the JOBS Act, which allows General Solicitation, and Advertising for Accredited Investors, Regulation D, Rule 506(c) and Rule 144A has drawn significant attention since September 23, 2013, due to significant changes in rules governing certain private offerings.

Historically, a Regulation D, Rule 506 offering has been exempt from SEC registration, provided that the offering is not publicly advertised and that the purchasers are largely qualified institutions or accredited investors—those whose net worth is greater than $1 million (excluding a primary residence) or whose individual income exceeded $200,000 ($300,000 for couples) for the past two years with the expectation for that level of income to continue in the current year.

Title II of the JOBS Act called for the SEC to lift the ban on mass marketing these offerings, provided that the issuer has taken reasonable steps to verify that the buyers of the private securities are in fact accredited.

In the case of Eureeca, what are some of the things that went wrong?

  1. Eureeca’s posting of securities offerings on its unrestricted website constituted general solicitation and advertising.
  2. Eureeca had a disclaimer on its website that its services were not being offered to U.S. persons.
  3. Eureeca was not registered as a Broker with FINRA or the SEC; nor was there any disclosure of Broker of record on the platform.
  4. The roughly 465 deals listed on the platform were not registered with the SEC.
  5. There was no firewall that prevented at least three U.S.A investors from gaining access to the deal room on the site.
  6. There were no ‘reasonable steps taken to verify’ that investors are “accredited.
  7. “Accredited” investor definition was not disclosed on the platform, as a mechanism to educate the potential investor pool.
  8. Disclosures were lacking on the on the platform

As a result of conduct described, Eureeca willfully violated section 15(a) of the Exchange Act, which makes it unlawful for any broker or dealer to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security, unless such broker or dealer is registered is or associated with a registered broker-dealer.

Penalty

Eureeca will have to pay civil penalties of $25,000 to the Securities and Exchange Commission in 10 installments of $2500 over the next year. In my opinion they got off easy.

Things for Funding Platforms to Remember

  1. Unless you are registered with the Securities and Exchange Commission as a Broker, or partnered with Broker, you cannot legally sell securities to the accredited investor via a funding platform using Title II, Regulation D, 506(c).
  2. The entity “Registered Funding Platform” does not yet exist until the final rules are issued for Title III and FINRA registers the platform to sell securities.
  3. Listing registered broker of record and disclosure documents on the platform is a must.
  4. Seek legal advice and or contact Crowd Finance consulting companies like Wales Capital to ensure that your platform is in compliance.

 

Read the complaint here!

Unlock the capital markets for small cap and mid cap business using the JOBS Act, Regulation A+

By: Kim Wales, 11/1/2014  —

On a warm Fall, October evening in New York, some of the securities crowdfunding industry pioneers, advocates, policy influencers and solution providers gathered at the Law offices of Pepper Hamilton for Dara Albright’s Regulation A+ event.  David Weild, the founder of Issuworks and former ex-Vice Chairman of NASDAQ, closed the evening with an impassioned message about what steps are needed to spur capital formation that will  start moving money into the hands on entrepreneurs and main street investors.

Unlocking the capital markets for small cap and mid cap businesses using the JOBS Act, Title IV (Regulation A+) is top of mind after 7 years of stagnant economy. This has become the mission for everyone in room such as Brian Korn (Pepper Hamilton), Peter Einstein (Crowdfund4All), Sara Hanks (CrowdCheck), Douglass Ellenoff (Ellenoff Grossman and Schole, Kim Wales (Wales Capital and CrowdBureau), and Sam Guzik (Guzik & Associates), Chris Tyrrell (OfferBoard) and Manolis Sfinarolakis (Crowd RealityTV) to name a few.  However, Weild was very clear in his messaging, “NASAA is doing incredible harm to the economy and they need to stand down.”

The North American Securities Administrators Association (NASAA) is a special interest group that represents state securities regulators. Ironically they have taken an anti-business / anti-investor approach by attempting to block Title IV (Regulation A+) of the JOBS Act – otherwise known as Reg A+. Regulation A+ includes the biggest opportunity presented by the Securities and Exchange Commission’s (SEC) proposal for preemption of State Blue Sky in 40 years. In addition, qualified purchasers can invest up to 10 percent of their net worth. Finally, Title IV of the JOBS Act increases the offering limit from $5 million to $50 million in a 12 month period.

NASAA aggressively lobbies Congress and has hired high powered attorneys to stop state blue sky preemption for certain private placements. Small businesses creates 64% net new jobs for the economy which is the vast majority for U.S. and should be the engine for economic growth. However, at play is protecting revenue stream and power at NASSA; that is thwarting the opportunity for small and emerging business to thrive and survive.

In addressing NASAA’s concerns, Weild aptly points out that state regulators will continue to have anti-fraud laws which they can use but calls their present stance “laughable”. “If you want to stop all fraud lets just stop all business …We all know that is not the right answer,” says Weild.

While there are clearly members of NASAA that disagree with this anti-business policy for now the group has paradoxically taken a position that is to the detriment of the economy. Weild also tackles other issues that are in need of regulatory change, including tick size reform, that are bogging down small cap IPOs.

David Weild’s closing address is a must watch for Anyone who is pro-economy and pro-small business :

Congressman Patrick McHenry: Three Leg Stool Approach Needed for Regulation A+

By: Kim Wales, 11/1/2014 —

With the national election scheduled in two weeks, Congressman Patrick McHenry finds the time to continue advocating for small business and emerging growth companies in the changing markets under the JOBS Act for Title II, Title II and Title IV at Dara Albright’s New York Event held on October 21, 2014.  Ultimately, Congressman McHenry’s delivered a keynote address that focussed on capital formation issues and offering a way forward.

In the keynote address, McHenry discusses: 1). the state of play in Washington; 2) outlines the three Titles of the JOBS Act that he is passionate about; 3) provides three leg stool for Regulation A+; 4) offers an explanation about why are we working through the question of Capital Formation?; 5) provides key take away; 6) Q&A:

Summary:

State of Play: Gridlock in Washington, based on the work product witnessed or not witnessed by the American people. The JOBS Act is the most significant re-write of securities law in the last 80 years.  There is greatest hope for capital formation and economic sustainability is built into Title III – Regulation Crowdfunding so long as Investor Protection and Capital Formation remain at the forefront of a developing robust marketplace.

Congressman McHenry highlights three Titles of the JOBS Act that he is passionate about and has tirelessly lobbied and advocated for on behalf of the American people and he remains hopeful that “right and just” will win at the end of the day.

  1. Title II (Regulation D, Rule 506(c) and Rule 144A: Lifting the Ban on General Solicitation, which was a straight forward piece of legislation that went live on September 23, 2013. Working well while in it’s infancy.
  2. Title III (Securities Based Crowdfuding): The ambition of Title III was to update outmoded securities law and merge technology with finance. Currently, the law remains deeply flawed and the rule has been pending for a substantially long time (over 700 days). What should have been structured at the Commissioner level has turned into a top priority at the SEC.  Now Congress needs to fix the problem, and the SEC must work with Congress because things like cost structure does not work as laid out in the final proposed rules.  To mention a few flaws that do not work: a). audited financial statements for offering $500K or greater; b). issuance capital raise limits up to $1 million; and c). prohibition on testing the water.
  3. Title IV (Regulation A+) – The biggest opportunity presented by the SEC’s proposal is the preemption of state blue sky law. Regulation A, lifts the capital raise limits from $5 million to $50 million; in addition, a qualified purchaser can invest up to 10 percent of the net worth in an Reg. A offering.  What is needed is a well written set of laws and rules for Regulation A. This is now become a top priority for McHenry!  “We must get the rules right so that is not a  dead letter upon arrival but rather it can be a lively opportunity.”

Further, by implementing Title IV, this will allow for us to fix the question of securities based crowdfunding, more specifically equity crowdfunding because of great opportunities afforded the main street entrepreneur, retail investor, and risk takers. “In order to get this right, there are 3 legs to the stool of this alliance”, says McHenry.

3 Legs to the stool of this alliance:

  1. Congress and SEC getting this question of regulation of law correct and done.
  2. Galvanize the democratization of finance: significant amount cultural shift in the marketplace must take place and we the people must be drivers of the shift; alongside helping to create useable public policy in Washington.
  3. Open structure data on the market: we must have the best information on the markets and best market structure that can follow as a result of open structure data. This most importantly can help to move Congress and SEC in the right direction.

Why are we working through the question of Capital Formation? Entrepreneurs may not be connected to the right side of the tracks to get financing for their companies. Delivering the entrepreneur to the marketplace and connecting them to the world of capital so that we can all live better tomorrow and have real vibrant economic growth!

Take Away: Communicate and Build Relationships. Make sure that we have connection with policymakers in Washington. The SEC has an open door policy — go to Washington and introduce yourself. Go to Capital Hill and get to know your U.S. Representative. If you don’t have relationships, go an introduce yourself, to your State Ccongressman and Senator. Inform them about sound public policy. Build these relationships!

Congressman Patrick McHenry takes the final question: Kim Wales, crowdfunding industry pioneer and founder of Wales Capital and CrowdBureau ask Congressman McHenry the last question: “You talk about lobbying our Senators and Congressman, but there is a lobbying group called NASSA that is an influential body as it relates to small securities offerings across all of the states. How do we balance the discussion with that organization and their influence on all of the states in terms of pushing this bill forward (Title IV – Regulation A+)?”

 

How to Get Funding in England?

July 26, 2014 — New York, NY

How to get funding in England?  Funding for Lending (FLS), the Bank of England and Treasury scheme, initially to boost bank lending to households and companies, opened for business at the beginning of August 2012.

The aim of the scheme was to increase bank lending by up to £70bn.

The government changed the rules in January 2014, with this type of funding is no longer used to support mortgage lending.  The scheme aimed to bolster the economy, by halting a downward spiral of lending and borrowing that the UK had experienced since the onset of the credit crunch and international banking crisis.

Banks and building societies are able to access the funds until the end of January 2015.

How does it work?

In essence, the Bank of England is letting commercial banks borrow funds from it cheaply, so that the banks then pass this on in the form of cheap loans to firms.

What is the point?

The point is to encourage the UK’s commercial banks to borrow more money, and more cheaply than at present, so they can then in turn lend it to companies who wish to borrow.

Is it working?

The debate is fierce. Some report banks are still unwilling to lend to business. Others say businesses are unwilling to take on new debt and are paying back loans. Either way, repayments are rising faster than borrowing, leaving the latest “net” lending figure (for the first quarter of 2014) down.

So what are the mechanics of FLS?

Banks and other lenders approach the Bank of England, if they want. They swap assets they already have, such as loans, with the Bank. It in turn provides them with pieces of paper known as Treasury bills, for a four-year period.

The commercial banks are then able to use these bits of paper as top quality backing with which to borrow cash in the wholesale financial markets, from other lenders. With the Treasury’s backing, the idea is that they will be able to borrow funds at very cheap rates.

How will the taxpayer be protected in this arrangement?

The collateral pledged by commercial banks will have to be worth more than the high-grade paper being offered by the Bank of England. So, for every £1 of Treasury bills they borrow, the assets being pledged will have to be worth, say, £1.10 or £1.20. Thus if the value of that asset subsequently falls, the Bank of England will not suffer from the top slice of any loss.

What about savers?

They have suffered an unforeseen knock-on effect of FLS. The availability of cheap funds from the Bank means that lenders do not need to try so hard to attract funds from the general public, to then lend on to borrowers. That is why it is now almost impossible to find a savings account offering more than 3% interest.

 

Japan Advancing in Crowdfunding

July 27, 2014 — New York, NY

When microbrewery owner Saburo Setsuda needed to replace a bottling machine last year, his bank said no to loan but introduced him to a Tokyo firm that helped him raise funds online.

In January, the first time Mr. Setsuda tried crowdfunding, which lets Internet users put money toward projects or companies in return for a cut of profits, he raised nearly ¥4 million in just 18 hours. The funds went for a new bottling machine to pack beer flavors like blueberry and brews made from hot-spring water from this area in central Japan. The second time, in March, he raised ¥1.2 million for a refrigerator.

In May, lawmakers passed legislation in Japan—similar to the U.S. JOBS Act (Jumpstart Our Business Startups), which increases the number of investors a private firm may have—to make it easier for companies to provide these services online.

When crowdfunding emerged, after the 2008 financial crisis, many investors simply used crowdfunding sites to donate a couple of hundred dollars to projects they found worthy. Now, more are showing interest in platforms that give participants a return on their money.

In Japan, where Prime Minister Shinzo Abe is trying to jump-start economic activity, politicians have viewed crowdfunding as a way to nudge some of the trillions of yen in household savings out of low-yielding deposits and into the hands of entrepreneurs.

In May, lawmakers passed legislation—similar to the U.S. JOBS Act (Jumpstart Our Business Startups), which increases the number of investors a private firm may have—to make it easier for companies to provide these services online.

Just over half of the ¥1.6 quadrillion ($15.7 trillion) in Japanese household assets are in cash or at banks. Only 11% is in stocks or bonds, compared with 42% in the U.S. and 23% in Europe, according to the Bank of Japan.

Meanwhile, strict regulations keep banks from extending credit to some firms, which may have a good business idea but other issues, such as debt, that prevent lenders from funding them. Banks are lending out less than 70% of the deposits they hold.

Normally, that is where venture capital might step in, but economists say Japanese firms tapping crowdfunding often prefer to remain relatively small, and aren’t looking for Silicon Valley-style backing, which tends to be aimed at companies targeting large-scale growth.

Crowdfunding is still small in Japan, estimated at ¥8.2 billion, or $80 million. Meanwhile, the global market, which was less than $1 billion in 2010, was estimated to reach $5.1 billion in 2013, with the North American market accounting for $3.7 billion, according to a report the research firm Massolution published in April last year.

In Japan, the most well-known crowdfunding companies offer investors annual returns ranging from 2% to 10%, with the average at 5%. Investors are repaid over a few months, or as much as a few years. They run the risk of not being paid at all if the company they are backing fails.

Skepticism about promised returns is a hurdle to attracting more investors. After decades of near-zero interest rates on savings deposits, many investors are suspicious of pledges of returns of 4% or 5%.

“Because interest rates have been so low at financial institutions, Japanese people began to believe that interest rates were something supposed to be low,” said Kaz Ohmae, who started the crowdfunding platform Crowdbank.jp in December. “We have to change that perception.”

Crowdbank.jp provides funds to small firms in Japan and overseas and lists an average 5.2% return on its website. In just half a year, the company has received more than ¥650 million in investments for companies it serves and is shooting for ¥10 billion in the next few years, Mr. Ohmae said.

Yasuyuki Yabumoto, a 43-year-old telecom worker with two decades of investment experience, has put ¥1 million in crowdfunding via Mr. Ohmae’s company since April. He is planning to invest more but wants to go slowly.

“At this stage I’m carefully assessing crowdfunding’s risk and return, especially the default rates of companies that receive investments,” said Mr. Yabumoto, who also invests in stocks, currencies and bonds.

Many early-bird crowdfunding investors have prior investment experience. Nanae Obara, who works in the financial industry in Tokyo, said the ¥400,000 she has spent on crowdfunding over the last two years has been a way to diversify her portfolio of stock and investment-trust holdings.

Some politicians have expressed concern about risks, and the law passed earlier this year requires that crowdfunding companies provide adequate information about investments online. Still, there is also optimism that crowdfunding could help individual investors earn more on their savings.

More money flowing to firms in rural Japan could cut their dependence on government subsidies, said former Economy Minister Motohisa Furukawa. Mr. Furukawa helped launch a government debate on crowdfunding after seeing how online fundraising helped companies in areas of northern Japan affected by the 2011 earthquake and tsunami disasters.

Rather than feeling threatened by the potential competition from crowdfunding companies, many of Japan’s small lenders are excited.

“There is a lot of need from companies who have good ideas, but not good finances. It seems contradictory, but it’s hard for us to give them money,” said Keishi Furusato, who works in the loan and company-support division at Hida Credit Cooperative, the lender that introduced Mr. Setsuda, the brewer, to crowdfunding.

Though Hida Credit Cooperative doesn’t put up any money in crowdfunding arrangements, the hope is that companies that benefit and thrive will come to them in the future for loans. Mr. Furusato said that three to four other firms in Takayama, a town of 92,000, look likely to start crowdfunding soon.

Dublin Chambers of Commerce calls for Non-banking Financing Solutions for SME’s

July 28, 2014 — New York, NY

The Dublin Chamber of Commerce is calling on the Government to give business owners early access to a portion of their pension funds for the specific purpose of business growth.  It calculates that up to €7.5bn worth of SME financing could be unlocked if this idea was implemented.  It forms part of the Chamber’s Budget submission which they are publishing today. The Chamber says the Government now needs to focus on non-banking financing solutions for SMEs.

***

Staying with the enterprise theme and anyone hoping to set up a business might consider going the co-op route. Legislation comes into effect today easing the regulatory burden on co-operative societies and making it easier to set up and run one. Minister for Enterprise Richard Bruton introduced reduced fees for the registration of co-operative societies about a year and a half ago. Among the changes will be an extension of the examinership process to co-ops.

 

Hedge Funds Lend to Companies based in Ireland

July 28, 2014,  New York, NY

By: Kim Wales

The central bank has drawn up new rules for Ireland, one of the biggest hubs for funds in Europe to allow hedge funds based in the country to lend to companies. The regulations  the central bank has drawn will allow specialized loan funds that it authorizes to extend loans internationally.

Lending to households and corporations have been sluggish since the 2008 financial crisis by European banks whom see to continue to increase the requirements to qualify.  Firms who are too small to issue bonds are increasingly seeking to borrow from other sources such as insurers, private equity firms and hedge funds.

Traditionally, Ireland prevented hedge funds domiciled in the country from lending because regulators viewed it as too risky. However, access to credit a growing problem in Europe and across the globe.

Under the rules, a loan fund will not be able to lend more than a quarter of its assets to one borrower and the amount of debt the fund can take on will be capped at a ratio of 1 to 1, meaning that if a fund has assets of 100 million euros it can borrow another 100 million euros.

The central bank issued a consultation paper on the rules on Monday and expects them to be in place by the end of the year.

“In our view this is a sector that should be subject to some additional regulation,” said Martin Moloney, head of markets policy at the Irish central bank.

“If you have loan origination funds operating out of Ireland and lending into other countries there are potential cross border issues. We wanted to deal with that upfront and we have been very focused on the financial stability issues.

The move by the Irish central bank comes as the European Central Bank and the Bank of England are trying to resurrect the European Union’s market for asset-backed securities as a way of getting credit flowing to smaller businesses and plug some of the gap left by banks.

Invest in next Facebook…for a few bucks

4/14/2014

NEW YORK (CNNMoney)  By Patrick M. Sheridan @CNNMoneyInvest

Plenty of people have donated a few dollars on Kickstarter to help fund everything from jeans to school field trips and the new “Veronica Mars” movie.
These “investors” rarely expected more in return for their money than T-shirts, a ticket to a movie screening or maybe an early version of a new product.

That’s about to change. Companies are starting to view crowdfunding as a legitimate option to raise serious cash.
Imagine the next Facebook (FB, Fortune 500) getting its start from average Joes and Janes deciding to give a few bucks each. Instead of just getting a nice thank you note, people who give money would get stock in the company.

In fact, virtual reality headset maker Oculus recently angered some of its earlier backers on Kickstarter by selling out to Facebook. Some Oculus fans felt betrayed and left out.

Related: ‘Veronica Mars‘ scores on Kickstarter

But mom and pop investors may soon have a chance to invest in startup companies. The Securities and Exchange Commission is in the midst of the approval process for so-called “portals” to connect regular people and entrepreneurs.

“If mom and pop had put $1,000 into Facebook in the beginning, they would have ended up with $200,000 the day Facebook had its IPO,” says Kim Wales, CEO of Wales Capital and CrowdBureau. The formal name for this is equity crowdfunding, and the process has already begun for “accredited” investors. Right now, the SEC defines an “accredited” investor as someone who makes more than $200,000 a year (or $300,000 together with spouse) or has a net worth over $1 million (excluding the value of their primary home).

But the new rules the SEC is working on would let anyone invest in startups via crowdfunding sites.  Of course, there are clear flaws to throwing open the doors to anyone. The most obvious is that most startups fail and people lose money.  The SEC plans to limit losses by restricting average investors from putting down more than $2,000 or 5% of annual income or net worth in any 12-month period — if the investor makes less than $100,000.  But $2,000 is still a lot of money to someone who doesn’t earn a high income.

Kim Wales is aware of the criticism. But she points out that there are plenty of checks and balances to keep investors from getting burned, including a 21-day investor protection period in which you can get your money back if you decide not to invest after all. Wales hopes to make CrowdBureau, a third party information site that will cater to crowdfunders a “bridge between Main Street and Wall Street.” She also points to the success of the Australian Small Scale Offering Board, a crowdfunding platform launched Down Under 8 years ago.

“There has been zero instances of fraud. It’s not that people haven’t tried, but the crowd has been very diligent in rooting it out,” she says.

While that may be true, some security experts worry that crowdfunding could be a bastion for scammers.

Related: Kickstarter pulls plug on Kobe beef jerky scam

Dan Karson, chairman of risk consulting and mitigation firm Kroll Associates, poses this scenario: “Someone in Bucharest creates a fictional identity but has a real bank account and gets lower-income, unsophisticated investors to send him money.”  That said, Karson does think equity crowdfunding will be “exciting for small investors.” He is just concerned that it’s “a new market with limited regulation.”

But fraud may not be the biggest problem. Lynn Turner, a former SEC chief accountant, notes that investing in startups is inherently risky.
“There’s a very clear track record that isn’t going to change. A vast amount of companies will fold,” he says.

The Small Business Administration reports that roughly half of all new businesses survive five years or more with about a third making it to 10 years.  Turner calls the pending equity crowdfunding situation “a fiasco” that could land the SEC with complaints from thousands of small investors who lose $2,000 each. “My prediction, but not my wish, is that equity crowdfunding will die from bad publicity after people lose their money from businesses that go belly up,” he adds. Equity crowdfunding will not make sense for many investors.

Related: What’s the deal with crowdfunding investments?

Why Facebook bought Oculus

Daryl Bryant, founder and CEO of StartupValley, a registered intermediary “or portal” that hopes to connect entrepreneurs looking for investors, concedes as much.  “There is no promise or guarantee. What we offer is high risk, high reward,” he says, adding that average investors shouldn’t be thinking about investments in startups as retirement savings.
Investors are going to need to do their homework as well. Companies looking to raise $100,000 or less, will be allowed to certify their own financials. You heard that right. And while a venture capital firm can afford to swing for the fences and lose money in the hopes of finding a few big hits, the average investor can’t.

But equity crowdfunding advocates say we are forgetting something important: the wisdom of the masses.”With this platform, it’s the crowd that helps determine if this is a good idea or not. The crowd is passionate about due diligence. The crowd will sniff out whatever doesn’t smell right,” Bryant said.

The New York Times thinks only the rich should profit from crowdfunding

VentureBeat

When Facebook purchased Oculus VR for $2 billion last month, many people got rich — just not the funders that helped get them to that purchase price.

The company, a mere 18 months old, got its market validation from a Kickstarter campaign. 9,500 contributors ponied up $2.4 million to preorder its virtual reality gizmo — another shining example of the power of the crowd to back initiatives they believe in. Yet none of these backers received a penny from the acquisition, because their support was in the form of donations and not investment.

Even though President Obama signed equity crowdfunding into law two years ago, which would have allowed these backers to own equity in Oculus and potentially profit handsomely, the law has yet to “go live” and permit average Americans from participating. If equity crowdfunding were available today, those backers might have seen a 400x return on their investment in 18 months. Hence, it is easy to understand why those backers would be upset.

But they shouldn’t be upset at Oculus or Kickstarter, which were following the current rules. Rather, Oculus backers should be upset at those delaying the regulations that will allow Americans to make their own investment decisions with respect to private companies like Oculus.

A March 29 piece called “How To Harm Investors” by the New York Times’ Editorial Board incorrectly used Oculus as a reason why debt and equity crowdfunding for unaccredited investors should be scrapped. The article calls the SEC’s proposed crowdfunding rules “a joke.” It says that “special interests” were behind the push “to end or loosen investor protections.” And it claims that companies do not have to “meet disclosure and accounting standards.”

Other than being hugely misinformed, the Times’ op-ed is a case study for why further delay in implementing Title III of the JOBS Act is bad for Americans, entrepreneurship, investors, and the economy.

Crowdfunding is no “joke”
First, this legislation was not hastily pushed through. It had its inception a full two years prior to being signed into law and went through multiple hearing in the House and Senate, revisions in sub-Committees, and to the floor for a vote. It was one of the only bipartisan pieces of legislation supported by both Congress chambers and the President in recent history. Rather than being backed by “special interests,” the crowdfunding language in the JOBS Act originated with the grassroots efforts of entrepreneurs, securities professionals, and legal experts to modernize outdated securities regulations that were crafted 80 years ago. These laws were written before most Americans had a landline telephone in their own homes. Today, we live in the age of Facebook and Twitter. Our securities laws and markets could benefit from the same real-time transparency those networks brought to the Internet.

Second, there is no “joke” in the SEC’s 585 pages of proposed rules. The SEC staff and commissioners have approached the regulatory process thoughtfully and we have great respect for the process and intent of the regulators. In addition to the White House, Congress, the SEC, and FINRA, industry and investor advocacy groups have been working tirelessly for the better part of two years to give the regulators the information they need to strike a proper balance between increasing the ease of capital formation for entrepreneurs and the equally compelling need for appropriate investor protections. This very thoughtful legislation “re-regulates” rather than “deregulates” how businesses can go about raising money. It sets forth a system and process whereby issuers that pass a background check can raise a limited amount of capital, and investors can take investment opportunities with a statutory cap on their risk. It embodies the two pillars the SEC was founded on: investor protection and access to capital. People seem to forget the latter.

Third, for the registered funding portals facilitating the transaction, the requirements placed upon them by the SEC and Congress are more stringent than the Times suggests. They may even be (as I wrote in a prior piece) a deterrent. As required by statute, portals will have to provide potential investors with meaningful education about crowdfunding and investing generally, about the illiquid nature of these securities, the risks associated with these kinds of deals, and the numerous risks (like dilution) associated with private market investing. Try to find that information when you click “buy” the next time you purchase a public stock. People will tell you it is there for you to find. But there’s a key difference: Investors must acknowledge an understanding of these risks when crowdfunding.

Fourth, for a specific venture, the crowdfunding portal has to perform mandatory background checks on the entrepreneur. They also require the entrepreneur to provide statutorily required disclosures (like a business plan, use of proceeds, and valuation) so that a potential investor can make an informed investment decision. This is more than what is typically required in the private capital markets.

This won’t be easy for issuers. It isn’t supposed to be. Raising money is serious and the proposed rules bring that home. Entrepreneurs will have a ton of work to do, and if they don’t complete it, portals can decline to list them. Even if they make it through, investors will make hay over questionable deals on the public comment boards — which is why there has been so little fraud in non-equity crowdfunding to date.

The Times piece claims “investors could end up with next to nothing even if they invested in the next big thing.” Thanks to the public markets and the global financial crisis, that’s what the American public has gotten for the past 80 years. Isn’t it about time that we try something new, something that leverages capital using the tools we use everyday to communicate? Isn’t it time we brought securities laws into the Internet age?

This op-ed was written in collaboration with several crowdfunding industry leaders, including Sherwood Neiss, Douglas Ellenoff, Jason Best, DJ Paul, Chris Tyrrell, and Kim Wales.

Why More Entrepreneurs than ever before Will Open Small Businesses in 2014

January 16, 2014 by 

Business owner Kim Wales, CEO of Wales Capital headquartered in New York is one of 67 entrepreneurs providing insight for 2014 Trends on Radius.  Common misconception says that small businesses–which account for the majority of businesses in the U.S.–make bad customers. Their small budgets don’t warrant the energy required for sales, keeping track of them takes too much work, and their inability to compete with big competitors often forces them to close. However, in the face of obliteration by an economic downturn and inaccessible capital, small businesses in America have thrived into the 21st century. What’s changed, and how can we foster our ever growing small business economy?

See the slideshow.