U.S. CrowdFunding Bill

[Stephen Gornick]

Lightrider posted this in another thread. It is using bitcoin for crowdfunding. Open Startup becomes an Open Source project  http://www.youtube.com/watch?v=xc8O1VevmcI

Heh, it stresses mining as the way to generate funds to invest.

I'm not sure I was comprehending correctly.  Did that say investors ("angels") give up 80% of any profits from ventures that launch because those profits are then reinvested into future ventures ("validated ideas")?  I had a hard time understanding the flow, as far as what an investor has control of.

When I'm choosing to invest in a startup, I'm hoping for a big hit.  I understand the risks but I'm thinking I'm smarter than everyone else and will discover the 10 bagger that nobody else did.  That supports my thinking that even if four-out-of-five investments fail, I still gain big thanks to the one that hits it big time.  But if I'm having to give up 80% of the gains, yet eat the losses then my motivation to go this route goes away.  I guess I am saying I don't trust that reinvesting of the profits in new "validated ideas" is always going to be the best use of my funds.

[RodeoX]

I also have to laugh at the term "Angel investor". I have done a bit of that myself and have friends who do it for a living. None of us are angels. Since when are angels motivated by profit.  

[Stephen Gornick]

The Jumpstart Our Business Startups (JOBS) Act was today signed into law:



Summary here:
 - http://www.crowdsourcing.org/editorial/obama-crowdfunding-bill-signing-/13174

So, crowdfunding is now legal.  Awesome!!

On this news, I would like to announce my new startup. I am seeking investment from the public via crowdfunding!

Ooopsss ... upon reading the details I see that even with this law it would be illegal yet for me to solicit funding by myself:

it essentially forbids companies from crowdfunding their own offerings on their own websites – companies must go through an intermediary if they want to crowdfund, and those intermediaries must in turn be registered with the SEC.

So scratch that.  And the SEC won't have their part (establishing the rules for the intermediary brokers) done until 2013.

The JOBS Act also imposes substantial requirements on companies seeking to utilize the crowdfunding exemption. For starters, they have to file with the SEC, the intermediary, and all potential investors, a beefy disclosure document that will include, at a minimum:

(A) name, legal status, address, website, etc.

(B) names of directors, officers, and 20% stockholders

(C) “a description of the business of the issuer and the anticipated business plan of the issuer” – the devil is really in the details of this one, and it remains to be seen whether the SEC will require this “description” to be 4 pages or 40 in order to be sufficient

(D) prior year tax returns, plus financials – see below for details

(E) description of intended use of proceeds

(F) target offering amount, deadline, and regular progress updates through the life of the offering

(G) share price and methodology for determining the price

(H) a description of the ownership and capital structure of the issuer, including a lot of detail about the terms of the securities being sold, the terms of any other outstanding securities of the company, a summary of the differences between them, a host of disclosures about how the rights of shareholders can be limited, diluted or negatively impacted, “examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions”, and a disclosure of various risks to investors

Unlike a Kickstarter, you can't just raise money for an idea.  There must be an actual legal entity, such as a corporation.  That's like $800 / year alone, in California.  I suppose setting up a corporate in Nevada or something similar is an alternative.

(E) crowdfunded securities cannot be transferred or resold for the first year after purchase, unless transferrred to the issuer, an accredited investor, as part of a registered offering, or to family members in some circumstances (i.e. death, divorce)

So much for free market valuation for what you've invested in, at least not for the first year.

When the dust settles, entrepreneurs and small business owners will have access to a revolutionary new method of raising capital, and ordinary Americans will be given the opportunity to invest in their friends, family, and favorite companies, and not just the behemoths offered by Wall Street.

[emphasis added]

That probably should have said: Americans will regain their right to invest in their friends, family and favorite companies.

Others can complain if they wish – we prefer to build.

Yup.  And nothing in there says the investment and/or dividends have to be made using dollars.  Hopefully the SEC doesn't screw it up.

[RodeoX]

Let the games begin!

I'm slapping some money down this weekend after I finish a little research on a company I'm looking at.

[guruvan]

When the dust settles, entrepreneurs and small business owners will have access to a revolutionary new method of raising capital, and ordinary Americans will be given the opportunity to invest in their friends, family, and favorite companies, and not just the behemoths offered by Wall Street.

[emphasis added]

That probably should have said: Americans will regain their right see their government Recognize their Right (again) to invest in their friends, family and favorite companies.

FTFY

Rights are not gained or lost at the whim of a government. They are only recognized or fail to be recognized by a government.

I don't know what the solutions are - but there must be some way to issue and hold a public security anonymously, and still protect both sides from fraud and other crimes. (lol, people are still saying that bitcoin isn't going to work!)

It's high time the people stopped relying on, and permitting the government to protect them from everything that might be harmful. It's ridiculous.

[Satori]

guruvan is quite correct.  I'd just been about to post that myself.

In this country, rights are considered to be intrinsic parts of us, given by our Maker.  The idea of living without your rights is similar to that of living with an artificial wooden head.

The whole excuse for having a government is to keep those rights upheld.  To the extent that it does not - or encroaches upon those rights itself - it's failing in its own purpose.

We delegate specific authorities to that government in the founding documents.  Anything we did not delegate to it, or to the States, remains with us.  No matter how big a heap of legislation they generate purporting to give themselves brand-new authorities, or create brand-new offices to control, monitor or dictate various aspects of our lives.

In order for me to give something to myself or someone else, I must first have it to give.  The same goes for government.  I suppose I could steal it from someone else, but that would be theft on my part.  In government, this is called usurpation.

So waiting for a government to tell you what you can and can't do is pretty silly.  They do have control over how corporations are run, but that's only because we told them to regulate interstate commerce.  That's probably forfeit at this point, inasmuch as they're so far outside the Constitution in most other ways.  I would say people would be completely within their rights to do an end-run around them and do whatever via Tor-based encrypted sites; the government has pretty clearly defaulted on its Constitutional duties by this point, and subsidizing it or adhering to it is more or less giving aid and comfort to the enemy.

[World]

additional info Crowdfunding: What it Means for Investors
http://mashable.com/2012/04/06/crowdfunding-bill-investors-tips/

[Stephen Gornick]

Public comments may be submitted here:
 - http://www.sec.gov/spotlight/jobsactcomments.shtml

The comments do require name and e-mail address and those are disclosed publicly, so keep that in mind if you are submitting anything.

I think I now understand why there was this understanding that "shares can't be sold" within the first year.  It might have to do with staying under the 500 unaccredited shareholders restriction.    So if you  were to start selling your shares to others in the public it wouldn't take long that in total there would be more than 500 unaccredited investors, and then certain (restrictive and expensive) reporting requirements come into being.

The expectation then is that the shares will be issued as being non-transferrable.
 - http://1billionangels.com/2012/04/13/summary-of-april-11-sec-panel-discussion-on-the-jobs-act/

Obviously, even when crowdfunding in the U.S. does start happening next year, it will not look like what investors and companies really want it to be.
 

[Stephen Gornick]

Here's an article from a Canadian news source, lamenting that they have not yet started down the equity crowdfunding road:

 - http://www.theglobeandmail.com/report-on-business/small-business/digital/web-strategy/crowdfunding-the-equity-divide-between-borders/article2433403/

[Stephen Gornick]

Interesting read.

Croudsourcing.org's Eric Blattberg interviews Jeffrey Rubin.  Rubin practices corporate securities law. In addition he is chair of the federal regulation of securities committee of the business law section of the American Bar Association.

Excerpts:

I think that, as a concept, crowdfunding is very compelling. Why shouldn’t a small entrepreneur be able to raise money without getting involved in a thicket of federal regulation? But on the other hand, if this becomes a playground for sponsors who will exploit the lack of regulation, then it becomes a very tainted marketplace. It’s going to remain to be seen — say, a year or two after [crowdfund investing] becomes a reality — whether the returns on crowdfunding will be compelling. It will be interesting to see what percentage of crowdfunded companies simply don’t thrive, and even those that do, to see how many of them actually justify the risk involved in the investment.

Many people have food to put on the table, kids to educate, mortgages to pay off, and I’m concerned that the prospect for these people losing everything in crowdfunding ventures is significant. You know, the whole reason the securities laws are in place is to offer investor protection. I’m concerned that we’re depriving folks of those investor protections.

The other side of the coin is you’ve got a company that’s not bankable, has no history, that’s got a good idea and the people are ethical, so what are they to do? Why embroil them in a ton of red tape in order for them to raise money? I’m sympathetic to that, too.

After a year or two, if 95 percent of the companies that raised money crowdfunding are either insolvent or otherwise not operating, then it will turn out to be a pretty significant scam. I know that, in that instance, people will turn to the SEC and say, “What were you doing?”

 - http://www.crowdsourcing.org/editorial/the-dangers-of-crowdfunding-a-jobs-act-discussion-with-jeffrey-rubin/15030

[Stephen Gornick]

The SEC missed its second deadline for lifting the ban on general solicitation and has now postponed the meeting for a week. It makes one wonder if the JOBS Act (and the jobs that could be created through it) will be tangled in a sea of red tape.

 - http://venturebeat.com/2012/08/22/crowdfunding-delayed-again-blasted-as-a-top-danger/

The North American Securities Administrators Association (NASAA) today released its annual list of financial products and practices that threaten to trap unwary investors.

New Threats

Crowdfunding and Internet Offers.

The 2012 JOBS Act makes significant changes to the methods startup businesses and entrepreneurs may employ to bring their ventures to the investing market, and investors must be wary of the attendant risks. Also, many more rules and mechanisms must be put into place for those changes to actually take effect. For example, the relaxed rules governing registration of relatively small securities deals, public solicitation for private funds, and disclosure of information to investors over the Internet are not yet written. So, the JOBS Act provisions related to crowdfunding, a much-publicized method for startups seeking capital, are not yet available – and will not be until sometime in 2013 – to legitimate businesses. Even when the relaxed rules and registration exemptions are effective, they will not make investments in small businesses less risky – just more prevalent. And the JOBS Act provisions do not eliminate fraud, an unfortunate common feature of Internet securities activity.

Many states and provinces report a recent increase in active investigations or recent enforcement actions involving Internet fraud, and JOBS Act-triggered activity is likely to elongate this trend. Investors must remember that small startups are among the riskiest of investment categories under the best of situations. The crowdfunding and Internet investing marketplaces in North America will develop and undergo major changes in the next year, and investors should monitor this emerging capital formation community with a wary eye.

 - http://www.nasaa.org/14679/laws-provide-con-artists-with-personal-economic-growth-plan/


That first article was written by Jason Best and Sherwood Neiss (who together helped write the House bill that was passed in March, before it become part of the JOBS act that was signed into law in April.).  In June I had the opportunity to talk with Jason.  What he knew of Bitcoin was what was the general overall message fed by the online media so he was a little surprised to learn that there already was equity crowdfunding using bitcoins.

I got to describe briefly GLBSE and how it uses bitcoin as the trading currency, such that neither the exchange nor the asset issuer necessarily know who the investor is, including from which country the investor hails.  When I explained that the cost to IPO was about $50 (BTC/USD was $6 at the time), he appeared to be amused.  When I then explained that there are even assets issued where the issuer is psuedonymous, that's when it even went past incredulity into annoyance.

I had purposely mentioned how this space had already moved well beyond what the JOBS Act (U.S. Equity-based Crowdfunding law) would permit.  I pointed out some contrasts.  With the equity crowdfunding law, Shares purchased are locked up for one year (except for sale back to the issuer or to an accredited investor).  Those investors cannot trade the equities they own on a secondary market during that lockup.

Another contrast is that the with the JOBS Act, equities offered via crowdfunding in the U.S. can only be purchased by those from the U.S.  

I pressed Jason as to why foreigners were ineligible to buy crowdfunded shares and his response was something to the effect that it was already nearly too much of risk trying to get the congress members and staff to grasp the crowdfunding concept.  If the bill were to include secondary markets and foreign ownership, they might not have been able to get it passed.

So the earliest you are going to be able realize the gain on an equity that was crowdfunded is no earlier than when you can first sell it  ... in 2014 at the earliest.

There wasn't much of a response then when I had stated that this online cyberequities system with no phsyical presence in any country wasn't something waiting on U.S. rulemaking to reach completion nor was it going to be getting altered once the rules come out so that it is compliant.

In hindsight, perhaps the reason I didn't get much of a response was because it really doesn't matter.  Really.  These aren't shares of ownership of incorporated entities, nonetheless even U.S. entities.  You aren't at risk of little old ladies investing in them.  This is not real equity and not real money.

I think as long as it is kept  out of FarmVille where anyone would notice it wil be left alone.

[Stephen Gornick]

KickStarter made some significant changes with what types of projects they will allow.

Basically, the more risky projects are no longer welcome on KickStarter.

If you have to use a drawing, CGI or animation to show your product, you aren't welcome at KickStarter -- photos of actual prototypes only,

If you are looking for speculative buying through KickStarter of your first production run, you aren't welcome.  One "reward" per backer.   KickStarter is no longer pre-selling but instead back to providing donation-based "funding".

The equity crowdfunding won't likely have such restrictions, but KickStarter doesn't want to be an equity crowdfunding platform so they needed to make it less possible that there will be "capital at risk" from "investment" into products that never materialize.

 - http://www.crowdsourcing.org/editorial/kickstarter-bans-project-renderings-adds-risks-and-challenges-section-/19431


There was a question asking about what Bitcoin-related crowdfunding exists.  The response:

For donation-based crowdfunding:

 - http://www.BitcoinFunding.com  (though the service is being run anonymously, and there are allegations of it not being legit)

There's also:

 - http://www.Propster.me
 - http://www.PirateMyFilm.com
 - http://www.Booster.io

"[Still] Coming soon"...

 - http://bitcoinstarter.com

and some day coming back:

 - http://www.BitcoinChipIn.com

P2P Lending:

 - http://www.BTCJam.com

Of course, the "equity" markets for equity-based crowdfunding:

 - http://www.GLBSE.com
 - https://en.bitcoin.it/wiki/MPEx#Stocks

[BitcoinINV]

Hey with all this stuff about the S.E.C I read this posts, You said it passed senate? I looked here and it said its has not http://www.govtrack.us/congress/bills/112/s2190

It was sent to Committee, that is where most bills die lol.

[Stephen Gornick]

You said it passed senate? I looked here and it said its has not

See photo above where POTUS signed the JOBS Act with the crowdfunding ammendment. 

Getting the laws changed took about three years since they began (ironically, with a plea to raise $1,000 from the crowd to write a proposal to get a change in the laws to occur).

But there were about half a dozen attempts with the same aim, including the attempt to get the crowd to buy the Pabst brewing company ( BuyABeerCompany.com, which the SEC shut down).

Here's a great article on the history:

 - http://www.crowdsourcing.org/editorial/how-crowdfunding-and-the-jobs-act-got-started-told-by-the-guy-behind-the-big-idea/19288/500

[BitcoinINV]

I think this S.E.C.  rooting around here might have something to do with this. Says they will not be done with the regulations till 2013 so we might be written in. Bad part about it is we really have no say in what they write.

[Stephen Gornick]

I think this S.E.C.  rooting around here might have something to do with this. Says they will not be done with the regulations till 2013 so we might be written in. Bad part about it is we really have no say in what they write.

Technological progress waits for no three-letter agency.

[Stephen Gornick]

I think this S.E.C.  rooting around here might have something to do with this. Says they will not be done with the regulations till 2013 so we might be written in. Bad part about it is we really have no say in what they write.

Technological progress waits for no three-letter agency.

Though not every bit of technological progress slides by without getting tripped up by one.

Nefario has, without a shareholder motion and in violation of the bylaws and GLBSE ToS, decided to close down GLBSE.
[...]

He is also illegally using user deposits to pay for his lawyer.

[...]

Since Nefario refuses to give complete details about his legal concerns and he has been acting strangely, I feel that it is somewhat possible that Nefario is working under some sort of plea bargain and is gathering IDs for future prosecution.

[420]

what the fuck does the bill do? i want 1-3 sentences...

[Stephen Gornick]

what the fuck does the bill do? i want 1-3 sentences...

Basically it lowers the bar as to who can get equity funding.  

Some of the projects on KickStarter or IndieGogo would never have passed muster with banks or angel investors, yet when these people put their ideas out there, there were actual potential users around the country and around the world who thought it was a good enough idea to drop $20 or $50 or whatever to see the idea be designed, built and sold.

Today chances of you as an non-established entrepreneur getting funding are much higher if you have wealthy friends or family.  You aren't allowed to put out a sign asking the public to invest in your business.  Even with Crowdfunding made legal, that will still true about the sign but at least you can list your startup with a crowfunding portal which is where your pitch is made.

Instead of needing to persuade a few wealthy investors that your idea will be more profitable than the next guy's idea, instead you can pitch to people like yourself who might uniquely see the same value in what your startup creates.  And they don't have to be wealthy -- they can invest $20 if they want, and can be from anywhere in the country -- not just local investors which nearly all startup funding historically has come from.

[420]

what the fuck does the bill do? i want 1-3 sentences...

Basically it lowers the bar as to who can get equity funding.  

Some of the projects on KickStarter or IndieGogo would never have passed muster with banks or angel investors, yet when these people put their ideas out there, there were actual potential users around the country and around the world who thought it was a good enough idea to drop $20 or $50 or whatever to see the idea be designed, built and sold.

Today chances of you as an non-established entrepreneur getting funding are much higher if you have wealthy friends or family.  You aren't allowed to put out a sign asking the public to invest in your business.  Even with Crowdfunding made legal, that will still true about the sign but at least you can list your startup with a crowfunding portal which is where your pitch is made.

Instead of needing to persuade a few wealthy investors that your idea will be more profitable than the next guy's idea, instead you can pitch to people like yourself who might uniquely see the same value in what your startup creates.  And they don't have to be wealthy -- they can invest $20 if they want, and can be from anywhere in the country -- not just local investors which nearly all startup funding historically has come from.

saying indiegogo was illegal before this bill?