SEC Small Business Forum: Takeaways From A Crowdfunding Perspective

SEC Small Business Capital Formation 2012The SEC Government-Business Forum on Small Business Capital Formation took place last week at the Securities and Exchange Commission Headquarters in Washington, DC.

I will admit that I was very excited to attend this event. This was the first event we attended last year shortly after we founded Crowdfund Insider, and it was my first opportunity to meet a lot of the stakeholders that are aiming to build an industry around equity crowdfunding and the JOBS Act.

Last year’s forum was a raucous event where entrepreneurs and advocates for access to capital took to the microphone to voice their opinions on what the JOBS Act hoped to be, where it fell short and where it stood to help entrepreneurs in new and exciting ways.

Each year the event is split into two sessions, a morning forum and a group of afternoon breakout sessions. Last year’s afternoon session on crowdfunding was packed.

A lot has changed in the last 12 months. Title II of the JOBS Act has now resulted in the implementation of Rule 506(c) of Regulation D. For the first time, entrepreneurs seeking capital are allowed to generally solicit their offerings to the public as long as funding comes via accredited investors. Concurrently, we have proposed rules for Section 4(a)(6) of the Securities Act, which will legalize popular equity crowdfunding for the masses for the first time. It is a revolutionary idea that finally combines the realities of raising capital with the reality of the Internet as an ubiquitous means of communicating in the modern world.

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Having said that, this year’s forum was decidedly different from last year’s forum. We will have plenty on the event this week, as – full disclosure – these things take a while to digest. As we take stock of last week’s happenings, here are a few high-level thoughts regarding last week’s forum…

This year’s event was not well-attended

As I said, last year’s afternoon breakout session was positively crazy. There was a line at the mic. Certain entrepreneurs showed up with hit lists of points they wanted to make in the presence of the SEC. A duo of co-founders from RocketHub stick out in my mind as being particularly well-prepared to address the Commission.

tumbleweedThis year’s event was sparsely attended at best, and a rough estimate would put this year’s crowd at about half of last year’s. I’m left wondering why that is.

It is important to note that this is one of the rare circumstances where the general public is invited to speak one-on-one with representatives and staffers from the Commission en masse. In short, it is vitally important that the interests of the crowdfunding industry are represented at this event if the industry wants to be heard. To be fair there were attendees in the crowd that made sure of that. I’ll talk more about that in a bit.

So, why the light attendance? In my mind there are only four possible reasons. One is that crowdfunding entrepreneurs may just be busy working on their products as we approach implementation, but that does nothing to diminish the event’s importance. The second is that the proposed rules may have gone a long way to addressing the concerns of the industry, which in theory could be a good sign for entrepreneurs considering crowdfunding as a way to raise capital for their businesses.

The latter of the possibilities come with some concerns, one being that crowdfunding industry stakeholders are victims of their own burn rates in the wake of a longer-than-expected wait on implementation of Title III. The last – and perhaps most foreboding – possibility is that crowdfunding stakeholders may not feel they’re being listened to.

Regardless, this was not a strong showing by the crowdfunding industry. If there are future grievances on finalized rules, let it be known that much of the industry didn’t show at what may have been their best opportunity to have their collective voices be heard.

Credit where credit is due

kim wales doug ellenoffI’m sure there were faces in the crowd that are either active in the industry or planning to be active in the industry that I am not familiar with. Having said that, those that were present deserve some honorable mention for representing their interests and the interests of crowdfunding portals and service providers across the country…

Kim Wales, Wales Capital
Sara Hanks, CrowdCheck
Daryl Bryant, Startup Valley
Chris Tyrrell, OfferBoard
Heather Schwarz-Lopez, EarlyShares
DJ Paul, GATE Technologies
Stephen Ferrando, CrowdClear
Douglas Ellenoff, Ellenoff, Grossman & Schole LLP

Again, this is only a synopsis, but be assured that I expected to see far more than seven familiar faces. It also bears mentioning that some may have participated via call-in, although I’d argue that an in-person presence is extremely important. It isn’t every day that the industry gets the opportunity for face time with SEC staffers.

Guidance is still needed from the SEC on key issues

For all the proposed rules do to answer questions about what is and isn’t allowed on the part of crowdfunding portals, there are still some key areas where further guidance is desired from the SEC. Curation was one aspect that came up time and time again both in the morning session and during the afternoon breakout groups. Portals need to know what constitutes investment advice and they need to know how to differentiate between simple curation and investment advice. These types of issues may drive more portals to partner with broker-dealers in order to avoid any backlash for providing information to their potential investors that could be interpreted as investment advice.

The topic of syndication also came up. Portal representatives wanted the SEC to allow portals to cross-list deals from their respective platforms on competing platforms, and more specifically they wanted the SEC to allow these portals to share commissions for successful acquisitions from outside platforms.

This begs the question of whether the comment period for crowdfunding will need to be extended to allow public comment on certain aspects of the proposed rules that the SEC hadn’t considered in detail up to this point.

Little has been decided on the topic of education

Crowdfunding is a lovely idea, but there is a huge educational gap that exists today. Many entrepreneurs still don’t know that crowdfunding is an option for raising capital, and many members of the public are not yet aware that they will be able to invest in small companies on lesser-regulated intermediaries soon.

Without a concerted effort focused on education, it is unlikely that crowdfunding will live up to the promise many had hoped for.

Title VII of the JOBS Act specifically directs the SEC to facilitate education on the JOBS Act…

The Securities and Exchange Commission shall provide online information and conduct outreach to inform small and medium sized businesses, women owned businesses, veteran owned businesses, and minority owned businesses of the changes made by this Act.

We will be watching intently to see what the SEC rolls out to adhere to this part of the law. SEC staffers in attendance were vague on the specifics of this effort, but they did allude to an educational program being in the works within the Commission.

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