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Crowdfunding for equity is one of those ideas that appeals to a lot of people. It has “crowd” appeal, you could say. Why not allow a great number of individuals (thousands) to each invest a little bit of money to fund projects that would otherwise not get funded? Especially projects like rooftop solar projects or similar ventures which improve society as a whole? Isn’t this a great idea?
Kickstarter now raises more money for the arts than the National Endowment for the Arts. Clearly, crowdfunding is the future we have all been waiting to be evenly distributed. (As William Gibson famously said, “The future is here, it’s just not evenly distributed yet.”)
But hold on a minute. We have a little snag we have to deal with first. That snag being state and federal securities laws. These laws were put in place in the aftermath of the stock market crashes that preceded the Great Depression, and strictly regulate the business of selling securities. These laws prohibit the crowdfunding future we thought was just about to be evenly distributed. Under these laws you can’t sell even $10 worth of securities without first going through an expensive process with state and federal regulators. There is no “de minimis” exception to the securities laws.
Under state and federal law, before you can sell any security, you must first either register the security with the securities regulators (which costs a ton) or find an exemption under which the security can be sold without registration. Most private company stock offerings proceed according to an exemption simply because the cost of registration is so great.
The problem for our crowdfunding future? Exemptions are limited in number and are typically subject to a number of conditions and limitations. There is currently in place no “crowdfunding” exemption.
Take my example, the company that wants to sell equity to build a rooftop solar or wind project by selling shares at the local coffee shop (just drop that $100 off while you pay for your coffee). The company would find it very hard (impossible actually) to find a securities law exemption that would allow it to proceed in the manner described.
The JOBS Act crowdfunding provisions are supposed to resolve the above dilemma, and allow ordinary Americans to invest. (By the way, right now ordinary Americans are cut out of the private securities market almost entirely because almost all private securities offerings are “accredited investor” only offerings. Accredited investors are generally individuals with a $1M net worth, excluding their home equity, or incomes of at least $200,000 a year for the last 2 years with the expectation of the same in the year of investment, or $300,000 with their spouses.)
The trouble? The very concept of crowdfunding is at odds with the structure of the federal securities law. The most commonly used federal securities law exemption, Rule 506, is a safe harbor under Section 4(a)(2) of the Securities Act. Section 4(a)(2) exempts “transactions by an issuer not involving any public offering.”
How can crowdfunding be reconciled with this very fundamental no-public-offering concept that has been a part of the securities laws since the 1930s?
Aren’t companies that are crowdfunding going to be able to generally advertise that they are raising money? The answer, oddly enough, is no. All companies are going to be able to do under a crowdfunding offering is give “notices which direct investors to the funding portal or broker.” The JOBS Act specifically disallows issuers of crowdfunding offerings from advertising: “an issuer who offers or sells securities shall . . . not advertise the terms of the offering, except for notices which direct investors to the funding or portal.”
If issuer can’t generally solicit, is it still crowdfunding? Well, it is still crowdfunding, at least according to the JOBS Act.
Contrast this with Section II of the JOBS Act. Under Title II, issuers in all accredited offerings are going to be able to put up billboards along the highway if they want, advertising “Buy Our Stock!” But that is for a different blog post.
Rarely do we get a break around here from the lofty world of startup law, corporate strategy, venture capital, SEC rules, M&A, etc. I received a submission from a friend who publishes ski/snowboard magazines and a fly fishing magazine. An interesting and funny guy who can throw together a good read. Enjoy! ~ Joe
Geek Vacations of the Future
Several years into our small publishing endeavor, my wife and I launched a flyfish title to complement our other media properties (focused on skiing and snowboarding), as a means to create a “summer job” for ourselves and our staff. We soon discovered, like the winter sports, fly fishing has morphed from a classic approach – casting to rising trout; skiing down ski area runs – to a more adventuresome and often esoteric one – skiing Sicily’s active volcanoes; fishing for primordial looking Amazonian species.
It isn’t enough to provide readers stunning river vistas from Wyoming and New Zealand, today’s fly fisher’s want to go deep and get weird.
From the aggressive and mysterious mansheer of southeast Asia, to the taimen, or “river wolf” of Mongolia, to the golden dorado of Bolivia — going to far flung reaches of the earth, surviving monsoons, tropical swelter and occasional war zones has come to embody what one might be tempted to call “extreme fishing” if the phrase didn’t sound a bit like “extreme sunbathing” or other (choose your own) non-sequitur. That said, there is something particularly engaging about a journey to remote waters for a species that otherwise exists for most Americans only in taxonomy books and at the Smithsonian. The taimen, the world’s largest salmonid, gets upwards of 200 lbs and six foot-plus; it basically looks like a brook trout that made its way into Jurassic Park. My friends who have fished for them, employ flies that look like bedroom slippers and are meant to imitate squirrels. The golden dorado of Amazonian headwaters looks like a really pissed off goldfish, and like the taimen, hunt in packs.
You’re just not going to get that in the Catskills or the Cascades.
However I think that like the Teddy Roosevelt sportsmen of yesteryear, this new breed of fisher may be starting to run short on Paleolithic fish species to drag up, snap a photo with and plaster on their Facebook (the reason people fish). While I am certain there are untold strange sculpin in Kilimanjaro run-off streams and others like this, at some point in the future, fisherfolk are going to hit a critical mass with travel, fish and a finite planet.
Which got me to thinking about Jaron Lanier. Jaron Lanier is a Silicon Valley icon both revered and dismissed. With his beard, dreadlocks and stout build, he tends to look a bit more like he should be selling nitrous balloons at Phish show parking lots than the man who created and coined the term “virtual reality” more than twenty years ago. Sneaking into the Stanford Navy labs at age 15, grad students and government employees there simply figured he must be one of many teen prodigies on campus. Jaron was free to go nuts on the best computer equipment at the time, and he created another world.
I had the opportunity to hear him speak almost two decades ago at the Stanford Professional Publishing Seminar in Palo Alto, CA. While others at the time in Silicon Valley were ratcheting up the cash machine with Java, Sun Microsystems, etc. Jaron had effectively walked away from the whole thing. Disillusioned with the military applications DARPA and the Pentagon were now applying to his virtual reality, he created programs for gamers, as well as for surgeons to do virtual practice runs before diving into the real thing. Jaron then retreated to his music, a computer infused sort of world beat thing. Today, he continues to create and critique, his latest work “You are not a Gadget” both inflaming and inspiring electronic culture.
But the thing I recall most about the talk he gave, was his description of virtual realities of the future. He used jukeboxes as an analogy: “When you are walking down the street and hear music coming out of a bar, without looking in, you can almost always tell whether the music is live or recorded. But if you had never heard recorded music, you would not be able to discern. Such it is with virtual reality: if you could transport yourself 100 years in the future, the quality of virtual reality programs would be indiscernible from actual reality, but for someone who has grown up with it, they will be able to tell.”
Enter the colo claw fish. Now, understand, the colo claw fish does not, in the traditional sense, exist. At least outside of Lucasfilms Productions.
Featured in the first Star Wars prequel “The Phantom Menace,” the colo claw fish makes an appearance when Qui-Gon Jinn and a young Obi-Wan Kenobi (I’m going to choose to ignore the Jar Jar Binks character altogether) are running the underwater canyons of Naboo. According to Wookiepedia (yes, it is exactly what you think it is), the colo claw fish runs approximately 40 meters in length, has opposing claws to hold captive their prey and bioluminescent nodules along their sides to attract them. Qui-Gon and Obi-Wan were only able to escape certain death when their pursuing colo claw fish is munched by the sando aqua monster, a 200m-long carnivorous sea mammal.
All of which starts making the heat of Thailand or rough roads of Mongolia start looking like kid’s play. And taimen, mansheer or whatever fish from South America look like anchovies with puppy eyes.
The thought is, if Jaron Lanier can conceive it, George Lucas can create it and DARPA can build it, retired Microsofties and oil execs can fish it.
Which brings me to my friend Agent X. Agent X, aka Mark Farmer is one of those unique Americans who straddle the line between renegade and hero. A former Coast Guard rescue swimmer in Alaska, he has gone on at various times to work at gun shops, mount a viable campaign for mayor of Juneau, and consult on such films as “Independence Day” as well as to write and shoot for Jane’s Defense, Popular Science, and frequency: The Snowboarder’s Journal, about everything from advanced weapons systems to interplanetary snowboarding. X is the first person to shoot good, land-based photos of Area 51 as well as the inventor of the sport of “gumbysuiting” (running class 4 and 5 rapids in a CG survival suit and no boat). Although X is not a flyfisher by nature, he does seem like the ideal guide for colo claw fish.
Conscripting Agent X into leading clients in a new virtual-based fishing guide service won’t be the tough part. I suspect some snowboard gear, and healthy tips from the 1% would do the trick. The tough part will be wresting the coding from DARPA and licensing from Lucasfilms, but I would be surprised if both outfits don’t have crazed flyfishers with greater allegiance to fishing than anything else. There will be moles.
Regardless, rest assured the wheels are in motion and we’ll be taking bookings soon. The deal with Expedia will be significant.
Forget about Alaska, Bolivia or the mountains of Central Asia, it’s all about Naboo now.
Jeff Galbraith is the President of Funny Feelings LLC, publishers of The Ski Journal, Frequency: The Snowboarders’ Journal, The Flyfish Journal. He is an expert on the pursuit of non-existent piscine.