As you are probably well aware by now, Congress passed a federal crowdfunding law. This was really exciting, but the federal law is problematic for many, many reasons. What are the problems with the federal crowdfunding law? To name just a few: Continue reading →
All posts tagged financings
Washington State Needs Its Own Crowdfunding Law
How Congress Can Make Startup Fundraising Easier and Better
I was excited to hear that fellow Seattle lawyer Eric Koester was going to testify in front of Congress next week on how to make startup financings easier and better. Please see the story on GeekWire. Eric, below is my bullet point list of what I would change if I could.
- Allow general solicitation.
Right now, startups are bound by Rule 502(c), which provides as follows:
Limitation on manner of offering. Except as provided in Rule 504(b)(1), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:
- Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
- Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising;
Intelligent folks have argued these rules don’t make sense. See footnote 25 of the Letter From SEC Chairman Mary L. Schapiro to The Honorable Darrell E. Issa, Chairman, U.S. House Committee on Oversight and Government Reform.
See, e.g., Final Report of the Advisory Committee on Smaller Public Companies to the U.S. Securities and Exchange Commission (April 23, 2006), http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf; Joseph McLaughlin, How the SEC Stifles Investment – and Speech, The Wall Street Journal (February 3, 2011). Concerns about the scope of the Commission’s rules on general solicitation and advertising have been raised by the participants in the annual SEC Government-Business Forum on Small Business Capital Formation. See 2009 Annual SEC Government-Business Forum on Small Business Capital Formation Final Report (May 2010), http://www.sec.gov/info/smallbus/gbfor28.pdf.
- Reduce the “accredited investor” financial thresholds.
Dodd-Frank made it more difficult for folks to qualify to invest in startups. This wasn’t helpful to startups.
- Add to the definition of “accredited investor” sophisticated persons who make certain acknowledgments about the risks of investing in investment agreements.
If folks are willing to acknowledge that they are willing to lose their money on a highly speculative venture, let’s let them.
- Allow a tax write off before the stock is sold.
Right now, the tax law doesn’t allow a recovery of basis in stock until the stock is sold. This encourages people to flip companies.
- Allow a tax credit for investments if the funds are used to employ people.
There is a great bill out there right now in Congress that would allow a 25% tax credit for investments made in qualifying startups. This would be a good law to add to the books.
- Disallow states from imposing fees on companies simply because an investor is resident there.
Right now, startups can wind up paying $300 fees in numerous states.
- Allow offerings in which small amounts of money are raised from many people to be completely exempted from the rules.
For example, if you are raising less than $500 (for example), from 1,000 people to fund a renewable energy project in your neighborhood, allow this to happen.
Good luck and have fun Eric!
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Update
Eric Koester’s written testimony to the House Committee on Oversight & Government Reform
Senate Votes to Save Startup Seed Financing and Angel Investing!
By Joe Wallin and William Carleton
On a voice vote today (7 pm Eastern time, just a few minutes ago), the United States Senate amended Senator Dodd’s financial regulatory reform bill, fixing what had been previously proposed for startup companies and angel investors.
The amendment, SA 4056, was co-sponsored by Senator Dodd and many others, and we believe it largely incorporates what Senators Bond, Cantwell, Warner and Brown introduced Thursday last week as SA 4037.
Senator Murray joined Senator Cantwell as a co-sponsor of SA 4056, meaning that both Senators from Washington State stood up and acted to protect startups, angels, startup innovation, and the jobs the startup ecosystem creates. Congratulations to Marianne Hudson of the Angel Capital Association, and Dan Rosen of the Seattle Alliance of Angels!
We expect to confirm shortly that SA 4056 does the following:
- eliminates the industry killing 120 day wait period;
- eliminates the “go back in time” provision, which would have re-adjusted the accredited investor financial thresholds in a way that would have wiped out 2/3rds of existing angel investors qualifying as “accredited investors”;
- excludes the value of an investor’s primary residence in determining whether the investor would meet the net worth standard; and
- adds “bad boy” provisions to Rule 506 offerings.
We expect to find that SA 4056 may improve SA 4037 slightly, by protecting the current accredited investor income thresholds for four years, in addition to protecting the current net worth test for four years (other than the exclusion of home value).
As soon as we obtain a copy of the amendment as passed, we will post it. Thank you Senators Murray and Cantwell!
UPDATE 05-18-10. Here now is the text of SA 4056, from the Congressional Record:
The Senator from Connecticut [Mr. DODD], for Mr. Bond, for himself, Mr. Dodd, Mr. Warner, Mr. Brown of Massachusetts, Ms. Cantwell, Mr. Begich, Mrs. Murray, and Mr. Corker, proposes an amendment numbered 4056 to amendment No. 3739.
Mr. DODD. Mr. President, I ask unanimous consent that the reading of the amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:
(Purpose: To improve section 412 and section 926)
On page 387, strike line 13 and all that follows through page 388, line 3, and insert the following:
SEC. 412. ADJUSTING THE ACCREDITED INVESTOR STANDARD.
(a) In General.–The Commission shall adjust any net worth standard for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, so that the individual net worth of any natural person, or joint net worth with the spouse of that person, at the time of purchase, is more than $1,000,000 (as such amount is adjusted periodically by rule of the Commission), excluding the value of the primary residence of such natural person, except that during the 4-year period that begins on the date of enactment of this Act, any net worth standard shall be $1,000,000, excluding the value of the primary residence of such natural person.
(b) Review and Adjustment.–
(1) INITIAL REVIEW AND ADJUSTMENT.–
(A) INITIAL REVIEW.–The Commission may undertake a review of the definition of the term “accredited investor”, as such term applies to natural persons, to determine whether the requirements of the definition, excluding the requirement relating to the net worth standard described in subsection (a), should be adjusted or modified for the protection of investors, in the public interest, and in light of the economy.
(B) ADJUSTMENT OR MODIFICATION.–Upon completion of a review under subparagraph (A), the Commission may, by notice and comment rulemaking, make such adjustments to the definition of the term “accredited investor”, excluding adjusting or modifying the requirement relating to the net worth standard described in subsection (a), as such term applies to natural persons, as the Commission may deem appropriate for the protection of investors, in the public interest, and in light of the economy.
(2) SUBSEQUENT REVIEWS AND ADJUSTMENT.–
(A) SUBSEQUENT REVIEWS.–Not earlier than 4 years after the date of enactment of this Act, and not less frequently than once every 4 years thereafter, the Commission shall undertake a review of the definition, in its entirety, of the term “accredited investor”, as defined in section 230.215 of title 17, Code of Federal Regulations, or any successor thereto, as such term applies to natural persons, to determine whether the requirements of the definition should be adjusted or modified for the protection of investors, in the public interest, and in light of the economy.
(B) ADJUSTMENT OR MODIFICATION.–Upon completion of a review under subparagraph (A), the Commission may, by notice and comment rulemaking, make such adjustments to the definition of the term “accredited investor”, as defined in section 230.215 of title 17, Code of Federal Regulations, or any successor thereto, as such term applies to natural persons, as the Commission may deem appropriate for the protection of investors, in the public interest, and in light of the economy.
On page 388, line 14, strike “1 year” and insert “3 years”.
On page 998, strike line 12 and all that follows through page 1001, line 25, and insert the following:
SEC. 926. DISQUALIFYING FELONS AND OTHER “BAD ACTORS” FROM REGULATION D OFFERINGS.
Not later than 1 year after the date of enactment of this Act, the Commission shall issue rules for the disqualification of offerings and sales of securities made under section 230.506 of title 17, Code of Federal Regulations, that–
(1) are substantially similar to the provisions of section 230.262 of title 17, Code of Federal Regulations, or any successor thereto; and
(2) disqualify any offering or sale of securities by a person that–
(A) is subject to a final order of a State securities commission (or an agency or officer of a State performing like functions), a State authority that supervises or examines banks, savings associations, or credit unions, a State insurance commission (or an agency or officer of a State performing like functions), an appropriate Federal banking agency, or the National Credit Union Administration, that–
(i) bars the person from–
(I) association with an entity regulated by such commission, authority, agency, or officer;
(II) engaging in the business of securities, insurance, or banking; or
(III) engaging in savings association or credit union activities; or
(ii) constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct within the 10-year period ending on the date of the filing of the offer or sale; or
(B) has been convicted of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the Commission.
