Shares Are For Sharing
Crowdfunding sites like IndieGoGo offer VIP Perks but not shares--
because offering profit participation is illegal. Securities law lets
you gamble your retirement on investments conveyed through the
all-controlling financial system, but you can't invest $100 in someone
you actually know personally, in order to help them start a small
business, write a book, make a film, build an iPhone app or develop a
new product that you believe has commercial potential.
How did things get this way? Read on for a mini history lesson, or else
skip down to find out what this project will do specifically.
HISTORY - Good Depression-Era Legislation Gone Bad
In the 1930s, our current system of securities laws was designed to keep
things honest by guaranteeing investors access to trustworthy
information about investments: audited financial statements,
documentation of ownership and management, strategy and future plans,
potential risks specific to a company, the general dangers of
forward-looking statements, etc. To make sure investors received this
knowledge, offerers have had to register with and be regulated by the
The system worked, and for generations, the SEC's uncorruptable,
white-hat dedication to enforcing transparency and protecting investors
stood as one of the pillars of U.S. financial success. Thanks to the
SEC's ongoing vigilance, U.S. businesses inspired and drew investment
from the rest of the world.
The problem is, some of this law is now a bit rusty. Beyond
protecting the proverbial helpless widows and orphans from boiler-room
scams (which is good), it also prevents small businesses and creative
ventures from seeking investment. Any investment that's offered to the
general public, no matter how small, requires SEC registration. And
registering a public offering with the SEC costs tens of thousands of
dollars at least, which is often multiples of the start-up capital
needed to begin with.
On the investor side, securities law similarly locks small investors out.
Unregulated securities are open only to "accredited investors," which is
legally defined as people who are either millionaires or who make more
than $200K per year ( 17 C.F.R. §
230.501(a)). The rationale behind this, from the Supreme Court's
1953 decision SEC vs. Ralston Purina, is that wealthier investors
do not need the SEC's protection. In practice, the law creates two tiers
of investors: Millionaires who can invest freely, and normal people who
can only invest in what the big financial companies offer and promote to
them-- and anything small or local will never appear on the menu.
Opportunity and Need for Change
Today, the internet lets anyone move information and money around
with the speed and freedom that only large enterprises enjoyed in the
1930s (or even the 1980s). We now have the infrastructure to let anyone
offer and benefit from very small-scale investments, as IndieGoGo and
other crowdfunding sites all but demonstrate.
Meanwhile, it's become more difficult for small ventures to get
loans. Can you raise $5,000 through investment, for a small project or
business improvement? Can you invest just $50 in someone you know and
trust, or you know and admire their work, or you have numerous friends
in common? The answers, currently, are "No," Raising a small amount of
money for a project online without expensive registration and investing
a small chunk into an unregistered project both violate current federal
Much of securities law is rightly devoted to protecting investors.
The main way it does this is by detailing the documents that offerers
must produce and deliver to investors-- prospectuses, periodic financial
statements, etc., all of which are must be audited independently and
carry appropriate warnings. In the 1930s these envelopes full of printed
matter were essential, but there's another basic way to protect
investors from losing their shirts: Limit the "losable" amount.
Cap the level of investment that anyone can make to some value that's
closer to the cost of a lottery ticket than to a mortgage.
This possibility was irrelevant in the 1930s when investment
offerings needed to be major undertakings, but with the fast,
lightweight ventures that are possible today and the minimal expense of
distributing information, this approach makes more sense. And it would
let people invest close to home, in things and people they know rather
than abstract remote companies that they only learn about through the
PROPOSAL - Where the SEC Has No Choice But To Engage
By the General Exemptive Authority stipulated under Sec. 28 of the
Securities Act of 1933,
the SEC may introduce regulatory exemptions in
order to "promote efficiency, competition, and capital formation,"
provided that the exemptions are "consistent with the public interest
and the protection of investors."
This project seeks a "Crowdfunding Exemption," which would set a very
low-value de minimis bound on securities offerings, below which
the SEC doesn't bother regulating. For example, such an exemption might
cap the aggregate value of an offering at $20,000 and, more importantly
for investor protection, cap individual investment at $100.
On the SEC's website at
http://www.sec.gov/rules/petitions.shtml, the SEC posts any
Petitions for Rulemaking that it receives. These are open letters that
request changes to SEC regulations. The SEC also solicits public
comments on these petitions for rulemaking, which it also posts in their
entirety, linked from the same page. This area of the SEC website is
surprisingly inactive. They post a handful of petitions each year,
mostly from investment law firms, and every petition has received
only limited numbers of comments from the public.
According to Linda Cullen at the SEC's Office of the Secretary, which
handles the Petitions for Rulemaking, there's no filter between their
receiving the documents and their posting them, other than do they
actually ask for changes to SEC regulations. In other words, if you send
it to them, it will be posted, and they will also post all
comments they receive that reference the petition. (And if you
browse the comments, you'll see that some are handwritten on pieces of
paper-- someone at the SEC has to scan these in and turn them into PDFs
The Katovich Law Group (
http://katovichlaw.com), an Oakland-based law
firm which specializes in "Cutting Edge Capital Raising for Small
Business" has agreed to draft a Petition for Rulemaking for
submission to the SEC, aimed at legalizing crowdfunded securities, for
$1000 raised through crowdfunding.
John Katovich, who heads the firm, has an extensive background in
securities regulation and has advocated elsewhere for new regulatory
exemptions based on capping individual investment, to help small
business. Katovich is a great firm to be doing this, and they
understand that their Petition for Rulemaking, which will bear their
letterhead, will have two audiences: the SEC and the public.
$1000 is a great price for this legal work-- Katovich Law attorney
Jenny Kassan, another leading fighter for small business fundraising
(and my contact there for this project), said that they have a new
attorney at the firm who's very interested in this project and can give
it some good pro bono time.
So Here's the Plan:
- Raise the $1000
here. When the total is reached, give Katovich
the green light for drafting the Petition for Rulemaking. Jenny Kassan
estimates that this will take them about 3 weeks.
- Submit the document to the SEC's Office of the Secretary.
- Wait until it's posted, along with its File Number, at
- Spread the word every way we can to encourage people to submit
comments regarding the petition.
This last step is the challenge-- if people aren't that interested and
only a few comments are submitted, then the issue remains invisible. But
if the SEC's quiet backwater web page becomes a site of political
activity, if they receive hundreds of comments and have to hire someone
to scan and post them all, then it becomes a story that fits the ever-newsworthy
journalistic trope of "Old Institution, Blindsided, Is Forced To
Confront New Phenomenon."
I've been following the issue of crowdfunded securities for a while,
and I know it's something that many people, like me, are passionate
about, and see it as a real game-changer: cutting-edge investors,
small business advocates, writers, artists, filmmakers, inventors,
musicians-- all the people who already make sites like IndieGoGo,
Kickstarter, Spot.Us, Biracy, Kapipal, Kiva, InvestedIn, Rockethub, and
FundBreak such centers of creativity and inspiration.
If this enthusiasm can be mobilized towards the SEC in a way that
guarantees their engagement, such as on their own website, that's a win.
Their reputation has been battered recently, for good reason, and they
may be looking for ways to show that they want to help the little
Regulatory reform is in the air, and Congress is currently
reviewing a bill to change financial regulations. These things generally
come to the table top-down, but this project proposes a relatively
simple regulatory change that would spark innovation and financial
activity from the bottom up.