Crowdfunding Campaign to Change Crowdfunding Law


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 SEC.

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 securities law.

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 media-financial machine.

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, 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 for posting.)

The Katovich Law Group (, 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:

  1. 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.
  2. Submit the document to the SEC's Office of the Secretary.
  3. Wait until it's posted, along with its File Number, at
  4. 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 guy.

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.

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