My buddy Daniel Sullivan of Crowdly wrote me recently for input regarding his crowd funding project www.wefund.us which is focused on driving grass roots support for the crowdfunding bill of Senator Scott Brown, Democratizing Access to Capital Act (S.1791), which allows a non-accredited investor to invest up to $1,000 in a company. (For a bit of background on the accredited investor concept, including recent revisions to the rule, see this NYT piece published last week.)
It is an interesting project and I am supportive of the concept (though I acknowledge the potential for issues down the road.) Dan asked for some input on a couple aspects of the project, and it gave me an excuse to crystalize my thinking on the issue, so I figured I would share that thinking here.
What I told Dan is that scoping the request and putting it in the proper historical context are the two critical steps necessary for getting this kind of law through Congress. What you want to avoid is looking like you are asking for pandemonium. Instead you want to package the request as reasonable. The history of securities laws is that they are fundamentally consumer protection laws. They were never meant to be unfair, they were always intended to protect people.
It all started in the wake of the great crash of 1929. The government had a decision to make – either get into the business of regulating the quality of stock offerings, or regulate disclosure. They chose disclosure – a famous line from that era was “sunlight is the best disinfectant” (uttered by Supreme Court Justice Louis Brandeis). Our government chose to make fulsome disclosure a requirement of anyone wanting to sell shares to the public. This was intended to protect “widows and orphans” from sketchy stock in non-existent companies.
All the current accredited investor rules at issue today actually came out of efforts to fence in and put a reasonable scope on the EXCEPTIONS to those rules. Because huge ill-defined exceptions would totally undermine the intent of the original well-meaning legislation, efforts were made to define the limits of the exceptions – in effect the concept (which became known as Regulation D) was to rule that you could avoid the requirement for full disclosure only if you were selling in very circumscribed ways: small private sales to people who were sophisticated, could stand the loss, and ought to know better. (Similar exemptions existed for off-shore deals, etc.) The rest is history.
So what the crowd funding supporters are basically arguing for is a much larger exception to the mandatory disclosure rule. Two critical parts of successfully arguing that are (1) defining the scope of the broader exception you seek and (2) putting it in terms that make it still consistent with the public policy behind the original laws.
Precisely how the movement best does that is anyone’s guess. Perhaps they offer to limit it to face to face sales only (so that people don’t sell bogus stocks over the internet) or you limit it to a certain number of investors per round, or a certain amount per year per person, or a certain amount per person per company (which, at $1,000, is the current limit in the legislation), or something else, but the key is that there has to be some scope or what is being asked for cannot be granted.
Likewise, it must be put it into a broader context than just “create jobs” which at this point virtually every single piece of legislation being proposed claims to do. This could be done by noting that the original legislation came at a time when relatively sexist views still existed (protecting widows and orphans), information was scarce and expensive to publish, and most sketchy stock sales were via dodgy middle men. Juxtaposed against today’s world where information is cheap and easy to come by (due diligence is just a web search away) and market participants are generally more savvy (a majority of US households own stocks either directly or via mutual funds) it is easy to show it is a different situation. And the proponents could offer parallels to the original protections such as a requirement that the sale had to be direct to the buyer, couldn’t include brokers, required a simple web disclosure form, it would fit more closely with the underlying public policy of the original statute.
With scope and context, the “ask” is much more manageable. You want to be asking for a very specific enlargement to the current exemption because in today’s world, that enlargement is consistent with the underlying public policy.
Comments, questions or reactions to this post? Leave a note below and I will respond to your questions.
Subscribe – To get an automatic feed of all future posts subscribe to the RSS feed here, or to receive them via email enter your address in the box in the upper right or go here and enter your email address in the box in the upper right. You can also follow me on Twitter @cmirabile and on Google+.
Speak Your Mind