I’m not a venture capitalist, a securities regulator, or a legislator. I’m not even a lawyer. While these are the folks who have driven the conversation about crowdfunding-as-investment, especially the new JOBS Act-related federal exemptions, the real action is happening on the ground – where I work – where lawyers and legislators are as rare as hen’s teeth.
Recently, I was invited to speak at the Crowdfunding Professional Association (CfPA) event in Washington DC. It was intended mostly for crowdfunding “insiders”, those who understand the law, compliance, and platform technology. I was asked to speak about how our crowdinvesting law in Oregon is working with under-served communities. I was scheduled towards the end of the day, (as is typical for the nonprofits among us) after most of the heavy hitters were done.
The air was thick with technical, legal, and financial language, and I did my best to keep up. I do pretty well, frankly, for someone who is a relative newcomer and an educator. I spoke about what we’ve come to call “community capital”, capital that begins in a community and ends up back in the community, via local securities. The 35 states that have passed local intrastate laws were my focus, as opposed to the national crowdfunding laws, so my focus was very local. But, as I listened, I was shocked when speakers shared their challenges of engaging in national crowdfunding.
It turns out, I knew more than I realized.
“One problem is that entrepreneurs will actually try to sell shares that don’t exist. In these cases, the entrepreneurs didn’t know they had to create them first!”said Sara Hanks, CEO of CrowdCheck. “On more than one occasion I had to get them to back up, start over, and help get them compliant, fast.”
Sara’s company helps entrepreneurs with compliance when contemplating the use of any of the new federal crowdfunding exemptions. Her pedigree is impressive… including graduating from Oxford University and working for the SEC. She knows her stuff. But, she’s rare. So, hearing the concerns I’ve been experiencing in small towns across our state coming from her was a bit of a surprise.
“Entrepreneurs need to understand that these crowdfunding laws are real securities. This is serious stuff. And, once the raise is over, there is still compliance documents to file and work to be done. There is just not enough education on this for entrepreneurs, and it slows down the effective use and therefore the benefits of crowdfunding for capital formation. It concerns me.”
Another example. One presentation by a young CEO who has just launched a new RegA+ offering for his company, SocialBlueBook. (He was so young his mom was there beaming and taking pictures.) Using the RegA+ exemption to raise money allows the entrepreneur to offer the chance to invest to “non-accredited investors” (non-wealthy folks), something these laws make possible for the first time. In his enthusiastic presentation, he went through a list of what was great about inviting his clients to be investors. Then his face fell, and he began to share some of the challenges he hadn’t expected:
“I now have to spend time educating people about the company and about the new investing crowdfunding law. This takes time I don’t have as I grow my company. I guess it’s what happens when you’re one of the first to use an innovation – you spend time getting others up to speed.”
So, it turns out I know a thing or two about crowdfunding.
These complaints are familiar laments of entrepreneurs using the new intrastate crowdinvesting laws. On top of having to explain their company’s idea, they have to explain the law. Think Aunt Mary, your next door neighbor, your mom. That’s the new market for investment crowdfunding.
Listening to them speak one after another was a revelation. They’re all the same people – whether an entrepreneur or a potential investor. They live in towns and cities across the country, and they don’t care which exemption you’re using.
Here in Oregon where we launched our own state’s crowdfunding law, we had nine companies use it right out of the chute, with optimism in their hearts. But, the amount of education needed by each potential investor was a shock. It took the entrepreneurs by surprise, and caused a few to balk. Add to that the ban on using social media due to outdated regulation, and the challenge multiplied.
The CfPA event was helpful for me, if only to confirm my suspicions – crowdfunding is brilliant, wonderful, and an enormous opportunity for all kinds of entrepreneurs, ideas, and communities. It is worthy of our attention. But, we are woefully behind the eight ball here. We forgot about the ecosystem. Building the plane while you fly it is a great metaphor, but another perhaps more apt is “driving the train before the tracks are built.”
Hear that grinding sound?
Until we work together at a national level to coordinate the growth of a supportive and professional ecosystem, we risk losing momentum and impact, (or worse).
Crowdfunding is brilliant, wonderful, and an enormous opportunity for all kinds of entrepreneurs, ideas, and communities, but the ecosystem is incredibly weak.
My takeaways from CfPA
1. All the Same People. It doesn’t matter which public crowdfunding exemption you choose – Reg CF, Reg A+, Intrastate Rule 147A – the people who are your potential investors are all the same people. They live across the country in big and small towns and cities. And they don’t know what the hell you’re talking about.
2. It’s Only Going to Get Worse. On April 20, the SEC made public a new rule that fixes regulations felt at the state level, enabling the use of social media and the internet for intrastate offerings. Historically, entrepreneurs using an intrastate law were banned from offering securities to anyone who lives outside the state. This language includes any information (perceived as “advertising”) that might reach someone outside the state. You see the problem. Enter the 21st Century, the web, and social media. So, wisely, the SEC implemented Rule 147A that now allows public advertising by entrepreneurs using an intrastate exemption (details here). So, what’s next?
Imagine the now 35+ states and their crowdfunding entrepreneurs advertising widely on the web. We should see an explosion of offerings in much more public places – on product labels, social media, email, t-shirts, billboards, radio, and more – now reaching everyone and everywhere.
While I could not be happier about this legal fix, I am flabbergasted at the lack of strategy by the powers that be. In fact, who are these powers that be? I can’t seem to find them. If I want to invest in a local businesses I love and patronize where do I go to learn more?
There are places for ecosystem builders to learn more: Locavesting, an education and news site by author Amy Cortese is excellent, along with Crowdfund Insider by new pal Andrew Dix. If you want some serious talk, Sara Hanks’ CrowdCheck Blog is eye-popping. These folks are tracking what’s going on nationally with accessible and helpful information. But, these sites are still for the already-somewhat-informed.
Which brings me back to what I know. I continue to go to conferences, seeking out the organization (person, leader, entity, agency) responsible for the crowdfunding ecosystem. Who is responsible for this new type of investor education? Who helps entrepreneurs with compliance? Who the devil is keeping track?
Turns out, no one is.
Stay tuned for a Part II of this article as the National Coalition for Community Capital launches two new entities to do just that – help build the much-needed ecosystem for crowdinvesting success.