31 posts categorized "January 2012"

Pick a crowdfunding exemption. Any crowdfunding exemption?

The AP reports that President Obama will endorse or propose a package of pro-startup legislation. Today.

The package will draw upon, among other elements, the Startup Act and the American Growth, Recovery, Empowerment and Entrepreneurship (AGREE) Act. Those Senate bills are grab bags of tax incentives, regulatory reforms, and new visas for immigrant entrepreneurs. (The Startup Act would make permanent a 100% exclusion on captial gains from qualified small business stock held for at least five years; it's a great idea, though query how the President is going to square it with electioneering against Mitt Romney's tax bracket.)

Screen shot 2012-01-31 at 7.19.24 AMIt will be interesting to see how granular the White House will get, when it comes to a crowdfunding exemption.

There are at least three crowdfunding exemptions to choose from. Four, if you include a proposal that state securities regulators may be conducting a two-minute drill to pull together.

The Congressional bills are H.R. 2930, S. 1791, and S. 1970.

In many respects, H.R. 2930 (hereinafter, the "McHenry bill"), passed by the House with unseemly unanimity, is the best and most obvious choice. Back in November, the President lent timely support to the McHenry bill with this statement.

S. 1791, introduced by Senator Scott Brown, is also viable. This is the bill being supported by the Wefunders petition (which came to my attention because it drove a ton of traffic to my site yesterday). Wefunders appears to be in the business of being a platform, so it may make sense that they support the Brown bill, which requires use of an intermediary.

S. 1970, introduced by Senator Merkley, is the crowdfunding bill that represents no crowdfunding exemption at all.

The optimum crowdfunding exemption may be a mix of the McHenry bill and the Brown bill. I like what Paul Spinrad said in a responsive comment under his own post on BoingBoing last night:

"I think H.R.2930 is right to not require an intermediary-- that's important, a small local non-tech savvy business shouldn't have to go online.  But I like the lower individual investment cap of $1000 better in S.1791 -- I think $10K / 10% of income (H.R.2930) is way too high to start this new legislation out with."

I'll have to do some more thinking before I give up on the idea that a platform is the best way to bring accountability to the issuers, but I hadn't before appreciated the point that some businesses may not know how to deal with the internet.

Note as I'm just about to hit "publish" at 7:02 AM Pacific: Check out this post by Instagram co-founder Mike Krieger on the White House blog. Among other things, Krieger talks about progress toward making it easier for immigrant entrepreneurs to establish themselves in the US.

Update 10:44 AM Pacific: The White House has issued a press release, stating that "The President is calling for a national framework that allows entrepreneurs and small businesses to raise capital through 'crowdfunding.'”

Twitter's New Negative Capability

"Starting today," an unattributed Twitter blogger posted last Thursday, "we give ourselves the ability to reactively withhold content from users in a specific country — while keeping it available in the rest of the world." 

Lots of smart people have noticed this official corporate announcement. Two in particular are also watching the reactions. Venkat Balasubramani surfaces two key questions that are not being asked: "what kind of takedown requests will Twitter honor," and "will Twitter implement its policy only where it has people and offices?" Dave Winer reminds us that our affinity with Twitter is part of our larger complicity with the privatizing of the internet; at stake is "the ability to organize ourselves outside of the control of huge corporations and governments."


I'd like to draw attention to the language of the majestic phrase, constructed in the royal first person plural, "we give ourselves the ability to reactively withhold content . . . "

"Ability" is well chosen. It denotes a policy choice for which the sovereign has conferred permission. It also suggests that a technical capability has been achieved. There is a sense that both the deliberation and the building may have been a long time coming.

To "withhold content" is a nice way of saying "to suppress" or "to censor." Ingeniously, "withhold content" still carries a connotation of neutrality, as in (to parody the regal voice) "we will withhold content until our people have settled their differences among themselves." Perhaps the most brilliant linguistic deployment here is the adverb, "reactively," which frankly acknowledges the euphemism it qualifies but effaces Twitter's agency: Twitter will censure, but its very ability to do so is predicated on the actions of a third party.

Words matter, if not always today, then in the permission they give tomorrow.

Consider this promotional language from a Facebook flyer, explaining its "sponsored stories" advertising product to prospective advertisers:

"The dynamic nature and unique algorithm behind each person’s News Feed means that each person’s experience is different on Facebook. For Page owners, this means that some of your fans do not see your valuable Page posts (status updates, videos, photos) in their News Feed. Sponsored Stories for Page Posts allows Page owners to ensure your fans see the content that your Page publishes."

This is what happens when euphemism becomes so practiced, what is signified loses color and all political charge. The last thing these words want to allow is the possibility that targeted advertising has gone too far in taking advantage of unsuspecting users.

I hope the obvious political aspect of Twitter's new ability will not turn out to have been cover for the privileging of corporate speech.

Image by Phillip Chapman-Bell.

Federal / State Crowdfunding Coordination

When testifying before the Senate Banking Committee early last month, NASAA (North American Securities Administrators Association) President Jack Herstein asserted that states, not the federal government, should be in charge of crowdfunded securities offerings.

Herstein"Congress should allow the states to take a leading role," Herstein said. "The states should be the primary regulator . . . of a crowfunding offering."

What's more, Herstein anticipated the objection that it would take too long for 50 states to put a crowdfunding proposal forward. "The states are working on it, and the states can do it," he testified then.

Clearly he meant that. Last week, Jim Hamilton's blog broke the news that a NASAA committee has submitted a draft to member regulators for comment. And as further discussed on this blog yesterday, the NASAA crowdfunding proposal takes us into details the the federal legislative proposals, so far, have not.

Now, NASAA appears to have thought better of putting its draft crowdfunding rule on the open web (the pdf was taken down from the NASAA site by the time I hit "publish" on yesterday's post), but we do know Herstein is following through. The NASAA document requests that member regulators submit responsive comments by February 7, 2012.

Why so fast? In part, the document says, because of "the speed with which Congress may proceed on these issues." Some proponents of a federal crowdfunding exemption worry that momentum may have stalled over the holiday break, but NASAA's sense still seems to be that the train is leaving the station.

But we don't know for sure that the states really will pull together to endorse an effective exemption. The draft proposed rule is cumbersome enough, and reflects a committment to a "theology," as SM Turner put it in the comments yesterday, of old school, blue sky law. Will the regulators' internal review process take the state crowdfunding prototype closer to the McHenry bill, or, as seems more likely, further from it?

As reassuring as Herstein was in his Congressional testimonry last month, the NASAA document reveals that the organization may still be trying to pin down how many states may be on board. One of the questions put out for response:

"If the federal exemption preserves state authority to regulate in this area, is your state unwilling to consider the adoption of a uniform crowdfunding exemption?"

Some Thoughts on the NASAA Crowdfunding Exemption

"NASAA" stands for the North American Securities Administrators Association, an organization of state and provincial securities regulators. NASAA and its member regulators have been paying attention to the crowdfunding bills in the current US Congress.

Careful attention.

NASAA does not like the fact that the McHenry bill, which passed the House with very broad, bi-partisan support, would preempt the jurisdiction of state regulators over stock offerings that would qualify for the contemplated federal exemption. NASAA is making efforts to persuade the Senate that the Senate's version of a crowdfunding exemption (there are at least two bills to be chosen from or reconciled) should preserve prescriptive state regulatory authority, or at least some state role in a federally conceived exemption.

Suggestion boxTurf battle? That's part of it. But it's more than that. In many ways, the bills the federal legislators are drafting don't take a realistic view of the SEC's culture, or its lack of bandwidth to administer a crowdfunding exemption.

In other words, it actually makes some sense that a crowdfunding offering might be administered by a relevant state agency, IF the crowdfunding exemption was uniform in all 50 states and IF one state only had the lead and IF there was no merit review or other up front impediment (something like the McHenry design, if you will, but administered by a single, chosen state regulator, rather than the SEC).

I shudder as I slip from the prior paragraph, because, in interacting with entrepreneurs (non-laywers) in recent months who are proponents of a crowdfunding exemption, I've gotten the sense that entrepreneurs don't appreciate what a tangle of complication, cost and delay can be entailed when you try to conduct a securities offering across several states, and you are not using the federal Reg D regime. There's a reason that almost all startup financing today takes advantage of Reg D. It preempts state regulation and it doesn't involve any prescriptive SEC review. Crowdfunding proponents who are securities lawyers by and large are inclined to want Congress to pass a federal crowdfunding exemption that preempts state law in the same ways Reg D today preempts state law.

NASAA is making the pitch that it can keep jurisdiction over a crowdfunding exemption that is uniform across the country and that won't require issuers (fancy term for startups that issue stock) and intermediaries (the crowdfunding platforms or sites) to deal with 50 different state agencies. That is reflected in their proposal with even more sensitivity than I saw from the NASAA representative in a Senate hearing on crowdfunding late last year.

As I mentioned yesterday, Jim Hamilton's blog provides a good overview of the NASAA proposal. (By the way, I credited the post to Jim, but I see now that the byline credits John Jascob. My apologies to Jim and John for that mistake.) At some point I'll probably try to update the chart I've been iterating which compares the McHenry, Brown, Merkley bills and the NASAA concept (now the NASAA draft rule). In the meantime, I would direct you to the post on the Hamilton blog, or to the NASAA document itself [clarification: as I get ready to hit "publish," I see that the NASAA document appears to have been taken off the NASAA site], for the key thresholds set by the NASAA exemption on offering amounts and individual investments, and on other structural points.

What I want to call out in this post are certain features of the NASAA proposal that reflect a mindset different from that animating the McHenry bill. These features happen also to raise details of implementation that we supporters of a crowdfunding exemption ought to be talking about, but which haven't been forced to the fore in discussion of the federal exemptions, so far.

(I'm going to skip the NASAA proposal's requirement that the crowdfunding intermediary, or platform, be a registered broker dealer. That is probably the biggest difference of the NASAA proposal, though that approach is also reflected in the mess that is the Merkely bill.)

1. The NASAA crowdfunding exemption proposes that all advertising and promotion of a crowdfunded take place on the crowdfunding platform's site.

Some background here: NASAA is not on the bandwagon to repeal the prohibition on "general solicitation." To the contrary, state regulators, who do battle with fraudsters who dress up scams as "Reg D offerings," don't like public promotion of offerings that are not regulated.

When it comes to crowdfunding, one might assume offhand that you have to make peace with the fact that the crowdfunding investors are going to be "generally solicited," on the internet - that the very nature of the activity is public.

But NASAA doesn't assume that. It's draft exemption provides that companies seeking crowdfunding must not promote the offering outside the regulated platform site. Tweets about the offering? Those should do nothing other than link the public to the platform's site. In a sense, the state regulators have the crowdfunding site acting as the offering circular or prospectus for the deal.

Here's pertinent language from the NASAA draft:

"(6) Restrictions on advertising and communications. The issuer shall not advertise the specific details of the offering, except for notices which direct investors to the intermediary’s website. Potential investors that have reviewed the information maintained on the intermediary’s website shall have the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information which the issuer possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy or clarify the information provided on the intermediary’s website.  If such additional information is material, the issuer and the intermediary shall immediately amend the information contained on the intermediary’s website to provide such information. The intermediary may also maintain a forum on its website whereby potential investors may ask questions of and receive answers from the issuer. Such forum shall be available to all potential investors as well as state securities regulators as provided in paragraph (c)(5)."

2. The NASAA crowdfunding exemption contemplates that crowfunding startups and crowdfunding platforms will be continually updating disclosure about the deal, based on investor questions.

This second point restates what you just read in the block quote above.

It's obvious to me right away that what NASAA is saying about continuous investor feedback and updating of the offering materials is not practical. The second sentence above ("Potential investors that have reviewed the information maintained on the intermediary’s website shall have the opportunity to ask questions and receive answers concerning the terms and conditions of the offering . . .") draws on process that is both prudent and feasible for an all-accredited offering, but query how the issuer and platform will deal with the unrestricted comments of hundreds of investors?

And yet, a process for identifying how changes to the offering terms might be made, and for how those might be communicated to investors already in escrow, is something any actually viable crowdfunding exemption is going to have to address.

3. The NASAA crowdfunding exemption contemplates that crowdfunding platforms will enforce, not only individual investment limits per deal, but also aggregate caps on each individual investor's activity across all crowdfunding deals.

Also in the draft NASAA rule:

"(3) Enforcement of investment limits. The intermediary shall take reasonable measuresto ensure that no investor exceeds the investment limits set forth in subsection (b)(2). In addition, the intermediary shall take reasonable measures to ensure that no investor has purchased securities in multiple offerings conducted in reliance upon this exemption that,in the aggregate, would exceed the greater of: (A) $2,000, if the investor has an annual income of less than $50,000; (B) Four percent of the annual income of the investor, if the investor has an annual income of at least $50,000 but less than $100,000; or (C) Eight percent of the annual income of the investor, if the investor has an annual income of at least $100,000."

The individual limits referenced are $1,000 per year. Assuming an investor maxes out her individual limit on each deal, that means she can do between two and eight crowdfunding deals per year, depending on her income.

Will different crowdfunding platforms have to share information with each other about crowdfunding investors? Will a platform be able to rely on information given by the investor?

4. The NASAA crowdfunding exemption contemplates that crowdfunding investors can demand their money back, at any time until escrow is broken.

Here's the provision in the draft NASAA rule concerning escrow:

"(7) Target amount, offering period, and escrow requirements. The issuer shall establish a target offering amount and an offering period of not more than 12 months from the date of filing the notice as set forth in paragraph (b)(4). All offering proceeds shall be held in an escrow account maintained by a qualified custodian until offering proceeds (less any offering proceeds from the issuer, its management or affiliates) totaling at least the target offering amount are received. If the target offering amount is not received by the end of the offering period, the proceeds shall be returned to the investors within thirty days. All investors shall have the right to withdraw their investment, without deduction of any kind, until such time as offering proceeds (less any offering proceeds from the issuer, its management or affiliates) totaling at least the target offering amount are received and the offering proceeds are released by the qualified custodian from the escrow account to the issuer."

If investors can ask for their money back at any time until escrow is broken, that could make it a challenge for the platform and the startup raising money to keep track of where it is on the amount in escrow, and how far away it is from breaking escrow. It certainly renders the escrow threshold a moving target.

Also note the investments by insiders do not count toward the minimum escrow threshold.

5. The NASAA crowdfunding exemption gets a bit more granular on what platforms will have to do to check out the startups whose offerings they list.

NASAA wants the platforms to do background checks, that the platform must share with regulators on request:

"(2) Reduction of fraud risk. The intermediary shall take reasonable measures to reducethe risk of fraud in connection with the offer or sale of the securities. Such measures shall include obtaining a criminal background check and securities enforcement regulatory check on the issuer and the issuer’s management, and notifying the issuer ofany information that may disqualify the issuer from using this exemption pursuant toparagraph (b)(9). Upon request from the Administrator, the intermediary shall provide the results of the background check and securities enforcement regulatory check, unless the intermediary has already provided this information to the Securities Administrator in the state in which the issuer filed its notice under paragraph (b)(4)."

Concluding thought: The NASAA proposal was directed to its member securities regulators in the form of a "request for comment." Email addresses and contact information are provided in the document. While comments from the public were not invited, why don't we provide some, anyway?

Flickr photo by sethoscope.

Orange Friday

Traveling today. The picture below tells where and why.

I've been thinking about prospective sunshine all week. It was raining in Seattle yesterday. It has been raining in Seattle all week.

Photo Orange weather

Program Notes: Two topics I can't get into today in depth, to which we will return, soon enough:

  • The association of state and provincial securities administrators, NASAA, has floated a draft of its proposed crowdfunding securities exception. Kudos to Jim Hamilton for blogging an overview. Thanks also to @JoeWallin for tweeting a heads up about Jim's post. The biggest distinguishing feature of the NASAA proposal appears to be that it would require crowdfunding platforms to register as broker-dealers. That will not go over well with many of the folks commenting on the #Crowdfunding posts on this blog.
  • Speaking of @JoeWallin, have you noticed that the approach he's taking on his blog lately is to survey core topics in a way that both revisits the fundamentals and brings them into current debates. Exhibit Number 1 of this method is his most recent post about "general solicitation." My own take is that practice has outrun the prohibition on general solicitation. That is, it's not just that the rule is crimping startup financings; it's that the rule is already being breached on an almost wholesale basis. Something's already toppled, and it behooves the regulators, as much as anyone, to reform the rule to conform to current practice.


One of the pleasures of redlining is that you can map a tour of changes made in a landscape of text.

I haven't yet had a chance to read Google's overhauled privacy policy. The changes look to be so substantial, it may be difficult for a redline to throw discrete instances of wordsmithing into relief.

That said, here is a small section of the anticipated Google privacy policy, marked against the version to be replaced. This passage, at least, does yield the experience only a redline will afford.

Screen shot 2012-01-25 at 10.26.20 PM

I don't have time this morning to fully narrate a tour. I'll just call out three highlights:

  • The implication that Google's security efforts will meet a certain industry or societal standard ("appropriate") is elided if not entirely replaced with the promise that Google will "work hard."
  •  Google itself is added as a beneficiary of its security efforts.
  • "Google employees, contractors and agents" go from working on Google's "behalf," to working "for" Google. This I think introduces the possibility of agency, or a degree of it, for which Google itself may not be responsible.

Tiny Constables in Gigantic Coaches

If you read the headlines this week about the Supreme Court's decision in its GPS surveillance case, you might be forgiven for thinking the Justices rang a bell for the expansion of civil liberties and privacy rights into digital territory.

Now it is true, the Court ran up the score, 9-0, in deciding against the government.

But the Justices were split over the legal rationale that should apply.

Three agreed with Justice Scalia, that the police, by surreptitiously placing a tracking device on a car outside the parameters of a judicially issued warrant, had "trespassed" on the property rights of the suspect. Scalia's reasoning relied heavily on an opinion written in 1765 by an English lord.

Three others sided with Justice Alito, who found it absurd to be asking how the Framers of the Constitution would have applied English property law to the remote harvesting of electronic signals. For Alito, the better (if imperfect) framework for analysis would have been found in more recent jurisprudence, which requires a court to weigh "reasonable expectations of privacy."

Justice Sotomayor, expressing more concern than her colleagues that existing legal precedent may not be up to the job of protecting privacy and civil liberties as mobile social networking habits become normative, found that the best thing to do with the case at hand was to agree with Scalia and Alito both. (Pending development of a suitable framework, she might say, any and every legal theory that gets you there in the meantime will have to do.)

You might ask, does the lack of a unified, coherent legal theory in this case really matter?

2678366310_bf3bf4233e_zIf you are a police chief, and you want to place a GPS device on a suspect's private vehicle without his express permission, then, arguably, no, the wrangling among the Justices is for you an academic matter. You know you need a warrant. Your GPS device, to paraphrase Alito's mocking analogy for Scalia's views, is like a tiny 18th Century constable who, having trespassed and hidden himself somewhere unseen in your oversized, horse-drawn coach, goes without food and water for weeks at a time in order to monitor your public outings.

But if you are an official with the Department of Homeland Security, asking Ford if you might tap into the GPS reporting capability built into the latest makes and models of car, then, yes, the lack of a consistent legal theory makes a difference to you, and provides choices. That is to say, you may or may not need the warrant. Under Scalia's standard, there would be no trespass. The suspect property, the car (or cars), would have included the GPS capability when the owner(s) first took possession. You need not touch or even approach the car.

Similarly, were you a government agent amassing a history of Foursquare checkins in order to compile a profile of an individual, you would probably not be concerned with tresspass. At the same time, if you skip the warrant, you run the risk that a court will find a "reasonable expectation of privacy" to protect the Foursquare checkins.

Alito feels that societal norms of privacy are better measured and codified by legislators. Sotomayor, on the other hand, is more adventurous, willing to float the exceptional idea that privacy and secrecy might be de-coupled. That is to say, Sotomayor feels it should be possible for certain information, depending on purpose or context, to remain legally protected, notwithstanding that it may be publicly accessible online or through technical means.

Appellate lawyers and Court watchers will tell you the Justices do this all the time. That is, they often decide cases on narrow and abstruse grounds, pushing the law forward as grudgingly as possible.

Such caution may be one of the few remaining factors of stability left in what now passes for American politics. But it's also a reminder to not expect too much of United States v. Jones. The lower courts will likely be wrestling with location tracking for some time.

Pictured: a constable who is too big, a carriage that is too small. (Flickr photo, George Eastman House.)

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