31 posts categorized "August 2012"

Fred's network effects

Half an hour ago, on the bus, on my phone, I read Fred Wilson's post from yesterday, Networks And The Enterprise.

Network cablingBefore I could finish it, I thought of two friends, a family member, and a prospective client who would want to see it. I emailed it out, and had two productive dialogues going before I got off the bus.

I don't know why this example of the power of blogging struck me so sharply today. Maybe I was a bit surprised that the time in transit was so productive.

But it's a familiar story. Posts by people writing about what they do everyday - particularly when the authors are acute observers like Fred who make a regular practice of communicating, both to share knowledge and to inventory and deepen their own - have so much more value than the crap you see on the branded media to which Twitter seems to be selling out.

Photo: UWW ResNET / Flickr.

The Curious Incident of the SEC's Proposed Rules to Lift the Ban on General Solicitation (in the Night-Time)

The rules proposed yesterday by the SEC are quietly astonishing.

Going into yesterday, one big concern had been whether a new, invasive regime of verification might chill angel investing, which would have been especially hard to bear when issuers chose not avail themselves of the new permissiveness. But yesterday's release goes out of the SEC's way to be reassuring about preservation of (to borrow Joe Bartlett's phrase) the "quiet" 506: 

"While we are proposing Rule 506(c) to allow for Rule 506 offerings that use general solicitation, we are preserving, under existing Rule 506(b), the existing ability of issuers to conduct Rule 506 offerings without the use of general solicitation. We recognize that offerings under existing Rule 506 represent an important source of capital for issuers of all sizes and believe that the continued availability of existing Rule 506 will be important for those issuers that either do not wish to engage in general solicitation in their Rule 506 offerings (and become subject to the new requirement to take reasonable steps to verify the accredited investor status of purchasers) or wish to sell privately to non-accredited investors who meet Rule 506(b)’s sophistication requirements. Retaining the safe harbor under existing Rule 506 may also be beneficial to investors with whom an issuer has a pre-existing substantive relationship. In this regard, we do not believe that Section 201(a) requires the Commission to modify Rule 506 to impose any new requirements on offers and sales of securities that do not involve general solicitation. Therefore, the amendments to Rule 506 we are proposing today would not amend or modify the requirements relating to existing Rule 506."

This is a good thing and should make it easier for the startup ecosystem to transition, over time, to something other than the paradigms that are normative today.

NTLive_Curious_A5-Portrait_ISO_web_0Curiously, however, the release does not go on to propose a prescriptive set of verification methods for the fork of 506 involving general solicitation or general advertising.

The guts of the SEC's proposed, new, "noisy" 506(c) read as follows: "The issuer shall take reasonable steps to verify that purchasers of securities sold in any offering under this Section 203.506(c) are accredited investors."

What are "reasonable steps?" The release says that the answer to that question will be "based on the particular facts and circumstances of each transaction."

The release does discuss a variety of verification strategies proposed in public comment letters to date, including the idea - advocated by the ACA, SecondMarket, and others - that a proposed investment over a certain size should be indicative, in and of itself, that the investor likely has the net worth to be accredited. Third party verification is also discussed, though the release declines to say that such third parties must be broker dealers or must satisfy any criteria.

And the release has implicit warnings, too. I'd still like to see answers to the questions I put to FundersClub in GeekWire last week, but the discussion below, from the release, raises yet more:

 "An issuer that solicits new investors through a website accessible to the general public or through a widely disseminated email or social media solicitation would likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits new investors from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party, such as a registered broker-dealer.  In the case of the former, we do not believe that an issuer would have taken reasonable steps to verify accredited investor status if it required only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status. In the case of the latter, we believe an issuer would be entitled to rely on a third party that has verified a person’s status as an accredited investor, provided that the issuer has a reasonable basis to rely on such third-party verification."

Many lawyers, I suspect, will feel that the lack of clearer guidance on verification methods will make the "noisy" 506(c) less usable. But I think many entrepreneurs are going to use the new rule.

I will say the release is curious in this regard: when you consider how important it seemed to the Commission to nail down how to calculate the exclusion of the principal residence from the accredited investor net worth test - even to the point of overriding state law about mortgage deficiencies -  it's odd to see it being so hands off on something so much more fundamental to private financing.

Liveblogging SEC open meeting on lifting the ban on general solicitation

12:15 PM Pacific

The proposed rules have been posted, here. Thanks to Kyle Hulten for the heads up in the comments below.

7:46 AM Pacific

Well, the next step is to look at these proposed rules. I don't see them on the SEC site just yet, though I might not be looking in the right spots.

7:43 AM Pacific

OpenMeetingscreenshot3Commissioners vote to approve publishing the proposed rules. Meeting is adjourned. SEC Chair Schapiro doesn't hesitate to defend herself and the staff. She says she thinks it's interesting that those concerned with the Commission being late on these rules under the JOBS Act, aren't concerned with lateness of the rules under Dodd-Frank. Go slow is the watchword on the latter.

Schapiro regrets ever floating the idea of interim rules. Should have set expectations all along that the rules would be proposed rules. And she thinks it right and proper that the SEC hear further comment from parties with valuable things to say yet, who haven't yet been heard. She may be referring to state regulators?

7:40 AM Pacific

Commissioner Gallagher emphasizes that Congress was adamant about ending the ban on general solicitation, and to do so right away. But, he adds, Congress was also clear about verification, that the issuer had to verify the purchaser was accredited. What would be reasonable steps? Congress deferred to us on how this should be done. He commends staff on the framework they came up with. (I am missing something: though there was a mandate by Congress to come up with methods, so far it sounds to me like no methods are being prescribed. I'll have to look at Section 201(a) again - maybe a loose collection of suggestions satisfies the letter of the Congressional mandate.) But he, too, wishes that the Commission were today approving interim final rules, rather than proposed rules involving more delay.

7:34 AM Pacific

OpenMeetingscreenshot2Commissioner Paredes is still concerned with the missing of the 90 day deadline. Not sure why he is bringing all that up. Oh, it's because he wants today's proposed rule to be an interim rule that has effect right away. He says, I think, that today's proposed rule was going to be an interim final rule, anyway, until the late switch last week.

7:27 AM Pacific

Commissioner Walter disappointed that release does not address comments, such as requirement that issuers file a Form D as a condition for using the exemption with general solicitation. I think she is saying there should be a pre-filing requirement, at least for the new 506.

7:23 AM Pacific

Will propose that Form D be amended to add a check-box, whereby issuer would indicate if it were availing itself of new subsection (c) of Rule 506. I wish I was firmer on what this new subsection (c) will say. Does this suggest there will be two Rules 506 - one like the one we use today, and the other a 506 for general solicitation? Joe Bartlett's "quiet" and "noisy," respectively?

7:20 AM Pacific

OpenMeetingscreenshotSounds like issuers will have to come up with their own multi-factored balancing test for verifying the accredited status of the purchaser.

Factors might include amount of information issuer has about the issuer; the terms of the offering; how purchaser heard about it; and the amount of money to be invested by the purchaser.

Here are some of the reasons that the proposal will not prescribe methods:

  • Proposing to require specific methods of verification would be not useful.
  • "A prescriptive rule could be overly burdensome."
  • A non-exclusive list could be viewed by market participants as a de facto list of requirements.

7:15 AM Pacific

I've been having connectivity issues. I've found a Starbucks parking lot and am using the wi-fi from the store to run the webcast.

7:00 AM Pacific

The SEC is meeting this morning to:

"consider whether to propose rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act."

This is a big deal.

Last night I tried to cull out from recent JOBS Act and Reg D posts those posts which key on this topic. It's probably safe to say that Section 201(a) of the JOBS Act - just a few lines in a long bill - does more to put the startup ecosystem at risk, potentially, than any other provision of the law.

What's at stake in tomorrow's proposed angel verification rule

Barring another delay, the SEC meets tomorrow to consider proposing rules to implement the lifting of the ban on general solicitation and general advertising for offerings under Rule 506.

The Congressional quid pro quo for lifting the ban is the imposition of new standards: methods, to be drawn up by the SEC, by which startups must "verify" the accredited status of investors.

This embedded tweet from Zach Brandon, head of the Wisconsin Angel Network and a member of the Angel Capital Association's public policy committee, underscores what is at stake.

My own view, completely personal and to be ascribed only to myself: I think Congress abrogated its responsibility by delegating a question of national policy, with enormous implications for job growth, to an administrative agency. The country needs jobs; the JOBS Act was at least nominally about creating jobs; and verification, tuned wrong, could chill financing of job-creating entrepreneurial activity.

But pass the buck, Congress did.

For better or worse, the SEC now has to balance factors Congress refused to weigh.

The current, 506 status quo - relying on accredited investors to self-certify (though it's a bit more than that) - is not an option, because the JOBS Act and the legislative history say as much.

On the other hand, publishing verification rules that scare private individuals out of startup investing . . . that would defeat the ostensible purpose of the JOBS Act. We could end up wishing to have back the ban on general solicitation.

The best SEC comment letter I've read on this issue is the one written by Marianne Hudson, speaking for the Angel Capital Association. Hudson lays out five concepts she hopes the SEC will honor when approaching this rulemaking:

  1. "The overall intent of the JOBS Act was to encourage more startups, which requires even more angel investment."
  2. "Do no harm: Preserve current Rule 506 standards when issuers do not generally solicit or advertise their opportunities."
  3. "Rules for offerings that do use general solicitation should minimize costs, burdens, and privacy issues for accredited investors."
  4. "Privacy is a major concern."
  5. "Issuers should have flexibility – the ability to select one method from multiple options ‐ in verifying the accredited status of their investors (in advertised offerings) and no one course of action should be the right choice or 'safe harbor.'”

Tomorrow will be important. I will do my best to live blog the meeting , assuming I can follow it via webcast.

(Disclosure: I serve on an advisory council to the ACA's public policy committee.)

Is it okay for the SEC to miss the JOBS Act deadline for lifting the ban on general solicitation?

Thanks to Jeff Joseph for the heads up on Rep. Patrick McHenry's August 16 letter to SEC Chair Mary Schapiro about the delay in getting a rule implemented to lift the general solicitation ban for offerings under Rule 506 of Reg D.

DelayedMcHenry thinks the SEC should move to publish an interim rule right away, rather than merely propose a rule, pushing implementation off several more months. "We are now over four months since the JOBS Act was enacted and over one month past your statutory deadline to implement this section removing the ban on general solicitation."

McHenry's letter is hard hitting and his critique is probably within the bounds of Congressional prerogative.

But I think Congress might better blame itself for this delay.

Instead of kicking the subject over to the SEC, Congress could have written Section 201(a) of the JOBS Act to be self-executing. The JOBS Act could have amended Rule 506, and the amendment could have been effective when the President signed the bill.

Amending a regulation by means of legislation has precedent. In fact, the accredited investor standard, a key element of Reg D, was amended directly by Congress with the Dodd-Frank Act. You'll recall how Dodd-Frank modified the net worth test of the accredited investor definition to say that, in calculating net worth, the value of the principal residence of the investor must be excluded.

True, the SEC went on to propose (complicated!) rules on how to calculate the principal residence exclusion, but the new accredited investor standard was actually in effect once President Obama signed Dodd-Frank.

Congress could have, should have, done the same thing with the lifting of the ban on general solicitation. Then the SEC could have taken appropriate time to generate rules to interpret and clarify the legislation, but the change itself would not have been held hostage to more process.

Photo: Alec Couros / Flickr.

Some thoughts about new ways of organizing or linking blog posts

New ways of organizing content seem to be circling high in the ether, waiting to land.

The idea that blog posts have been too long tethered to a chronological format for organization, that rings right.

Diary

Mind you, there is also something straightforward and appealing about approaching the production of content as a daily practice. From the producer's perspective, this producer's perspective, the discipline of the daily appointment is sustaining, enriching and rewarding.

But I'm often frustrated, too, that I can't find even my own content easily enough. Category tags aren't enough. They just give me another chronological listing under a category heading.

Searching helps, but it's not perfect.

The products Disqus is rolling out are exciting and look very promising. The promise is this: don't just recommend blogs that are similar, or other posts within a silo that are related, but connect specific content with other content and discussion, wherever it may be hosted. Disqus could be a non-jealous aggregator, one that doesn't actually have to pull distributed content into a single space. That feels democratic, and modern, and disintermediating to me - in all the good senses of those three terms!

Other new platforms to watch: Medium, Engag.io, and Branch.

Photo: Barnaby Dorfman / Flickr.

Light Industrial Lifestyle

A few months ago I joined a cigar club located in SODO.

Running parallel to the working Port of Seattle, SODO is home to light manufacturing and heavy transport.

PhotoIt's thought of as Seattle's destination for professional baseball, soccer and football, though the parks for those events define the northern edge of SODO, its border with Pioneer Square.

The designation "SODO" itself acknowledges this. The acronym means (I think) "south of the Dome," a reference to the Kingdome, which in the 90s was torn down to make way for Qwest Field, now dutifully re-branded as Century Link Field. (Some day I have to get my hands on the naming rights contract.)

Photo (3)South of the parks, along First Avenue, are enterprises of all kinds and sizes.

Alchemy Goods, a maker of messenger and laptop bags from recylced bicycle intertubes, is here. The very excellent Macrina Bakery bakes the goods for its various area outlets here. And Starbucks has its international headquarters here, too.

Over the years I've harbored many urban lifestyle fantasies that never quite come off. For instance, I used to wish I'd keep a house friends would feel free to drop in at. That hasn't happened. I have to work at finding summer evenings to invite people over. Another example: I've often resolved to walk to work more regularly. But I never seem to build in the time and end up driving.

Photo (2)But in joining a club located in SODO - and without really intending this to happen - I've shaken up my routine in a way that adds light industrial textures, sounds, colors and flavors to the mosaic of my Seattle experience.

I'm staying tuned.

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