31 posts categorized "March 2013"

Easter Sunday cherry blossoms

This is the first Spring in many I haven't made it to the arts quad on the University of Washington campus to see the score or more of sprawling, ancient cherry trees that bring thousands of people out.

If I get my work today done in time, maybe I will make the pilgrimage. Today is the sunniest, bluest skied, warmest day in Seattle this year, and I have reason to think the UW trees will be peaking.

Even if I don't make it over, this year stands out. I can't recall a Spring in any town I've lived when the cherry blossoms were more glorious. It's all happening right now. And the now has extended its moment of magnificence for over a week now.

Easter Sunday cherry blossoms

Pictured above are some neighborhood trees I photographed about an hour ago. And below is a photo I took and tweeted Thursday evening, same street, a block further south.

Easter Sunday cherry blossoms

FundersClub and footnote 1

For angel crowdfunding platforms in general, footnote 1 of the FundersClub no-action letter may be the most important.

For while the SEC staff appear to be indicating that FundersClub may take a carry, and may otherwise conduct business exempt from broker dealer regulations as a VC might (the FundersClub model will likely permanently disrupt the current VC model), footnote 1 may be suggesting that a carry, in and of itself, will blow the JOBS Act Section 201(c) exemption from federal broker-dealer registration requirements.

That JOBS Act exemption requires that the platform and persons associated with it receive "no compensation in connection with the purchase or sale" of the securities offered through the platform.

The very same exemption expressly blesses co-investment, and one can certainly make a good argument that a carry - contingent compensation which is not paid unless and until investors have all of their capital returned - is in the nature of a co-investment. When it comes to lobbying for income tax breaks, the VC industry of course takes the position that carried interest should be taxed as capital gain - that is to say, like an investment, even if "purchased" with time rather than dollars - and not taxed as ordinary income.

But footnote 1 says no.

Doesn't it? Here is the full footnote:

FundersClub and footnote 1

It may be that, from the SEC perspective, the no-action letter for FundersClub shores up the recent staff FAQ, which appears to take a very restrictive view of angel platform compensation. The statute itself clearly contemplates that angel platforms may charge for "ancillary services," but we don't yet know what the parameters are for such fees or compensation.

Many thanks to Adam W, whose comment on Thursday's post has engendered this post.

Mr. Wallin Goes to Washington (State)

Startup lawyer Joe Wallin testified yesterday before the House Technology & Economic Development Committee of the Washington State Legislature.

You can catch Joe's remarks from the hearing beginning at the 1:45:25 mark of the archived webcast.

Joe Wallin in Olympia

Joe laid out for the Washington State legislators his proposal for a state crowdfunding bill that would stand in, at least within the confines of Washington State borders, for the failure of federal legislators to get a viable non-accredited crowdfunding bill across the finish line.

Joe has written that state crowdfunding bill, and in fact has already published it on GeekWire. I think this is a very viable approach to investment crowdfunding for non-accredited investors. State securities regulators have been and will continue to be proprietary about small offering exemptions.

Steve Reaser has informed us in a comment of an effort to introduce a state crowdfunding bill in North Carolina. So perhaps, state legislators, a race is on!

Joe also challenged the lawmakers to make sure that Washington State’s laws are at least as hospitable for startups as are the laws in California and other states.

Apropos to that point, here's probably the money quote from Joe's testimony:

"I personally think that if you're trying to create a startup ecosystem in this State, then none of our laws should be worse than the laws in the State of California. We should always outperform California when it comes to our law. And there are some circumstances in which we just don't."

To widen the scope to address startup policy at a national level, check out a global list of Joe's suggested policy reforms at startuppolicy.org.

Follow-up on FundersClub

This just in: FundersClub has received a "no-action" letter from SEC staff.

You may recall that FundersClub is the Y Combinator graduated startup that seeks to offer, in the words of the company's promotional copy, "insider access to pre-vetted startup opportunities that are otherwise difficult to access."

Fundersclub cartoon as low as 1000Last year on GeekWire, I expressed skepticism, and published questions, about the FundersClub model. As far as I know, FundersClub never answered Todd Bishop's invitation to comment on the GeekWire post. But this week's no-action letter, a public document, does now largely address my questions.

Basically, FundersClub is shaping its business within what appear to be the permissible contours of existing law for "venture capital fund advisers," as well as within the compensation restraints of the new angel platform exemption under Section 201(c) of the JOBS Act.

Fundersclub cartoon fast easy accessIn the process of requesting assurance from SEC staff, FundersClub's lawyers also indicate how FundersClub, itself a startup venture looking to monetize its business, intends to make money within - again, for emphasis – the constraints of the angel platform exemption's prohibition on transaction-based compensation.

For FundersClub, the prospective solution to the compensation conundrum seems to be: borrow the VC carried interest mechanism, but ditch the VC management fee.

The following is from the lawyer's letter on behalf of FundersClub (part of the pdf accessible on the SEC site), requesting the no-action assurance:

"As discussed above FC Inc. and FC Management currently do not receive any compensation for their activities in organizing and managing the investment funds. FC Inc. and FC Management propose that, in connection with future investment funds, FC Management would earn 'carried interest' in connection with its role in organizing and managing the investment funds. . . . We anticipate that [the] amount of carried interest in most cases would be 20% or less of the profits of the investment fund, but in no event would the amount of carried interest exceed 30%. FC Inc. and FC Management would not receive any additional annual management fee in addition to the carried interest. This fact distinguishes the compensation contemplated by FC Inc. and FC Management from that received by many venture capital fund advisors . . . which typically receive an annual management fee (typically 2% of the value fund) in addition to carried interest (typically 20% of the value of any profits of the fund) (collectively, a fee structure often referred to as '2 and 20')."

In short, FundersClub is proposing to drop the VC management fee, keep the carry, and maybe in some cases amplify the carry.

This no-action letter is a very big development in the emerging world of accredited crowdfunding. By studying the FundersClub no-action letter, other angel platforms might refine their approaches to the transaction-based compensation restriction under the angel platform exemption of Section 201(c) of the JOBS Act. Some may consider imitating FundersClub's innovative take on imitating a venture capital firm.

Much more in this no-action letter to discuss - such as strategies to pass along a platform's third party fees, and what feels like the increasing irrelevance of any analysis of general solicitation - so we'll be back.

Substance and tactics in the California same-sex marriage case

The Silicon Valley economic case against California's Proposition 8 and for same-sex marriage did not surface during yesterday's oral argument at the US Supreme Court.

I listened to an audio file of the argument in Hollingsworth v. Perry, after the fact. Here's my take.

Supreme Court Hollingsworth v Perry outside closer

Cooper, the attorney for several sponsors of Proposition 8, attempted to launch into rhetoric about the wisdom of ages past, but the Chief Justice cut him off and insisted that he address first a procedural question, namely, whether Cooper's clients had standing to press a case in federal court.

Olson, a former Solicitor General of the United States during the G. W. Bush administration, did manage, slyly, to make a moral statement at the top of his remarks. He did it by acknowledging first that he knew the Court would want him to address the standing question, and stating an intention to get to that subject right away. And then he proceeded to frame the case in terms of the stigma imposed on gay and lesbian people by the same-sex marriage ban.

Because I was listening to a sound recording, I couldn't see the Chief Justice's face, but I imagine he felt bushwhacked by Olsen's tactic. At any rate, the Chief Justice, invoking fair play, eventually cut Olson often, too, but not before Olson had laid out more of his set speech than Cooper had his.

Olson was good, but in almost every respect he had the easier assignment. We are already on the cusp of a cultural shift, where all recognize there is no rational, moral, economic, child-centered, or healthy emotional reason to discriminate over the sexual orientation of couples who want to marry. Olson did a nice job with the standing questions, but on the substance, he was preaching to the choir.

Given this new reality, Cooper readily conceded there is no legitimate basis on which to discriminate against people because of their sexual orientation, other than with respect to marriage. And even with respect to discrimination in marriage, Cooper seemed loathe to actually cite any loss or harm to anyone from allowing same-sex couples to marry. As if acknowledging his weaker hand, Cooper's tactic was to divert attention from the merits to a question of democratic process: shouldn't the Court should stand down, he argued, and let society continue to have a healthy debate about marriage; because no one can really know what the societal consequences of same-sex marriage will be, wouldn't it be better to allow time to assess the consequences in those states which have already chosen to permit same-sex couples to marry?

Cooper's argument was that of a lawyer trying to win the case at hand. I'd imagine it irks those conservatives who want to defend the federal Defense of Marriage Act, the featured subject at this morning's Supreme Court oral argument. In the DOMA case, the issue is whether federal law can deny the benefits of marital status to same-sex couples who are legally married in those states that have already made Cooper's democratic choice.

Justice Scalia, the personification of the best argument that appointments for life are a bad idea, found Cooper's moral relativism appalling. He demanded that Cooper give concrete examples of how same-sex marriage could cause societal harm. And Scalia didn't wait for Cooper to provide an example. Scalia provided one: the adoption of children. It could be, Scalia argued, that a state wouldn't want same-sex couples to marry, because that would mean gay couples could adopt children. (Was Scalia not aware that it is legal for same-sex couples in California to adopt children?)

If Cooper was rolling his eyes, I didn't see it, but he didn't sound like Scalia was doing him any favors. Cooper did utter a canard or two on his own initiative, but, on the whole, he kept to his mission. He tried to define a space where one could feel principled - "we are simply deferring to the democratic process" - about being bigoted.

Not nearly as savvy as Cooper: the brief of the United States Conference of Catholic Bishops, which makes the polygamy argument:

"Though no party to this litigation argues that multiple friendships and polygamous relationships constitute marriage, it is not evident why they would not also qualify as 'marriages' under the Ninth Circuit's novel test."

I know Pope Francis is getting a lot of great press, and I want to keep an open mind about what he has to say about poverty and the distribution of wealth, but the Catholic position on same-sex marriage is medieval and un-Christ like. If the Pope were to withdraw his Church's opposition to same-sex marriage, that might have a bigger impact a judicial thinking than even the conversions of Senator Portman and other Republicans.

Photo from yesterday: Ted Eytan / Flickr.

California's businesses assess the competitive price of the state's bigotry

I'm posting today in advance of this morning's oral argument at the Supreme Court for Hollingsworth v. Perry, the case involving California's ban on same sex marriage. Assuming something doesn't come up at work at that hour, I'm planning to listen in on C-SPAN Radio.

California flagThere is so much good writing and good coverage on the case, I will be reading more than adding substantively to the main thread. But I did want to call out some passages from the brief submitted on behalf of Adobe, Akamai, Alaska Airlines, Apple, Cisco, Dropbox, Facebook, Google, HP, LinkedIn, McKinstry, Qualcomm, REI, salesforce.com and 86 other companies, all (I think) with substantial business operations and employees in the State of California.

These businesses want the Supreme Court to know that bigotry is bad for their ability to compete from operations based in California.

The key point in the brief, I think, is that California's Proposition 8 puts California employers at a disadvantage to employers in states that don't demean gay and lesbian couples:

"Recognizing the rights of same-sex couples to marry is more than just a constitutional issue. It is a business imperative. By singling out a group for less favorable treatment, Proposition 8 impedes businesses from achieving the market’s ideal of efficient operations—particularly in recruiting, hiring, and retaining talented people who are in the best position to operate at their highest capacity. Amici are competing domestically and internationally with companies inside and outside the United States in places where all couples, regardless of whether they are of the same sex, are afforded equal access to marriage. Those of us operating in states like California face a competitive disadvantage . . .

"It is undisputed that gay men and lesbians suffer a daily gratuitous insult by their relegation to second-class status—an insult that negatively affects their productivity in the workplace and thus indirectly impairs their employers. Businesses suffer a more direct injury than that, however. Because domestic partnerships are not equivalent to marriages, supra at 9-11, it should come as no surprise that loving, committed same-sex couples may choose to relocate to states where their relationships are afforded the dignity and respect they deserve as marriage. Take, for example, a graduating engineering student near the top of her class at MIT. She is interested in putting her skills to work for one of the major technology companies in Silicon Valley and finds the perfect job that utilizes all of her skills, talents, and education. The difficulty is that she is also in a long-term, committed, same-sex relationship and she expects that she and her significant other will soon marry and start a family. With those goals in mind, however, the couple cannot move to California (or, at least, would have no interest in moving to California) because they will not be able to get married in California or have their marriage from another state recognized in California. So, they may choose to stay in Massachusetts or New York, even if they are not able to find a position there fully utilizing her unique talents. Even worse for American business, she and her significant other could choose to move to Spain, Sweden, Portugal, the Netherlands, Denmark, or Belgium—all countries that recognize marriage of same-sex couples. And the superstars from those countries will be less likely to take jobs here."

What is the impact on the competitiveness of business operations based in California? The brief says, in a word, "devastating."

Photo: SirJoseMaria / Flickr.


My friend and fellow lawyer Joe Wallin thinks a lot about how laws passed by Congress - often including laws that have good purposes in the appropriate arenas - end up having adverse effects on startups.

I know this about Joe for almost as long as I've known him. In fact, we often collaborate on projects to identify threats to startups and startup investing, such as the Save Reg D campaign.


Even so, I was blown away by an email he sent last week on which I was copied, in which he laid out, bullet by bullet, what amounts to a truly pro-startup federal policy agenda. With Joe's permission, I'm posting his email below and at startuppolicy.org.

Joe Wallin's Ideas:

• Make Section 1202 permanent. Right now, it expires at the end of this year.
• Repeal Section 409A as it applies to startups. Watch this video. See also this quora post.
• Make the 60 day window on 1045 longer. 60 days is too short in startup land to find a replacement investment.
• Shorten the 5 year holding period under 1202 to 2 years.
• Repeal the bad actor provisions in the Dodd-Frank Bill. These provisions are a form of extreme overkill. They are going to make it a lot harder for startups to startup and grow.
• Repeal the increase the accredited investor threshold in the Dodd-Frank bill. Why make it harder to invest in startups?
• Repeal the second sentence of section 201(a) of the JOBS Act:
(a) Modification of Rules-

(1) Not later than 90 days after the date of the enactment of this Act, the Securities and Exchange Commission shall revise its rules issued in section 230.506 of title 17, Code of Federal Regulations, to provide that the prohibition against general solicitation or general advertising contained in section 230.502(c) of such title shall not apply to offers and sales of securities made pursuant to section 230.506, provided that all purchasers of the securities are accredited investors. Such rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission. Section 230.506 of title 17, Code of Federal Regulations, as revised pursuant to this section, shall continue to be treated as a regulation issued under section 4(2) of the Securities Act of 1933 (15 U.S.C. 77d(2)).
This second sentence is what has hung up the SEC. Why require SEC regulations at all. Repeal the current regulatory barriers directly!

Also, the crowdfunding bill ought to be amended. Bill and I have sets of amendments that are places to start.

Also see this on quora.com.

It's possible startuppolicy.org will be a place where Joe might further iterate his list, or where others might add or develop policy ideas.

Photo: "Petition of Ohioans to the Senate and House of Representatives Regarding Land Sale Policy, 01/10/1810," The U.S. National Archives / Flickr.

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