30 posts categorized "August 2013"

101st Day of Summer

Lots of stuff going on in Seattle this Saturday of the 2013 Labor Day Weekend: PAX; Bumbershoot; Huskies football opener in an upgraded stadium; Taylor Swift concert (I have friends with younger kids, is how I know this).

6a01156e3d83cb970c019aff1e4ea7970dBut Helen and I are sitting at Machine House Brewery in Georgetown (not the cinema-perfect set of This Town but the light industrial neighborhood of the Emerald City) watching a replay of a Premier League game while we wait out the thunder storm delay in Columbus, Ohio, from whence the Sounders game is to be telecast.

It got to 80 today. Mild for my friend Mark in South Carolina. Full on summer for Seattle.

Talking past each other

Regular readers of the startup financing-related posts on this blog know that I frequently express frustration at how state securities regulators, on the one hand, and participants in the startup financing ecosystem (which is largely the province of angel investors), on the other hand, seem to have different fact sets.

372792227_70ca7738bb_z"Everyone is entitled to their own opinions, but they are not entitled to their own facts," as Daniel Patrick Moynihan famously said.

But each camp - state regulators and startuppers - have their own facts when it comes to Regulation D.

The state regulators think Reg D is the permitter of all sorts of wrongs, a federal exemption that preempts their ability to regulate the merits of private offerings. Entrepreneurs and the angels who support them know that the startup financing ecosystem is virtually free of fraud, and that's likely because of how open and flexible Reg D is, not in spite of it.

We're not going to settle this conundrum in today's post, but an article by Suzanne Barlyn in Reuters yesterday, FINRA tackles private securities as investors seek yield, does the best job I've seen yet of identifying the disconnect: state securities regulators are looking at brokered private placements. (Yours truly is quoted at the end of the article.)

Angels won't have anything to do with brokered private placements.

If all of the problems with Reg D come up when a broker is involved, and only when a broker is involved, it helps explain why the two camps have their own facts.

In the slew of proposals and reforms that are coming up - to Reg D, to Form D, to the very definition of accredited investor - it may make sense to try to separate deals that are brokered, and deals in which investors deal directly with the issuer.

Photo: Erin and Lance Willett / Flickr.

Washington Post article about the lost promise of new startup financing rules

Today's post is a re-posting of a comment I left yesterday on a Washington Post article by J. D. Harrison, entitled Can crowdfunding fill stock market’s ‘black hole’ for startups and small businesses? 

The article speaks broadly to the need startups and innovators have for capital, and how financial markets are no longer serving that essential function as they should. My comment isn't about crowdfunding, generally, but rather is pinpointing on one of several remarks made in the article by Mark Cuban. Overall, Cuban's points are terrific; but with regard to his comment on the burden of accredited investor verification under upcoming Rule 506(c) (to be effective on September 23), I think Cuban makes the same mistake most of us have, and is overreacting to that particular, Congressionally-mandated burden.

CaptureOne other prefatory comment, and this is an aside that may be gratuitous: it's a good thing that Jeff Bezos will soon own the Washington Post, because the current stewards of the site make it extremely painful and difficult to leave a comment. I probably spent more time trying to register to leave a comment, than I actually spent writing the comment - and even then I had problems getting the site to let me post. Gotta think Bezos will fix nonsense like that in a heartbeat.

Mark Cuban's comments are insightful and compelling - as his comments usually are. But I think he and most of us, frankly, are overstating the problem with the accredited investor verification requirement that was part-and-parcel of the lifting of the ban on general solicitation in Rule 506 offerings (now to be known as Rule 506(c); more on that below).

First of all, it was Congress, not the SEC, that determined that the tradeoff, for making it okay for startups and emerging companies to advertise within a 506 exemption, was to make it tougher to simply accept the investor's word that she is accredited. And when the SEC gave us all, in proposed rule form in August 2012, a rule set that basically said, go do what is reasonable in the circumstances, we all looked a gift horse in the mouth and demanded "safe harbors." And now we're complaining about those safe harbors. Thankfully, if you look closely at the final rules, I think you can fairly say that we still have the benefit of the flexible rule as first proposed. In other words, skip the safe harbors and go develop good industry practices for "verification" that do not involve the dissemination of PII to every garage startup with absolutely no ability to control and secure sensitive private information.

Second of all, the SEC had the foresight to leave the old rule set - Rule 506 without general solicitation - in place. The agency did not have to do this. So now we have two rules in parallel: the old 506, now to be called 506(b); and the new 506 under which you can advertise, as long as you take "reasonable steps to verify" your purchasers are accredited, christened as 506(c).

More troubling than the final rules lifting the ban on general solicitation - which again I think the agency did a good job of - are a set of proposed rules that would make it tougher to comply with 506(c) and would make 506(b) harder as well. The proposal is untimely. It will be tough enough to get used to 506(c) as Congress intended it.

March on "This Town"

I'm looking forward to listening to some of the speeches from Washington DC today, either as they are broadcast while I'm at work, or else as rebroadcast later in the day.

Just as with Lincoln's Gettysburg Address, King's I Have a Dream Speech has many phrases which resonate at all levels of art and philosophy.

The passage from King's speech I am taken with this week, here on the 50th anniversary of the March on Washington, is this:

'This will be the day, this will be the day when all of God's children will be able to sing with a new meaning: "My country, 'tis of thee, sweet land of liberty, of thee I sing. Land where my fathers died, land of the pilgrim's pride, from every mountainside, let freedom ring." And if America is to be a great nation, this must become true.'

It's the dependent clause, "If America is to be a great nation," that grabs you. King, like Lincoln, found, identified, fixed, called out that entrepreneurial and aspirational genius that sets America apart, makes the American experiment exceptional: the positive energy of our nation, what propels the society, is an expectation that we may actually, some day, realize, live and embody our own, radical, founding ideals.

6a01156e3d83cb970c019aff0d4361970d-580wiAs an American you embrace this existential uncertainty every time you sing the Star-Spangled Banner. "Oh say does that Star-Spangled Banner yet wave o'er the land of the free and the home of the brave?" It is an unanswered question.

Each generation of Americans is responsible for moving the ball forward, for calling ourselves to account on where our prejudices keep us from the standards we know are required.

Of late, I am thinking about the two journalists on NPR, who last week on air mocked a transgendered young person in transition for asserting her identity. Dr. King would not have stood for that and it should not be okay in America to do that.

Because my work has me dealing with angel investing on a daily basis, I'm aware, admittedly only late, that the rule set on who is allowed to invest discriminates against investors in same-sex relationships. That is shameful, shaming, and immoral, and it should not be okay in America to perpetuate that degrading double standard.

Washington DC is a silly, venal, superficial town - or at least that is the impression of it I am getting from reading "This Town" by Mark Leibovich, a celebration of being in the "in" crowd in DC by an author very much taken with his own insider status.

But I think that is okay. The political class, like the Hollywood class, probably has to reflect that kind of temperament to fulfill the functions they have.

Not okay is for the citizenry to be uninformed, indifferent, to act like consumers, to participate uncritically in the handover of the internet to a corporate few.

We have Lincoln's and King's voices to energize us and help us see that next plateau.

Eighth & Seneca in Seattle

Most weekday mornings I walk by a big dig at Eighth and Seneca, kitty corner to the travelling lecture venue in Seattle known as Town Hall.

If I go out of town for a few days, or even just skip my routine for a day, I'm shocked at how much the construction project has progressed.


Pictured is a panorama shot (thus the warping of the footprint for the tower-to-be) assembled this morning.

Whenever I consider construction sites like this in Seattle, I wonder whether the late Christopher Martin Hoff would have painted it. I don't know that Eighth and Seneca would have itnerested him. Check that: had it piqued his interest, he would have found a perspective that wasn't obvious but would have unleashed a new way of seeing.

Another way to give input on the changes coming to startup and emerging company financing

There is a committee, the "Advisory Committee on Small and Emerging Companies," which from time to time gives the SEC recommendations that flow from a "focus on interests and priorities of small businesses and smaller public companies."

Pc-gold-noticeAccording to this public notice, this committee is going to have an open and web-cast hearing on September 17, to discuss "matters relating to rules and regulations affecting small and emerging companies under the federal securities laws."

Here's what's in play right now, ranked more or less in order of which will come first:

  • How extensive will the changes be to Regulation D and the Form D filing requirements, both for Rule 506(b) and Rule 506(c). Will there be Form D notice pre-filing and information filing requirements for issuers that utilize Rule 506(c) (allowing general soliciation and general advertising as long as all purchasers are accredited and the issuer takes reasonable steps to verify the accredited status of such purchasers)?
  • Will transitional rules make those who use 506(c), come September 23, regret that choice?
  • Will the accredited investor definition continue to discriminate against investors who meet the objective financial standards, but are discriminated against because they are in a same-sex relationship and live in jurisdictions that do not permit them to marry?
  • Will the GAO report recommendations on changes to the accredited investor standard be construed or applied make it easier to be an accredited investor (providing additional ways for natural persons to satisfy the test), or to make it harder (raising thresholds or piling on additional requirements to be satisfied)?

Schedule permitting, I will plan to live blog the webcast on September 17. In the meantime, the notice invites the public to submit "statements."

So here is yet another way to give input on the changes coming to startup and emerging company financing.

Photo: Archives New Zealand.


SBX (Seattle Brisket Experience) 7 is tomorrow, Sunday, at the Royal Room in Columbia City.

Any time you have the chance in Seattle to have Texas brisket, slow cooked over 19 hours, so that it gets tender and yields "sugar cookies" from what otherwise might have been gristle, that's something you have to stop what you're doing to go get.

But, I'm conflicted. Tomorrow is Clint Dempsey's home debut as a Seattle Sounder. The stadium will be sold out. The other team is Portland, and they are not retiring this summer. Eddie Johnson should be in the lineup. Hopefully Obafemi Martins will be, too.

So I'm dropping by Jack's tonight, with my wife, and then tomorrow, with some friends, to trade some work for soaking up as much of the wood smoke and meat smell as possible, for missing the event.

It's cooking already! The smoker is pictured here.

Dempsey is from Texas. I'd bet he'd appreciate Jack's BBQ.

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