[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
          CROWDFUNDING: CONNECTING INVESTORS AND JOB CREATORS
=======================================================================



                                HEARING

                               before the

                SUBCOMMITTEE ON TARP, FINANCIAL SERVICES

              AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

                                 of the

                         COMMITTEE ON OVERSIGHT

                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 15, 2011

                               __________

                           Serial No. 112-118

                               __________

Printed for the use of the Committee on Oversight and Government Reform


         Available via the World Wide Web: http://www.fdsys.gov
                      http://www.house.gov/reform




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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

  Subcommittee on TARP, Financial Services and Bailouts of Public and 
                            Private Programs

              PATRICK T. McHENRY, North Carolina, Chairman
FRANK C. GUINTA, New Hampshire,      MIKE QUIGLEY, Illinois, Ranking 
    Vice Chairman                        Minority Member
ANN MARIE BUERKLE, New York          CAROLYN B. MALONEY, New York
JUSTIN AMASH, Michigan               PETER WELCH, Vermont
PATRICK MEEHAN, Pennsylvania         JOHN A. YARMUTH, Kentucky
JOE WALSH, Illinois                  JACKIE SPEIER, California
TREY GOWDY, South Carolina           JIM COOPER, Tennessee
DENNIS A. ROSS, Florida

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 15, 2011...............................     1
Statement of:
    Cross, Meredith, Director, Division of Corporation Finance, 
      Securities and Exchange Commission; Dana Mauriello, founder 
      and president, Profounder; Jeff Lynn, chief executive 
      officer, Seedrs Limited; Sherwood Neiss, cofounder, 
      FLAVORx; Micheal Migliozzi, managing partner, Forza 
      Migliozzi, LLC; and Mercer Bullard, associate professor of 
      law, the University of Mississippi.........................     5
        Bullard, Mercer..........................................    62
        Cross, Meredith..........................................     5
        Lynn, Jeff...............................................    36
        Mauriello, Dana..........................................    22
        Migliozzi, Micheal.......................................    62
        Neiss, Sherwood..........................................    45
Letters, statements, etc., submitted for the record by:
    Bullard, Mercer, associate professor of law, the University 
      of Mississippi, prepared statement of......................    65
    Cross, Meredith, Director, Division of Corporation Finance, 
      Securities and Exchange Commission, prepared statement of..     7
    Lynn, Jeff, chief executive officer, Seedrs Limited, prepared 
      statement of...............................................    38
    Mauriello, Dana, founder and president, Profounder, prepared 
      statement of...............................................    24
    Migliozzi, Micheal, managing partner, Forza Migliozzi, LLC, 
      prepared statement of......................................    85
    Neiss, Sherwood, cofounder, FLAVORx, prepared statement of...    47


          CROWDFUNDING: CONNECTING INVESTORS AND JOB CREATORS

                              ----------                              


                      THURSDAY, SEPTEMBER 15, 2011

                  House of Representatives,
      Subcommittee on TARP, Financial Services and 
           Bailouts of Public and Private Programs,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:34 a.m., in 
room 2154, Rayburn House Office Building, Hon. Patrick T. 
McHenry (chairman of the subcommittee) presiding.
    Present: Representatives McHenry, Quigley, Cummings, and 
Maloney.
    Staff present: Molly Boyl, parliamentarian; Drew Colliatie, 
staff assistant; Peter Haller, senior counsel; Ryan M. 
Hambleton, professional staff member; Christopher Hixon, deputy 
chief counsel, oversight; Rebecca Watkins, press secretary; 
Jaron Bourke, minority director of administration; Devon Hill, 
minority staff assistant; Jennifer Hoffman, minority press 
secretary; Carla Hultberg, minority chief clerk; Lucinda 
Lessley, minority policy director; Jason Powell and Steven 
Rangel, minority senior counsels; and Brian Quinn, minority 
counsel.
    Mr. McHenry. The committee will come to order. This is the 
Subcommittee on TARP, Financial Services and Bailouts of Public 
and Private Programs. This hearing is entitled, ``Crowdfunding: 
Connecting Investors and Job Creators.''
    It is the practice of the Oversight and Government Reform 
committee to begin with a mission statement of this committee. 
We exist to secure two fundamental principles. First, Americans 
have a right to know that the money Washington takes from them 
is well spent. And second, Americans deserve an efficient, 
effective government that works for them. Our duty on the 
Oversight and Government Reform Committee is to protect these 
rights. Our solemn responsibility is to hold government 
accountable to taxpayers, because taxpayers have a right to 
know what they get from their government. We will work 
tirelessly in partnership with citizen watchdogs to deliver the 
facts to the American people and bring genuine reform to the 
Federal bureaucracy. This is the mission of the Oversight and 
Government Reform Committee.
    With that, I want to thank our witnesses for being here, 
and I will begin by recognizing myself for 5 minutes for an 
opening statement.
    Over 2 years into an uncertain economic recovery America's 
labor and capital markets continue to face unprecedented 
challenges. Nearly 14 million Americans remain officially 
unemployed, with an additional 11 million underemployed. And 
small businesses continue to struggle to access capital despite 
an endless number of Federal initiatives.
    Fixing this mess will not occur overnight, nor will it be a 
race by more government regulation. The purpose of today's 
oversight hearing is simple: In an economic environment in 
which lending to job creators and entrepreneurs remains dismal, 
we must find new and modern means for capital formation to 
ignite our sputtering economy.
    An existing and innovative means to connect investors and 
job creators is crowdfunding. Many folks have not heard this 
terminology before, but crowdfunding is essentially the ability 
of individuals to pool their money in support of a common 
cause. Crowdfunding has traditionally taken place in the realm 
of charity and the arts, but also online communities and social 
networking where it could have a very positive implication for 
America's small businesses and investors.
    If crowdfunding sounds familiar because politicians have 
been doing it for a few generations now, but it has been called 
something different. In the 2008 Presidential election then 
candidate Senator Barack Obama through small contributions 
alone raised over $100 million. Now that is quite advanced 
crowdfunding. So this makes sense, if crowdfunding can finance 
a candidate's campaign and really show a matter of grassroots 
support for what you are trying to achieve, if it could make a 
difference there, then certainly under the Securities and 
Exchange Commission we should be able it permit crowdfunding to 
empower citizens to invest seed money for American 
entrepreneurs and innovators.
    During President Obama's speech last week I was happy to 
hear when he said, ``We're also planning to cut away the red 
tape that prevents too many rapidly growing startup companies 
from raising capital and going public.''
    The first thing I thought of when he said that was today's 
hearing. I thought: Well, of course not, that is not exactly 
what he is going to be talking about. The next day when the 
White House released the details of the President's plan in 
bullet point form, I mean sort of the broad brush of it, he 
used the term ``crowdfunding.'' And so it is very timely that 
we're having this hearing, and I don't think the White House 
coordinated with my schedule. But I applaud the President for 
finally recognizing that regulatory red tape has kept American 
startups from raising capital and hiring workers. This has 
never been a secret.
    Unfortunately, news and information travels a bit slower 
over at the SEC. Despite recent efforts to relax rules on 
general solicitation and quiet periods, overall, the SEC has 
resisted calls to modernize securities regulations to meet the 
needs of today's economy.
    For instance, recent studies show that most startups use 
lines of credit, such as credit cards or home equity lines, as 
the first step to finance their business. The difficulty with 
this is two-fold: Fewer people have access to credit lines or 
home equity sufficient to start a business. And second, small 
businesses using a credit card with high interest rates, it 
makes it tremendously difficult to finance a new business. 
That's exactly how my dad started his business.
    But these ideas often don't make it past the dinner table 
for small businesses. We want to make sure that they have this 
access, this opportunity to get their friends and their 
neighbors involved in this process.
    By updating regulations for today's economy, conventional 
barriers for raising capital could be a thing of the past. 
Recently as 2009, two ad executives started a crowdfunding 
campaign called buyabeercompany.com to buy Pabst Blue Ribbon 
Beer Co. Many folks call it PBR. By illustrating the true 
potential of crowdfunding they were able to raise over $200 
million in pledges from over 5 million individuals through 
social networking sites such as Facebook. The average pledge 
was just $40, demonstrating the impact of even small donations. 
However, the SEC shut it down due to outdated--what I believe 
were outdated--regulations.
    This example and thousands like it highlight the fact that 
America does not lack the ideas or creativity to get this 
economy moving again. It simply lacks access to capital. To 
rectify this tragedy in American innovation I introduced the 
Entrepreneurial Access to Capital Act, H.R. 2930, yesterday. 
This bill simply heeds the President's call to cut red tape for 
startups and allow everyday investors to connect with 
entrepreneurs.
    In today's fast-paced world of innovation and innovators, 
all Americans rather than just banks and venture capitalists 
and so-called qualified investors, high net worth individuals, 
should be able to invest in the next Google, Apple, Facebook, 
their local coffee shop or their favorite beer company.
    And I'm interested to hear from the witnesses today. I am 
so happy that we have such a great panel. I look forward to 
your testimony.
    With that, I recognize the ranking member, Mr. Quigley of 
Illinois, for 5 minutes.
    Mr. Quigley. Thank you, Mr. Chairman. Thank you for calling 
this hearing and for our witnesses being here today. We are in 
agreement: job creation must be the number one priority of 
Congress. But for businesses to expand and hire new workers 
they need resources, they need capital. Unfortunately, billions 
of dollars of capital are sitting on the sidelines because 
potential investors aren't confident enough to invest. 
Investors are worried of investing capital when our growth 
prospects are so uncertain.
    As Secretary Geithner said last week, the world economy is 
in the midst of a second economic slowdown of this recovery 
from the financial crisis. This is why last month zero jobs 
were created and the unemployment rate remained over 9 percent.
    What this means is that we have to consider any and all 
ideas for raising capital to invest in new businesses and hire 
American workers. Crowdfunding is one such idea. It is an 
innovative proposal for raising private capital through the 
power of the Internet. Crowdfunding uses small investments from 
often nontraditional investors to fund startup ventures. This 
is extremely important because these smaller startups often go 
unnoticed by bigger institutional investors.
    To the extent that crowdfunding can match ready capital 
with quality investment opportunities it will be a success. I 
believe our witnesses will convince even the skeptics among us 
that there is enormous potential here for job creation and a 
stronger, more vibrant economy.
    Still even though most of us would use crowdfunding to 
jump-start a new tech company or small neighborhood business, 
there are legitimate concerns that exempting crowdfunding from 
securities regulations would open and expand opportunities for 
fraud. Just as water standards keep our water safe to drink, 
financial regulations protect us against unsafe financial 
products.
    According to SEC Chairman Schapiro, the SEC has a dual 
mandate to facilitate capital formation and protect investors. 
In facilitating capital formation, we must ensure that we do 
not leave investors vulnerable to fraudulent financial 
products. That's why the SEC maintains strict registration 
disclosure requirements for securities advertised through a 
general solicitation. In the words of the Supreme Court Justice 
Louis Brandeis, sunlight is the best disinfectant.
    Exempting securities from these registration and disclosure 
requirements is a decision that cannot be taken lightly. The 
key is finding the balance between the two objectives of 
capital formation and investor protection.
    Crowdfunding might also expose ordinary investors to a 
level of risk that is unacceptable when not accompanied by 
standard registration and disclosure. The reality is that many 
of these startups will fail and cause the investor to lose his 
or her entire investment. We have to be careful to ensure that 
investors fully understand the risk of investing in these 
financial products.
    My goal today is to find answers to some of these 
unresolved questions. What is crowdfunding's potential for 
capital formation and job creation? What is the potential for 
fraud through crowdfunding? What common sense steps can we take 
to minimize fraud and protect investors? What risk will 
investors be exposed to through crowdfunding? And are these 
risks acceptable? What other steps can we take to facilitate 
capital formation and job creation?
    I again want to thank the chairman for calling this timely 
hearing, and I yield back.
    Mr. McHenry. I thank the ranking member. I'm going to keep 
the introductions short since we have such a substantial panel. 
Suffice it to say we have an academic, we have folks involved 
in crowdfunding, and then we have a representative from the 
SEC. So I will go through the introductions and then we will 
swear you in and we will get started with opening statements.
    Ms. Meredith Cross is the Director of the Division of 
Corporate Finance at the Securities and Exchange Commission. 
Miss Dana Mauriello is cofounder and president of Profunder--
ProFounder, I'm sorry. Mr. Jeff Lynn is chief executive officer 
of Seedrs Limited. Mr. Sherwood Neiss--Neiss, Lord, I'm sorry--
is cofounder of FLAVORx. Mr. Michael Migliozzi is the managing 
partner of Forma Migliozzi. He can correct me on that.
    Mr. Migliozzi. Forza Migliozzi.
    Mr. McHenry. Okay, I'm sorry. I have it written down wrong. 
But Professor Mercer Bullard is the associate professor of law 
at the University of Mississippi School of Law.
    Thank you all for being here. It is the policy of the 
Oversight and Government Reform committee that all witnesses be 
sworn in, so if you will please stand and raise your right 
hands.
    [Witnesses sworn.]
    Mr. McHenry. Let the record reflect the witnesses answered 
in the affirmative. You may be seated.
    So in order to have time for a discussion and questions if 
you could please keep your opening statement to 5 minutes. 
You'll see by the lights in front of you, green means go, 
yellow means whoa, and red means stop. Whoa is a technical 
term, I'm sorry to use that. But we will first begin with Ms. 
Cross, you are recognized for 5 minutes.

STATEMENTS OF MEREDITH CROSS, DIRECTOR, DIVISION OF CORPORATION 
 FINANCE, SECURITIES AND EXCHANGE COMMISSION; DANA MAURIELLO, 
 FOUNDER AND PRESIDENT, PROFOUNDER; JEFF LYNN, CHIEF EXECUTIVE 
 OFFICER, SEEDRS LIMITED; SHERWOOD NEISS, COFOUNDER, FLAVORX; 
MICHEAL MIGLIOZZI, MANAGING PARTNER, FORZA MIGLIOZZI, LLC; AND 
 MERCER BULLARD, ASSOCIATE PROFESSOR OF LAW, THE UNIVERSITY OF 
                          MISSISSIPPI

                  STATEMENT OF MEREDITH CROSS

    Ms. Cross. Chairman McHenry, Ranking Member Quigley and 
members of the committee. I'm pleased to testify on behalf of 
the Commission on the topics of crowdfunding and capital 
formation. The SEC's mission is to protect investors, maintain 
fair, orderly and efficient markets, and facilitate capital 
formation.
    As you know, Chairman Schapiro and I appeared before the 
Oversight and Government Reform committee in May to testify on 
the topic of capital formation. We noted that a critical goal 
of the SEC is to facilitate companies' access to capital while 
at the same time protecting investors. Companies of all sizes 
need cost effective access to capital to grow and develop. And 
the Commission recognizes that any unnecessary regulations may 
impede their ability to do that.
    At the same time the Commission must seek to ensure that 
investors have the information and protections necessary to 
give them confidence they need to invest in our markets. 
Investor confidence and the fairness and honesty of our markets 
is critical to capital formation.
    To further our goals a few months ago Chairman Schapiro 
instructed the staff to take a fresh look at some of our 
offering rules to develop ideas for the Commission to consider 
that may reduce the regulatory burdens on small business 
capital formation in a manner consistent with investor 
protection. The staff is in the process of conducting that 
review, and in doing so, is considering the regulatory 
questions posed by new capital raising strategies, including 
crowdfunding.
    Interesting crowdfunding as a capital raising strategy that 
could offer investors an ownership interest in developing 
business is growing. As you know, proponents of crowdfunding 
are advocating for exemptions from Securities Act registration 
requirements for this type of capital raising activity in an 
effort to assist, early stage companies and small businesses.
    The staff has been discussing crowdfunding among other 
capital raising strategies with business owners, 
representatives of small business industry organizations and 
State regulators. For example, the staff has met with the 
representatives of the Small Business and Entrepreneurship 
Council and from the North American Securities Administrators 
Association.
    In addition, we anticipate that crowdfunding will be 
considered by the Commission's recently announced Advisory 
Committee on Small and Emerging Companies.
    Current technology allows small businesses owners to easily 
reach a large number of possible investors across the country 
and throughout the world as a potential source of funding to 
help grow and develop their businesses or ideas. This source of 
capital and the ease with which an individual can communicate 
with potential investors presents an opportunity for smaller 
companies in need of funds. At the same time an exemption from 
registration and the investor protections that come from our 
disclosure requirements also could present an enticing 
opportunity for the unscrupulous to engage in fraudulent 
activities that could undermine investor confidence.
    As a result in considering whether to provide an exemption 
from Securities Act registration requirements for capital 
raising strategies like crowdfunding, the Commission needs to 
be mindful of its responsibilities both to facilitate capital 
formation and protect investors.
    In considering crowdfunding, some of the questions to 
consider include: Should certain minimum information be 
provided to investors? For example, should investors know the 
names of the entrepreneurs, a summary of the business plan, 
have a plan to use the money they raise? Should individuals or 
firms with a history of securities fraud violations be allowed 
to use the exemption? Should an SEC notice filing be required 
so that activities in these offerings could be observed? Should 
securities purchased be freely tradable? Should Web sites to 
facilitate crowdfunding investing be subject to regulatory 
oversight?
    While the small amount of any potential crowdfunding 
investment should generally limit the extent of any 
individual's losses, these are issues that are among those the 
Commission would need to consider in connection with any future 
proposal.
    In addition to looking at new capital raising strategies, 
including crowdfunding, at the chairman's request the staff is 
also looking at the triggers for when a company has to begin 
public reporting, the restrictions on general solicitation and 
private offerings and the rules governing communications in 
connection with public offering.
    My written testimony provides an update on our efforts. We 
are committed to carefully considering these areas and 
developing thoughtful recommendations for the Commission 
consistent with the goals of facilitating capital formation and 
protecting investors.
    Thank you for inviting me here today. I look forward to 
answering your questions.
    [The prepared statement of Ms. Cross follows:]
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    Mr. McHenry. Thank you.
    Ms. Mauriello.

                  STATEMENT OF DANA MAURIELLO

    Ms. Mauriello. Good morning, Chairman McHenry, Ranking 
Member Quigley. Thank you for having me here this morning. My 
name is Dana Mauriello. I'm cofounder and president of 
ProFounder, which I started with my cofounder, Jessica Jackley, 
who is also the founder of Kiva, one of the first peer-to-peer 
microlending sites.
    We started in August 2009 a platform to allow entrepreneurs 
to raise investment capital from their communities.
    One of case studies that we saw that inspired us to start 
this business was two of our classmates at the Stanford 
Graduate School of Business that had a new technology startup 
that they were beginning, and they were looking to the 
classmates to see if those classmates wanted to contribute 
investment capital. We are a very tight community, about 350 
students. So we know each other well after 2 years of being in 
class together. And within 24 hours 60 people in that class 
said they wanted to put in the $1,000 cap that those 
entrepreneurs had set to invest. This seems like a beautiful 
story, but unfortunately their lawyers let them know that this 
was impossible, in their words. And when the entrepreneurs 
pressed, as entrepreneurs tend to do, they found out that it 
was ``impossible because those investors were unaccredited.''
    We had student debt, we did no meet the accreditation 
requirements. There were also more people than their lawyers 
felt could contribute. The entrepreneurs pushed and eventually 
lawyers came back with Reg D 506, which would allow 35 of those 
investors to contribute that $1,000 minimum.
    That answer took 4 months and $20,000 to achieve. That was 
an incredible inefficiency that Jessica and I witnessed. And 
that's what really got us thinking about how could this be 
possible that an entrepreneur with a great idea, and a 
community that has the capital and wants to support them, would 
have something standing in the way of being able to meet each 
other. And looking back at my own personal history with small 
family businesses, none of them would have gotten off the 
ground if not Uncle Joe and Uncle Gene and a lot of other 
friends and family members contributing. So this seemed like a 
very logical answer.
    So we started ProFounder with the vision of allowing 
businesses to access capital and access resources that 
supported their community. The solution that we came to after a 
year of legal research with many counsels was Regulation D 504, 
a Securities exemption that allows entrepreneurs to raise the 
capital if it is less than a million dollars. It is coming from 
people you have a substantial preexisting relationship with, 
and you follow state-by-state Blue Sky laws.
    Here's how we did that. Entrepreneurs came to our platform, 
created a pitch, they created their term sheets. We offered two 
term sheet templates, either equity or revenue share. It could 
have been anything that was a security. And then we had a 
compliance calculator that allowed entrepreneurs to say here 
are the people who I want to invite. And we would spit out here 
are the laws, here are the notice filings, here are the filing 
fees that you need to pay. And that was no easy task because 
these Blue Sky laws, which are different in every State, are 
completely interdependent on each other as well. You have one 
investor from Connecticut, you can only have 10 investors in 
Colorado. So that was a bear to both navigate, make a technical 
solution for and explain to our entrepreneurs, but we did.
    We had some amazing success stories that I'm very proud to 
share. Bronson and the Chang family in Honolulu, they were able 
to open their second shaved ice store by raising $54,000 from 
19 investors that included Bronson's freshman year roommate at 
USC, their best customers at the shop, and all of their friends 
and family.
    Mark at Cubic Motors was able to start a motorcycle company 
in San Francisco with the help of his fellow motorcycle 
enthusiast friends to raise $50,000 from 16 investors that all 
got these businesses started and off the ground. They are now 
raising additional rounds of capital. At least two of our 
entrepreneurs have gone on to raise additional capital now.
    We also faced challenges, we faced a lot of challenges. And 
the one that I'm most eager to talk about as an expert here is 
the challenges that these companies like ours that are 
facilitating crowdfunding face and how those challenges can be 
alleviated. We were approached by the Department of 
Corporations of the State of California to investigate our 
operations, and they came to the conclusion after months of 
conversation that we needed to be a broker-dealer to be 
facilitating these transactions on the site because we were 
providing form templates, because we had term sheets that 
people could take advantage of on the site.
    Whatever regulations ultimately goes into place for 
crowdfunding I think it is critical to consider what can be 
done for companies like ours to help facilitate. If we need to 
be broker-dealers there is no way that we can help the small 
entrepreneurs like Bronson and his family's shaved ice shop in 
Honolulu because these due diligence requirements on us will be 
too high and too onerous for us to be able to serve that 
smaller client who has the greatest potential to really make a 
difference, create jobs and spur the economy.
    Furthermore, another problem that we faced was definitions. 
There with a no clear definition for us of friends and family, 
of substantial preexisting relationship. There was no 
definition of sophisticated investor. Because of this lack of 
definitions it made the law extremely difficult to implement. 
And it made it very difficult for the counsel of the 
entrepreneurs that we were working with to get on board and 
feel comfortable with these changes.
    In conclusion, thank you for having me here today and I 
look forward to answering your questions.
    [The prepared statement of Ms. Mauriello follows:]
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    Mr. McHenry. Thank you.
    Mr. Lynn.

                     STATEMENT OF JEFF LYNN

    Mr. Lynn. Chairman McHenry, Ranking Member Quigley, 
honorable members of the subcommittee. My name is Jeff Lynn and 
I am CEO and cofounder of Seedrs, a forthcoming equity 
crowdfunding platform based in London. I'm also a U.S. 
securities and corporate lawyer by background, having practiced 
with the international firm of Sullivan & Cromwell in both New 
York and London. I want to thank you for inviting me to testify 
today on this very important and timely topic.
    Seedrs will allow entrepreneurs to raise up 100,000 pounds 
in equity capital from the crowds through an online platform. 
We like to think of it as kickstarter with returns instead of 
donations or lending club with equity instead of debt. Details 
of how the platform works are set forth in my written 
testimony.
    We have applied for Seedrs to be authorized by Britain's 
Financial Services Authority, and assuming we are successful it 
will be the first equity crowdfunding platform anywhere in the 
world to be expressly approved by a major securities regulator. 
We will launch initially in Britain only, with the aim of 
rolling out through the rest of the European Union shortly 
thereafter.
    When my cofounder and I designed this model, we examined 
both the United States and Britain as our potential first 
target market. Both had positives and negatives, but the 
overriding consideration was the current U.S. securities laws 
would present an insurmountable obstacle, where securities 
regulation in Britain is significantly better suited for this 
financial innovation.
    We are very excited about making crowdfunded equity finance 
available in Britain and eventually across Europe. 
Nevertheless, it is highly encouraging to see that some 
lawmakers want to consider rule changes that would allow equity 
crowdfunding platforms like Seedrs to operate in the United 
States as well.
    I believe this is a very positive development, as it will 
open a powerful tool to American entrepreneurs and investors 
alike, and could prove to be a key factor in boosting the 
economy and creating jobs throughout the country.
    At the same time it is important that any rule changes be 
considered carefully, and in particular that a balance be 
struck between keeping administrative burdens low enough for 
these platforms to be viable while still maintaining sufficient 
investor protections.
    I've laid out in my written testimony a few thoughts on how 
best to strike that balance based on our experience on building 
Seedrs. I would like to briefly summarize the three main ones 
here.
    First, we think it is important that equity crowdfunding 
platforms be subject to some degree of regulation. This does 
not need to be highly burdensome. There are categories of 
regulation currently in existence that small businesses have 
been able to comply with, such as broker-dealer registration 
and SEC investment adviser registration, and those could be 
used as a starting point, albeit they would need significant 
adaptation.
    In the absence of any form of supervision though, there's 
too much scope for crowdfunding platforms that lack sufficient 
systems and controls to cause harm to investors. And as 
importantly, many investors simply will not use platforms that 
lack a regulatory seal of approval. We have been told 
repeatedly about potential Seedrs investors that the fact that 
we will launch only after becoming FSA authorized is absolutely 
crucial to their decision to use us.
    Second, we would be against imposing a limit on how much an 
investor can invest in a particular startup. These platforms 
can only function if larger investors are able to participate 
alongside smaller ones. And a per investment cap risks 
unnecessarily excluding larger investors.
    At the same time, there are better ways of making sure that 
investors understand the risks involved and do not get in over 
their heads, such as capping aggregate investment based on the 
investor's declared net worth, and requiring investors to 
complete a questionnaire showing their understanding of the 
risks. Seedrs will do both of these.
    Finally, we think that equity crowdfunding platforms will 
be most effective when they are actively involved in executing 
the investment transaction and managing the investment after 
completion.
    The greatest risk to investors when investing in a startup 
comes not when the startup fails but rather when it succeeds. 
Any sensible investor knows and accepts that the odds are 
significant that the business will not work out and there will 
be no return of capital. However, if the startup succeeds but 
due to a flaw in the way the investment was structured or 
managed the investor does not get the benefit of that success, 
that is a much bigger problem. This is why Seedrs will provide 
a substantial level of intermediation as part of its service, 
including legal due diligence, subscription agreement 
negotiation, and post completion management. We expect that 
other successful platforms are likely to do the same.
    We do not think that these services need to be required by 
law, but it is important that whatever set of rules is adopted 
for crowdfunding they at least allow for and perhaps even 
explicitly authorize a meaningful level of intermediation.
    To conclude, Mr. Chairman, I am both encouraged and excited 
by the prospect of equity crowdfunding becoming a reality in 
the United States. I hope the thoughts and insights I have 
shared from our experience will prove helpful as consideration 
of rule changes moves forward.
    Thank you for the opportunity to appear before you today, 
and I would welcome the chance to respond to your questions or 
to amplify or clarify these statements at any time.
    [The prepared statement of Mr. Lynn follows:]
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    Mr. McHenry. Thank you, Mr. Lynn. Mr. Neiss.

                  STATEMENT OF SHERWOOD NEISS

    Mr. Neiss. Chairman McHenry, Ranking Member Quigley, and 
members of the committee, thank you for holding this hearing 
today and allowing me to share an entrepreneur's perspective on 
how crowdfunding investing will spur innovation among your 
constituents, create jobs and help our economy grow. This 
framework was just endorsed by President Obama in the American 
Jobs Act.
    My name is Sherwood Neiss, and I'm a entrepreneur who 
started and sold the 3-time Inc 500 company and is trying to 
raise capital for two more. This is my third time I have given 
congressional testimony on the hurdles related to capital 
formation for entrepreneurs and small businesses. This 
testimony was written in conjunction with my cofounders at the 
startup exemption, Jason Best, a 2-time Inc 500 entrepreneur, 
Zachary Cassidy-Dorion, and Karen Kerrigan of the Small 
Business and Entrepreneurship Council.
    I'm going to discuss three things: First, how crowdfund 
investing solves a problem of connecting entrepreneurs to 
capital; second, the framework under which we suggested this 
should take place; and, third, provide two examples.
    As someone who has tried to raise capital in the past few 
years I know how hard it is. Try going into a bank to get a 
loan or a line of credit. Try finding a credit card company 
that will give you a decent interest rate or try peddling your 
idea to venture or private equity. They aren't focused on who 
will create the majority of net new jobs, but who has the 
greatest chance for a 10X return in the shortest period of 
time.
    So the point is there is no capital out there for the 
majority of businesses. We need to hire Americans and get us 
out of this recession.
    A solution is crowdfunding investing. Crowdfund investing 
is using equity to pool small amounts of capital from a large 
number of Americans to start and expand at businesses. 
Crowdfunding is nothing new to America. The Statue of Liberty 
was even built thanks to thousands of small donations from 
Americans. On crowdfunding investing sites entrepreneurs will 
their pitch ideas, and investors decide which ideas they think 
are worthy of backing. If a startup doesn't hit its funding 
target, no money is exchanged.
    The funding rounds will occur via SEC regulated Web sites 
where entrepreneurs will be vetted and their ideas discussed 
freely with other investors. Anyone with deceptive practices 
and false moves will be documented and discussed by the 
thousands on Facebook, Twitter and other platforms. Time and 
again we see if you make a false move on the Internet it will 
only take hours before millions of people know about it.
    Successfully funded businesses will not only benefit from 
the capital but the collective knowledge, experience and 
marketing power of the people who have a vested interest in 
making sure the entrepreneur succeeds. Successful businesses 
will also create jobs.
    The complete rules of our framework are in my written 
testimony, but here are six main points. First, we propose the 
creation of a funding window of up to $1 million for 
entrepreneurs and small businesses.
    Second, investors would have to acknowledge the risk 
involved in this type of investment and that there is no 
guarantee of return.
    Third, once they acknowledge the above they can choose to 
invest. However, investments via this window would be limited 
to $10,000.
    Fourth, because of the size of the crowd and the 
anticipated small dollar amounts invested, we propose 
eliminating the 500 investor rule, as well as broker-dealer 
license requirements.
    Fifth, due to the limited size these offerings should be 
exempt from costly State registration.
    And sixth, general solicitation should be allowed only on 
registered Internet platforms where entrepreneurs and investors 
can meet and people and ideas can be vetted by the crowd.
    Standardized base reporting will be used to submit 
information to the SEC about small businesses utilizing these 
platforms.
    CFI is being using in other countries successfully, 
including the U.K., France, Hong Kong, and China. Over the last 
5 years over $300 million has been donated on U.S. crowdfunding 
sites for art related projects or entrepreneurs in the 
developing world. Just think what could have been accomplished 
if we used the same dollars to fund jobs and innovation in the 
United States.
    Here are two examples of where people have donated money to 
support an entrepreneur. Imagine how many more companies we 
could fund if the same investors were given potential for a 
return on their investment. Three engineers created a product 
that greatly improved mobile video cameras. They were turned 
down by 43 vc's and banks. So they created a short video on a 
Web site and solicited money via their Twitter, LinkedIn and 
Facebook communities. They raised over $24,000 and announced 
selling the products, creating jobs and have gained investor 
interest from vc's.
    And Brooke from Lancaster, Pennsylvania wanted to expand 
from a small T-shirt kiosk to a larger store, but was unable to 
raise capital through traditional means. So she created a video 
and raised $15,000. Now she has a stand alone store and has 
hired more employees.
    These are just two stories but thousands are waiting based 
on estimates from the SBA and the Kauffman Foundation. We 
believe CFI can generate over 500,000 companies and over 1.5 
million net new jobs over the next 5 years.
    Americans should be allowed to invest in their communities. 
Today technology makes this a possibility. The Internet with 
its transparency and accountability will make this concept 
thrive. In turn, the crowd will fund ideas they believe in and 
these ideas will be the launching pad for thousands of 
worthwhile businesses. Both parties agree on the importance of 
getting capital to our entrepreneurs; our framework is at zero 
government cost proposal to accomplish this.
    Thank you for your time. I look forward to your questions.
    [The prepared statement of Mr. Neiss follows:]
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    Mr. McHenry. Thank you. Mr. Migliozzi.

                 STATEMENT OF MICHEAL MIGLIOZZI

    Mr. Migliozzi. Good morning and thank you, Chairman 
McHenry, Ranking Member Quigley, and members of the committee. 
My name is Micheal Migliozzi. I am the creative director and 
managing partner of Forza Migliozzi, an advertising and brand 
content agency. I am honored to have my presence requested by 
this body for any assistance regardless of how small that I am 
able to contribute with ideas to unleash our economy, leading 
to job creation and financial recovery. I am without question 
absolutely humbled to contribute what experience I have.
    From my earliest memories my father told me that America is 
the land of opportunity, or that you can become whatever you 
want to become, through hard work you will succeed. I'm passing 
this on to my two little girls. I chose advertising.
    I have had the unique opportunity to work with some of the 
smartest pioneering dream chasers and passionate people in 
business. As an ad man, it is though I am part psychologist, 
part bartender, and part clergy. It is my work to sell their 
work. My career path has taken me all around this great Nation, 
northwest, east and south, working for some of the best 
advertising agencies in the world from New York City to 
Portland, OR, creating campaigns for sneakers, sodas, sports 
teams, credit cards, casinos, hotels, beer and many other 
categories.
    For an ad man the struggle and battle was to get to the 
reward of the big idea, the 24/7 quest to solve the problem at 
hand is never ending.
    I came to realize that this is the struggle of the 
entrepreneur as well, a 24/7 cycle of commitment to your dream, 
the risk that might never see a reward, the fight to battle, or 
maybe to look failure in the face and fail it to take a hike. A 
few years back I took my own advice and became an entrepreneur 
by opening my own advertising agency.
    I'm going to get on to crowd sourcing. What is crowd 
sourcing? The best definition I have ever found--excuse me, 
give me a moment.
    Mr. McHenry. Sure.
    Mr. Migliozzi. What is crowd sourcing, the best definition 
I've ever found--I'm going to have to pass for a moment.
    Mr. McHenry. We will come back to you to finish up, if 
that's all right. If you need some more water----
    Mr. Migliozzi. Thank you.
    Mr. McHenry. Mr. Bullard.

                  STATEMENT OF MERCER BULLARD

    Mr. Bullard. Chairman McHenry, Ranking Member Quigley, 
members of the subcommittee, thank you for the opportunity to 
appear today to discuss the regulation of crowdfunding.
    I would like to start by laying out the structure of 
securities regulation in order to put crowdfunding regulation 
in context. Securities transactions are generally regulated on 
three levels. On the first level securities transactions are 
subject to the same general commercial anti-fraud provisions 
that apply to all businesses.
    On the second level securities transactions are subject to 
security specific anti-fraud provisions that provide increased 
investor protection.
    There is some general agreement that crowdfunding triggers 
the first two levels of regulation which provides some degree 
of investor protection. On the third level, securities 
transactions are subject to public registration or reporting 
requirements, and this is where crowdfunding runs into trouble. 
Public registration, reporting requirements are generally 
impracticable for crowdfunding. In fact many issuers find them 
to be impracticable.
    Congress and the SEC have created a variety of exemptions 
from public registration and primary public registration 
requirements, but these exemptions are also impracticable for 
many forms of crowdfunding. And the most significant problems 
are generally that some form of disclosure document is required 
and there is a general prohibition against solicitations and 
advertising in connection with the sale of securities. So the 
regulatory question as to crowdfunding is whether it would be 
appropriate to liberalize one or more existing exemptions or 
create a new exemption to accommodate crowdfunding.
    I think the answer should be yes for the archetypal 
crowdfunding program. This would be offerings in which 
investors, individual investments were limited to a small 
amount, $100 or $250. The total amount of the offering did not 
exceed for example $100,000. For such de minimis investment 
amounts registration and reporting requirements should not 
apply. Other requirements should be imposed, including enhanced 
requirements for crowdfunding broker-dealers to combat the 
heightened risk of fraud.
    Other types of crowdfunding, macro crowdfunding finance,--
macro finance crowdfunding if you will, raise very different 
concerns. A $10,000 investment, for example, is not a de 
minimis amount, it is a significant amount for many investors 
and should be subject to some degree of registration and 
reporting. Making it much easier for scam artists to sell 
unregistered securities to families living below the poverty 
line or seniors barely surviving on Social Security is usually 
not good public policy.
    Any macro finance crowdfunding exemption should be subject 
to the regulatory cost-benefit analysis traditionally used to 
evaluate registration and reporting requirements. This cost-
benefit analysis generally considers the increased risk of 
fraud and the benefits to capital markets and to investors. It 
also considers the relationship of any new exemption to 
existing exemptions and the interest of all issuers, not solely 
those of crowd funders.
    The areas where reform is needed in macro finance grant 
funding would be easier. Increasing the Reg A limit to $50 
million is an example of why I don't believe there would be 
that much dispute. But let's not do that to make crowdfunding 
easier, let's do that to make Reg A work better for all types 
of capital raising.
    Similarly, the 500 investor trigger for reporting 
obligations, the ban on general solicitation in advertising, 
and the qualifications for accredited investors all need to be 
reformed, but not to accommodate macro finance crowdfunding. 
They need to be reformed to accommodate the full range of 
issuers. The 500 investor trigger is routinely honored in the 
breach. Firms with thousands of beneficial owners are often 
permitted to cease public reporting. At the same time other 
firms with thousands of beneficial owners are never required to 
file public reports in the first place.
    The ban on general solicitation and advertising is 
fundamentally inconsistent with the Information Age. The 
frenzied and very public trading of Facebook's 2\1/2\ billion 
shares makes a mockery of this prohibition, as did the failure 
of the U.S. segment of a Facebook private offering earlier this 
year.
    The wealth and income test for accredited investors have 
not been adjusted for 20 years, and they are structurally 
nonsensical. A young investor with $900,000 cannot put 10 of it 
in a hedge fund, but a retired auto workers with a million 
dollar portfolio living on say $40,000 a year that the 
portfolio generates can drop the whole million in a hedge fund. 
The investor who can afford to lose his shirt cannot invest, 
but the investor who cannot afford to lose his shirt can.
    In conclusion, there is micro finance crowdfunding that 
simply does not implicate the public policy concerns underlying 
the third level of securities regulation, registration and 
reporting. The exemptions for other small issuers where 
investors are risking more than de minimis amounts are 
appropriate only to the extent of the cost of increased fraud, 
if any, is outweighed by the benefits.
    Thank you again, and I would be happy to take any questions 
you might have.
    [The prepared statement of Mr. Bullard follows:]
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    Mr. McHenry. Thank you, Mr. Bullard.
    Mr. Migliozzi, we will return to you, if you can summarize. 
I think 4 minutes left.
    Mr. Migliozzi. I will pick up if I may with regards to the 
entrepreneur.
    So a few years back I did, I took my own advice and became 
an entrepreneur by opening my own advertising agency. I now 
share the same challenges and same roadblocks that many 
entrepreneurs face regardless of size, purpose or industry. My 
business is wholly dependent on other businesses who need to 
sell their products or services. They are dependent on an end 
consumer to sell to, the consumer a paycheck to spend with. As 
we have seen, the cycle or the gears of this cycle have locked 
up.
    Crowd sourcing and advertising. What is crowd sourcing? The 
best definition I ever found goes something like this. It is a 
neologistic compound of crowd and outsourcing for the act of 
taking tasks traditionally performed by an employer contractor 
and outsourcing them through a group of people or community 
through an open call to a large group of people, a crowd asking 
for contributions.
    Apparently I've been doing this for quite some time. We 
will go on to buy a beer. This is fun.
    In the fall of 2009 I read a----
    Mr. McHenry. Just take your time, it is okay.
    Mr. Migliozzi. All right. I'm having an allergic reaction 
to medication.
    Mr. McHenry. I'm sorry, I know that's very convenient for 
the day you are having.
    Mr. Migliozzi. Huh?
    Mr. McHenry. So sorry. I know having an allergic reaction 
is very convenient for testifying before Congress.
    Mr. Migliozzi. Yes, I'll finish it.
    Mr. McHenry. I say that with sarcasm but just take your 
time. It is fine.
    Mr. Migliozzi. Okay. In the fall of 2009 I read a New York 
Post article about Pabst Brewing Co. was up for sale, and the 
asking price was $300 million. In jest via a corporate Twitter 
account I tweeted maybe we can crowd source this. And before I 
could even hit the ``send'' button I knew this would be at the 
very least a great case study to evaluate crowd sourcing, its 
behavior, its magnitude.
    My expertise is not finance, economics or law. My expertise 
is in effective branding, marketing consumer behavior and 
possibly a little side show regardless of medium.
    I'm not here to confirm nor deny any of the findings of the 
Securities and Exchange Commission's cease and desist order. I 
was asked to be here to recount the important aspects of my 
experiment as it relates to funding companies without 
traditional financial outlets and to highlight the success it 
had not in theory but in actuality.
    Crowd sourcing means crowdfunding. This experiment was to 
answer my questions about crowd sourcing. With such a large 
amount, a $300 million asking price it would require the crowd 
sourcing vehicle to be easily partaken by all, exclusively 
online.
    Excuse me. The goal was to stay as the focal point, a 
countdown starting at a mind boggling $300 million may not be 
so mind boggling as we're hearing about trillions of dollars 
every day, but a very large amount just the same. What was 
being asked of them, their interest to join in the largest ever 
crowd sourced audience, that was their interest, came in the 
form of pledging their name, email address and an unbinding 
amount they were pledging and in caps ``send no money.''
    It is important for me to state here that at no time was 
any money ever received, nor was there any way for users to 
send the money nor any way for us to collect money. How to 
create enough buzz to get this into the hands of others would 
be required, how long could the buzz be sustained, how would 
the user take control of the conversation to generate buzz. 
Transparency, any questions and their answers needed to be 
anticipated and answered by viewing the site.
    Of course at the onset of the experiment there was simply 
no way to predict a positive outcome, far too many variables. A 
one page Web site is created with full disclosure, a Twitter 
account created, a press release circulated, this on or about 
November 10, 2009. By December 1, 2009, over $14.75 million was 
pledged.
    I'm getting into the red, if I may ask for additional time.
    The amount of press, press about the concept, the ease of 
understanding, the genius of the experiment generated buzz 
traffic sharing that by the end of 2009, the amount of pledges 
had exceeded $100 million. Christmas, New Year's passed. I was 
certain with the new year this would be old news. By February 
22, 2010, over $200 million was pledged. What was just an 
experiment was now taking up far too much of my time with press 
requests, some 150 articles written, radio interviews by that 
point. There was an interest by media users, etc., that this 
could happen. Could it? How? What steps would need to be taken? 
Pledges were still coming in. Press was still writing about 
this. This experiment was turning into a solid case study and 
an award winning one at that as it won for most innovative in 
the crowd sourcing competition at South By Southwest in 2010.
    On March 24, 2010, I received a FedEx from the SEC which 
led to the shuttering of buyabeercompany.com. Those proceedings 
concluded on June 8, 2011. Pabst Brewing was purchased on May 
26th purchased 2010 for about $250 million, according to the 
Wall Street Journal, by investor C. Dean Metropoulos. At the 
time of closing buyabeercompany.com, over $282 million was 
pledged by over 7 million users, averaging $38 per pledge.
    My conclusion is coming. I believe this illustrates the 
power of crowd sourcing or rather as it is referred here 
specifically as crowdfunding. What a powerful tool whereby the 
investor now becomes purchaser, brand steward, evangelist where 
the brand must answer to them and live up to their every 
expectation, not as a simple financial tool but as their 
expansion of buying into the brand. This process could have 
been easily used for the sale of Hummer GM, as seeking to shed 
their division was selling this American icon to China. While 
that $150 million fell through, I can't help but imagine if 
crowdfunding could not have only saved this brand but the jobs, 
the dealerships and the money spent on R&D, the equity built 
into the marketing brand loyalty by simply opening this up to 
the general public.
    What started out as an experiment to test for hypothesis or 
the power of social media and the propelling of a crowd toward 
a common goal had become a concrete and plausible way to do 
business in a landscape which moves rapidly and without 
harness. For my purposes it gave me invaluable information on 
consumer behavior. Hopefully other aspects of this can provide 
light on how we can utilize this to fund, build, expand 
businesses, the economy, leading to job creation. The 
possibilities of crowdfunding for starting expanding and 
purchasing companies are never ending.
    Thank you.
    [The prepared statement of Mr. Migliozzi follows:]
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    Mr. McHenry. Thank you. I understand the pressure of 
testifying and at the same time having a health issue as well. 
So we certainly understand that.
    I will begin my questions and recognize myself for 5 
minutes. Votes are called on the floor, so we're going to try 
to get through our first round of questions and come back for 
more.
    Ms. Cross, the President outlined in his speech and then 
the administration issued the following: Reducing regulatory 
burdens on small business capital formation. The administration 
also supports ``crowdfunding'' exemption from SEC registration 
requirements for firms raising less than $1 million with 
individual investments limited to $10,000, or 10 percent of the 
investor's annual income, and raising the cap on many offerings 
Reg A, that Mr. Bullard testified about from $5 million to $50 
million. This will make it easier for entrepreneurs to raise 
capital and create jobs.
    Can you describe the SEC's perspective on the President's 
recommendation in terms of the crowdfunding portion, not the 
Reg A, but if you could describe the SEC's perspective on this.
    Ms. Cross. Thank you for your question. I have to say first 
the Commission hasn't taken a position yet. These statements 
were just made. So we're discussing the matter internally at 
the Commission. I'm sure we will be having more discussions in 
light of the interest in the topic.
    From my personal perspective I think that the key to such 
an exemption would be whether it could be crafted so that there 
could be cost effective crowdfunding exemption that could be--
that wouldn't present significant concerns of fraud. If so, 
then I could see real benefits.
    The issue you've got to watch out for is that if it becomes 
viewed as a tainted market where people go to fraudulently 
steal money, then that won't help anyone. So there needs to be 
some sort of balancing happening on a cost effective basis 
where some level of requirements, what kind of information 
might be required, are there notice filings, things of that 
nature, what the caps are, how much money for any individual, 
all of those issues would be important so this isn't a place 
where just bad actors go to steal money from people.
    Mr. McHenry. Okay. And so would an annual audit be one of 
those?
    Ms. Cross. That's an interesting question. I don't know if 
an audit is what I would be thinking of. I was thinking more in 
terms of oversight of those operating the site so that at least 
someone is keeping track that these companies actually exist, 
that the money is coming from investors to these companies, 
those sorts of things that would give you pause. If somebody 
just opened up a Web site and took money and then disappeared 
that would be pretty awful. So what----
    Mr. McHenry. Which--not to use sarcasm, which never happens 
today?
    Ms. Cross. Well, I can't say whether it happens today or 
not.
    Mr. McHenry. Really? So I would just propose this. So based 
on this the SEC would think that the eBay exchange where I 
offer my used pickup truck for sale, that that transaction 
would never happen without the SEC preserving and protecting 
against fraud.
    I'm not asking you to answer, but what's the timeframe for 
the SEC to review this recommendation and how long would that 
take to implement?
    Ms. Cross. We're currently discussing it internally. I 
don't have a timeframe, but I would expect we would want to 
consider it deliberately in the near future.
    Mr. McHenry. Is that 2 years, 1 year, is it 6 months?
    Ms. Cross. As I said, I can't commit the Commission to a 
timeframe but I would expect that it would be in the near 
future.
    Mr. McHenry. Back in May I asked a similar question about 
accredited investors, the 500 investor cap. Any update there?
    Ms. Cross. Yes. We're deep into the various work streams 
that we discussed back in May. One of them is the 500 
shareholder cap. We have a study underway at the Commission now 
to get all the data that we need in order to be able to 
determine what revisions to the cap there should be. So that's 
deep underway right now.
    We also are working on concept release on how to address 
the issues with regard to a ban on general solicitation and 
looking at targeted offering reforms around these issues and in 
addition we just announced this week the formation of our Small 
and Emerging Co. Advisory Committee so we can get their input 
there as well.
    Mr. McHenry. What was the impetus for creating that group?
    Ms. Cross. For the committee? We've been working on forming 
a committee. It is complicated to form committees under the 
advisory committee rules. The purpose of it is to get--to be 
able to try out ideas.
    Mr. McHenry. I understand the purpose. What was the impetus 
for creating it?
    Ms. Cross. In order to be able to get--I'm sorry, we've 
been in the process of forming it since many months ago.
    Mr. McHenry. Okay, okay. Do you have a timeframe for when 
this 500 investor cap will--there will be some resolution to 
it?
    Ms. Cross. I would say because we have to do the study to 
get the data that we need to do an appropriate analysis it 
would take a significant period of time. It would be sometime 
in 2012.
    Mr. McHenry. Mr. Quigley is recognized for 5 minutes.
    Mr. Quigley. Thank you, Mr. Chairman.
    Mr. Lynn, make sure I get this right, you talked about 
allowing a dual set of investors, high end as well as the low. 
Are you talking about the high end ones being under the normal 
rules or also under crowdfunding?
    Mr. Lynn. No, on our platform they will all be under the 
exact same set of rules. Everybody will come in through the 
platform whether they are investing 10 pounds or 10,000 pounds 
or 100,000 pounds, directly to the platform.
    The key point, just to try to elucidate slightly why it is 
important that we have the big investors alongside the smaller 
ones, is that platforms like this will not succeed if it is 
only $10 or $100 investments being made through them. What will 
happen is the business that is seeking capital, we will get a 
lot of interest, there will be a high volume of investors, but 
to try to raise $50,000 or $100,000 on the back of $10 or 
similar size investments the deals simply won't get closed.
    So for these platforms to function for a marketplace to 
exist, we think that we need to be able to go after both the 
smaller investors, but also people who might traditionally be 
angels but see a value proposition in investing through a 
platform like ours alongside the smaller investor.
    Mr. Quigley. Why can't you do this in a system, a dual 
system for the same sort of investment? The whole point of the 
high end investors having so much more regulation and control 
is because you are dealing with a lot more money. At least it 
is one of the elements of this. Don't you now run the risk, why 
would anybody go under the normal rules if the big one could go 
under crowdfunding?
    Mr. Lynn. Two answers. Yes, first of all, you could do two 
separate systems, absolutely. You could do a system where the 
smaller investors receive an additional level of protection and 
the larger investors do something on a different track, 
different plane. It just adds administrative complexity, and 
there is no particular reason when you could have everything 
under the same system where effectively, as I've said in my 
testimony, we're looking at a platform where all investors get 
a much more significant level of protection than they would if 
they went off and bought shares in their friend's company.
    The second point is investing through a platform like ours 
has both advantages and disadvantages to high net worth 
investors. The advantage is it is simple, it is easy and 
straightforward and they don't have to do a lot of 
administrative work. Many angels prefer to be able to invest in 
a hands-on way, to be able to interact directly with the 
entrepreneurs, to be able to go on the board, provide advice. 
And we think that many angels will continue to want to use the 
traditional off-line method of investing as well. We want the 
choice to be there for them.
    Mr. Quigley. Ms. Cross, we're on limited time because we're 
due on the floor a few minutes ago. How do you begin to balance 
this? You talk about the notion of at least having some rules 
about this, you ticked off quite a few points. But at what 
point are we right back to where we are now anyway with all the 
rules and regulations that the President sort of referred to 
that we want to pull away so that we encourage this kind of 
investment at the small level?
    Ms. Cross. That's a very important question, and I think 
any rulemaking would have an appropriate balancing of the cost 
and benefits. I think that the smaller the amount of money that 
people could risk losing, the less regulation you would need, 
the less impact it could have across the markets.
    Mr. Quigley. Let me interrupt you again because we are 
short. I guess the crux of my concern is that the smaller 
investor--doesn't it seem like that is the less sophisticated, 
less knowledge, less ability perhaps; perhaps the very person 
who needs the most protection? I mean, is that a glimmer in 
your mind or is that just wrong.
    Ms. Cross. That's certainly a concern and you would need to 
think about that. I think the notion of crowdfunding, which 
again the Commission has not taken a position on, but the 
notion of it is at some de minimis level, one would argue that 
there isn't a need for the full panoply of regulations that 
comes from securities registration, even though the particular 
people may be on the less sophisticated range because they have 
less to lose. And the question really is a cost-benefit 
analysis.
    I think it's important, though, that if it turns out all 
the unsophisticated investors who don't get the information 
registration would require end up defrauded, then it's going to 
be an unsuccessful experiment. If, instead, it's a success, 
and--then I think it does provide an opportunity for--and this 
is my personal view--for another avenue to raise money cost 
effectively, but it's--it's an interesting experiment that we 
would need to at least keep a close eye on.
    Mr. Quigley. Mr. Chairman, these are thoughts that I'd like 
to get the thoughts of all the participants unfortunately, we 
are now heading to the floor.
    Mr. McHenry. And the chair would announce that we have 
votes on the floor. It's the intention of the chair to go cast 
the first vote, return back here, try to get a few more rounds 
of questioning in, at which point we'll have two additional 
votes thereafter.
    There are Members that will be sworn in between the first 
and second vote here. So we should be able to get back and have 
an additional 30 minutes.
    Mrs. Maloney. Point of information, Mr. Chairman. May I ask 
my question and make a bolt to the floor because I don't think 
I can come back?
    Mr. McHenry. Yeah, I would just ask indulgence of the 
Member to come back after this first series of votes because 
the----
    Mrs. Maloney. It is really hard for me. I can just do it 
really quick right now.
    Mr. McHenry. I have to go get to the floor and vote so I 
can get back here. Go ahead, I will give the gentlelady a 
minute.
    Mrs. Maloney. First, I want to thank you for holding this 
hearing. It is tremendously important, looking at the 
crowdfunding exemption and how it is implemented.
    An offer, a startup mentor and angel investor in the 
district that I represent by the name of Marty Zwilling wrote 
an interesting blog calling into question some of the virtues 
of crowdfunding, and I would like to quote what he said, ``He 
warns that crowdfunding places the focus on the product, not 
the business model. When pitching to consumers online or off 
line, the feedback will likely be on features and design. The 
key success factors of the business model, meaning how you make 
money, management expertise, and financial projections, will 
likely get overlooked.''
    And I would just like to know how the panel would respond 
to what he said. He also warns that investors are not prepared 
for the high risk of startups and he has--he believes that it 
will be marketing to the riskiest, most speculative investments 
to some of the least sophisticated. So I would like to hear 
your response.
    Mr. McHenry. The gentlelady's time has expired. We have 
just enough time for me to get to the floor--for us to get to 
the floor to vote. When we return, I will let the panel answer 
that question. The committee is in recess.
    [Recess.]
    Mr. McHenry. The committee will come back to order. We do 
have two new Members that won special elections on Tuesday 
being sworn in on the floor today, right now at this moment. So 
we have some time to have additional rounds of questions, and 
so I will recognize myself.
    Well, actually, I will let the panel answer my colleague 
Mrs. Maloney's question, which pertains to fraud. If you could 
begin with that, if you can recall her question from 15 minutes 
ago, Ms. Cross, and we will just go right down the panel.
    Ms. Cross. Yeah, I will just quickly respond. I think that 
her question points out the point about whether investors will 
have access to the kind of information that they need, whether 
it is focused on the idea or the company in which they would be 
investing, and so whether that is through the rules of the 
platform or any other regulations, what kind of information 
would be needed at a minimum is an important issue.
    Mr. McHenry. How would the SEC deal with that?
    Ms. Cross. I think it depends on the costs and benefits. I 
think at the lower levels of investing, fewer requirements may 
make sense. Higher levels, you would think perhaps you would 
need more robust disclosure requirements.
    Mr. McHenry. All right.
    Ms. Mauriello. So just to address the general issue of 
fraud, the idea has come up from numerous people about broker 
dealership or the responsibilities of the facilitating party to 
do something. And, Chairman McHenry, I think you brought up a 
good analogy with eBay that if I am going to buy a car on eBay, 
I am not going to ask eBay to verify that the seller of that is 
legitimate. I am going to look at the reviews. I am perhaps 
going to call, get references on his reputation.
    So this issue of fraud is certainly not a new one that we 
are facing with the idea of crowdfunding. It is a very old 
idea, and while it is been well tested and well proven what the 
solutions can be online, improvement of those solutions are 
more based on reputation and based on crowdsourcing information 
than on the facilitating party.
    So, for example, if we had been a broker/dealer at the time 
that some of these deals had gone through on our site and had 
to do due diligence, for example, I would have had to call to 
do reference checks the very same people who are doing 
investments in the deal in the first place. They had more much 
more information than I did at that particular time.
    Mr. Lynn. I mean, I think I agree with Dana and I think an 
important point as well about fraud, generally, is it is in the 
interest of every one of these platforms like ours to do 
everything we can to minimize the levels of fraud that occur. 
Is it bad for the market? If this becomes, as Ms. Cross said, 
if this becomes an environment in which sort of bad or 
fraudulent companies see this as a way to raise money, I am out 
of business. So there is--whatever the regulation may be, we 
have a tremendous incentive and we have with Seedrs put in 
place a number of very significant protections to try to limit 
that.
    Also, just quickly to address Congresswoman Maloney's point 
about investors not being sufficiently sophisticated or not 
understanding what they are getting into, I firmly disagree 
with that. I think that while we do have a level of screening 
on the test to make sure that truly vulnerable people do not 
invest through the platform, it is not that hard to understand 
that investing in startups is a very high-risk, highly illiquid 
form of asset, and we think that a wide range of people are 
capable of and qualify to do so.
    Mr. Neiss. I concur with that. I think Congresswoman 
Maloney was talking about people focusing on the product and 
the business model. I just don't get why we have to keep on 
pushing people down with the relentless assaults on their 
intelligence. I mean, we are pretty smart people. I am going to 
be partaking in these platforms. I have money tied up in an 
investment group. I know how to ask questions and I know how to 
educate other people that will be investing as well.
    So by people like me partaking in this, we are just going 
to be educating more people, which is going to raise the bar 
and make it even safer for everyone.
    Mr. Migliozzi. I come from the same position as yourself as 
far as eBay is concerned. I look at State lotteries. A dollar 
and a dream is probably one of the best tag lines in New York 
State in many, many years, and most of those people funding the 
lottery are not exactly sophisticated investors, nor are they 
sophisticated investors in casinos. Now they are all hoping to 
gain.
    What we are doing, at least from what I an understanding 
here, is we are preventing people from the possibility of huge 
opportunities to either elevate themselves up, whether it is a 
small amount of money or a large amount of money, and 
preventing them making this--what we have, the land of 
opportunity, is now protecting you from fraud and therefore 
curtailing any possibility of getting yourself involved in a 
crowdfunding or a startup or riding it all the way up.
    Mr. McHenry. Mr. Bullard.
    Mr. Bullard. The answer to the eBay question, which is a 
good question, is really a structural one. The answer is that 
for going on 100 years legislators and regulators have treated 
securities transactions differently from other transactions. If 
they are not different, we should repeal the Federal securities 
laws, but this isn't a matter of crowdfunding regulation. That 
is fundamentally a matter of whether securities transactions 
are different, and I think they are.
    As to whether, for example, private offering requirements--
you know, unaccredited investors are an assault on the 
intelligence of Americans--again, it is so deeply embedded in 
the structure of the Federal securities laws to make 
paternalistic judgments about who is going to be allowed to 
invest in unregistered offerings. The idea that that is somehow 
just fundamentally questionable is not a crowdfunding issue. 
That is an attack on the very structure of the Federal 
securities laws, and maybe that is the way Congress wants to 
go, but let's not pretend it is anything other than what it is.
    It also shows I think, you know, the ignorance of people 
who, you know, I think have good-faith businesses and want to 
raise capital with respect to the amount of fraud that goes on 
on the Internet, and specifically with respect to securities. 
And there is no question that any liberalization of the 
exemption rules will result in some incremental increase in 
fraud. And you know, no one likes to say it except for someone 
who is somewhat of a free agent, but the bigger issue is about 
figuring what the optimum level of fraud is, and you are going 
to get a lot of fraud.
    And if the bill, which I appreciate, you know, starts the 
conversation, is as written made into law, you'll have a 
massive amount of fraud. And I can tell you, your crowdfunding 
market will cease to exist because the level of fraud will 
simply destroy any confidence in anyone, other than an 
unsophisticated investor would be willing to participate in.
    So, you know, there is a level of discussion that we are 
just not recognizing here. It is about some of the fundamental 
assumptions about how securities transactions are regulated, 
and if that is what you object to, I think we need to put that 
on the table and have the conversation about that.
    Mr. McHenry. I recognize myself for 5 minutes. Thank you 
for answering that question.
    Ms. Cross, is this--the number one concern is fraud?
    Ms. Cross. That's certainly a very important concern. We're 
not talking about regulating just for regulating sake.
    Mr. McHenry. What are the key concerns?
    Ms. Cross. The key concern would be that investors would 
part with their money to unscrupulous business operators who 
just take the money and run, and that we all watched that 
happen and didn't take the time and effort needed to come up 
with a system that would provide a level of safety, disclosure, 
oversight, some ability to watch what's going on. I think--you 
know, I worry about, as I mentioned, Web sites popping up all 
over the place and then disappearing, and people put in money 
and then it is gone, and I think those are the concerns that I 
would have.
    Mr. McHenry. Okay, okay. So, for instance, as a former wise 
investor in pets.com, this has happened with registered 
securities where the business plan was bad. And so how do we, 
Mr. Bullard, in your opinion, how do we ensure that we open 
this area--it sounds like that you are willing to go with the 
idea of crowdfunding with some exemption. How do we do that 
while at the same time dealing with that question--that concern 
of fraud?
    Mr. Bullard. Well, I think that the analogy to pets.com is 
a very apt one because, you know, we are sort of revisiting the 
way we have structured the Federal securities laws, and it 
comes down to the question of, you know, how much paternalism 
are we going to have because it's--I would have to disagree 
with Ms. Cross. It's really not about getting information into 
investors' hands because the way securities laws work is 
there's no amount of information you get into some people's 
hands that's going to allow us to allow them to invest. It is a 
prophylactic rule. It is not a do you have enough information? 
A lot of these people, simply no matter how much information 
you give them, the Federal securities laws have decided they're 
not going to be allowed to invest in certain offerings.
    Pets.com jumps through a bunch of hoops, but there are 
still people who lose their shirts, sophisticated or otherwise.
    So I think the answer is you've got to draw that line and 
say, for example, on a de minimis level you're making a 
decision that we are going to allow a lot of losses to go on. 
We are also going to allow an increase in fraudulent losses, 
not just people investing in pipe dreams, but good-faith pipe 
dreams. We're are also going to be allowing people to lose to 
scam artists.
    There's a question about confidence in the markets. There's 
a question about, you know, how much do you want to make 
decisions for people based on individual liberty interests, 
which is a real value at issue here, and I think it's 
appropriate to draw a line and say were just not going to step 
in at some point. But above that, I think that you've got to 
think more carefully about the effect on the structure of the 
markets and, you know, and what, let's say, a $10,000 exemption 
would do without the right kind of restrictions.
    And my--and so the most specific answer would be I think we 
need to move generally more into intermediary regulation as one 
of the solutions to capital raising.
    Mr. McHenry. Okay.
    Mr. Bullard. And the second answer, it's got to be kind of 
crowdfunding specific which may militate for changing the 
triggers for registerings of broker/dealers. As I mentioned in 
my testimony, that's pretty much an all-or-nothing game.
    Mr. McHenry. My time is short.
    Mr. Bullard. Right.
    Mr. McHenry. So, Ms. Mauriello, Mr. Lynn, Mr. Neiss, can 
you respond to this concern?
    Ms. Mauriello. Absolutely. I think if we're going to put in 
protections, which you are right, there's a balance to strike, 
the most effective party to be doing this--this is not the 
facilitating party, it is the people themselves. So, for 
example, the way that purchasers are qualified now by their net 
worth, whether they're accredited or unaccredited, is that 
really the best way to determine that someone can make a smart 
investment decision just based on how much money they have in 
the bank? I would argue not at all.
    So redefining what qualified investors are in this context 
of crowdfunding I think is an apt path an to go. For example, 
the sophistication laws, great intention there, but if they're 
not defined, they can't be used. Define sophistication allows 
the sophisticated investors regardless of net worth to be able 
to invest.
    Someone who's local should be a qualified purchaser. If I 
live next door to the coffee shop, I know more about that 
coffee shop than anybody else, regardless of how much money 
they have in the bank. I should be a qualified purchaser if I 
know that person, so liberalizing what substantial preexisting 
relationship is. The classmate example I gave earlier, if we 
went to school together, I know more about you. Regardless of 
what my net worth is, I should be a qualified purchaser. That's 
how I would prevent fraud as well.
    Mr. Lynn. I think there are two key points here. One, in 
terms of, you know, the qualification to be allowed to invest--
and I agree with the previous comments--and just want to 
emphasize that, you know, regardless of what the system has 
been since 1933 and regardless of whether we're opening up a 
broader debate here or not, there is a serious sort of over- 
and under-inclusiveness to the accredited investor rules. It is 
a loose proxy that has always been based on just, you know, a 
very sort of loose cutoff, but it doesn't necessarily say 
anything about whether people are really qualified to invest 
as, Congressman, I believe you said earlier.
    One of the things we do on Seedrs is before you can invest, 
you take a quiz, and the quiz is a multiple choice 
questionnaire and it says things like most startups succeed or 
fail. Well, we think that people can get through that and it 
gets to dilution and couple of other issues. We think most 
people can get through that. That's a pretty good indicator, 
regardless of how much money they have, of whether they will be 
able to make the investment decision.
    On the fraud point, which is a little different. I mean, 
the qualification of investors is about whether you know your--
the risks involved and are able to take them. On the fraud 
point, I disagree with you, Professor. I think that the amount 
of fraud that occurs in this marketplace among good 
crowdfunding platforms is actually going to be very minimal.
    In our case, we are going to have substantial legal 
protections in place, and we will go after, very, very quickly 
and very publicly, any entrepreneur who does try to defraud the 
investors. We will press criminal fraud charges against them 
and we will quickly establish reputation as one of the least 
favorable places to try to run a scam. I think most other 
platforms are going to do very similar things, and this is 
going to be a market in that environment under which very 
little fraud occurs. It's yet to be seen but that's our view.
    Mr. Neiss. And I would agree with Mr. Lynn and disagree 
with the professor as well.
    I think first and foremost anyone that's going to register 
on these platforms is going to have to give over their personal 
information: Social Security number, address, date of birth, 
and they're going to have go through a background check to see 
if they've committed any fraud. So, boom, if you've got a 
checkered history, you're out.
    Second of all, I personally believe most fraud to date has 
been committed on a one-to-one basis where you don't have this 
open network that we are advocating for on these platforms, 
where the communities can come together and give a combined 
opinion. Lots of voices are going to go into this, and that's 
going to whittle out people from committing fraud and it's 
going to expose the people that are trying to take advantage of 
people on these platforms.
    So I just think--and a third point, in an all-or-nothing 
fashion, which is what we're advocating on these platforms, you 
have to act to raise the entire amount or you get no money. You 
have to hit the bar pretty high and convince everyone before 
you get a dollar.
    Mr. McHenry. Mr. Bullard, would you like to respond to any 
of those? Is there some way to get some consensus about how we 
achieve this?
    Mr. Bullard. The way to achieve is you first have to start 
with the member of the Mafia who decides to become a broker/
dealer and runs one of these businesses. I mean, if you want to 
have a discussion about what's going to happen, put them on the 
panel, because we're not talking about legitimate businesses 
and what they're going to do as a matter of business practice.
    What was just described here was business practices. If you 
want to write them into the law, then it will work, but they're 
not going to be part of the law. You say you're going to do 
certain checks----
    Mr. McHenry. That's why I'm asking. So to this point----
    Mr. Bullard. Right. So I look to the effect of what's the 
minimum necessary, and I think it's intermediary requirements 
where the burden has to be placed on the intermediary. There is 
no way you can make this function where you're always putting 
the burden on the issuer. That's just inconsistent with the 
whole idea of crowdsourcing.
    Mr. McHenry. So Mr. Bullard and Ms. Cross had mentioned 
this, which is establishing some criteria for intermediaries, 
right? That that would be the onus of regulation and that would 
be sort of an initial view of how this could work best?
    Mr. Bullard. Right.
    Ms. Cross. If I could, I just want to be clear. I was 
expressing my views. The Commission hasn't taken this up yet. 
So I view intermediary regulation as perhaps a cost-effective 
way to deal with this because, for an individual company 
raising $50,000, for example, putting all of the requirements 
on them may be cost prohibitive. So if someone is running a 
site and is, for example, taking 5 percent commission and is 
running a site where they're raising billions of dollars, 
perhaps, if it turned out great, then they could afford to deal 
with intermediary regulation; whereas the individual company 
raising $50,000, that might be the harder question. That's just 
a personal view as to what might be a way forward.
    Mr. McHenry. So would they be broker/dealers?
    Ms. Cross. The question of broker/dealer registration 
requirements depends on what their functions are. If they--
under the rules now, if they have a salesman stake, which is, 
for example, commission for success, and if they deal with 
client funds and securities, then they may come within the 
definition. Then you would have to look and see how would 
regulation work. If they're not engaging in those sorts of 
activities under the Federal securities laws, it's not clear 
that they would be broker/dealers, and so then maybe you would 
come up with an alternative mechanism of regulation that's an 
oversight-type role. It's an interesting question, what would 
be the right way to approach it.
    Mr. McHenry. So that broker/dealer status, Ms. Mauriello, 
is that too onerous and expensive?
    Ms. Mauriello. Yes. So we have no salesman stake, no 
commission being charged. We're basically making no money and 
still would be told that we need to be a broker/dealer but not 
by the SEC, but--so I do have experience----
    Mr. McHenry. You've been told that by your legal counsel?
    Ms. Mauriello. By the Department of Corporations in 
California. So through that process, we did learn a lot from 
approaching many broker/dealers and trying to partner with 
their license and learned what their criteria was and, most 
important, education. We were told across the board that it was 
not advantageous for them to work with us because our average 
deal size was under $50,000. So the requirements in the 
compliance that they would need to do as a broker/dealer, it 
would not behoove them to do deals that small. So unless we're 
willing to bring our deal size up to an average of, say, $5 
million or more, they were not interested. So that's what we're 
trying to navigate now.
    Mr. McHenry. Mr. Lynn, is that your experience in Great 
Britain?
    Mr. Lynn. Well, it's actually the opposite. And without 
having detailed knowledge of what is required of broker/dealer 
registration, the FSA authorization process is a very flexible 
one that looks specifically at exactly what a business is doing 
and then imposes a series of requirements and regulations on 
it. So far--and I say this as a business that has not yet 
completed the process--that authorization process seems to have 
been a very happy medium for us. The costs are not very 
substantial.
    To give you a sense, the entire cost of preparing the 
application and filing it would be between 10,000 and 15,000 
pounds, and our ongoing costs would be something like 5,000 
pounds a year, which if compared to our marketing and operating 
budgets aren't that overwhelming.
    Mr. McHenry. That's reasonable. Is the SEC--is the question 
of being a broker/dealer--how many broker/dealers do we have in 
the United States roughly?
    Ms. Cross. I'm going to have to get back to you with 
answers to those questions. That's the trading and markets 
division, so I'm not--I'm really not qualified to answer that 
question. You know, I think that, to the point----
    Mr. McHenry. But the cost is substantially more to be a 
broker/dealer in the United States.
    Ms. Cross. I would assume so. So I think, again, one of the 
points I was trying to make was that in crafting a regulatory 
approach, if there isn't one that's already appropriate, you 
would perhaps be able to, depending on what the functions are 
of the intermediary, craft regulation that fits best on a cost-
benefit basis. So I think--it may be that's it scalable the way 
that it's in London. I think that's a question that would need 
to be discussed.
    Mr. McHenry. Okay. Mr. Neiss, in terms of your experience 
with this, how can we confront this issue of fraud? What's the 
legitimate way--we're looking for public policy here and that's 
the idea here. I mean, the whole panel, we have a minority 
witness, we have a witness from the SEC, and the whole panel is 
in agreement--well, Ms. Cross has not stated an opinion on that 
because that's a matter of SEC policy that she wouldn't come 
forward on--on that type of whether this is a good idea or not. 
So, just to state that clearly.
    But even minority witness agrees that this idea of 
crowdfunding is a worthy one. The structure of it really is the 
question here, and so I do want to get to the structural 
question. How do we structurally allow this to take place 
because this--having a conduit between small investors and 
small businesses I think is a worthy one. It's not the full 
answer.
    I mean, you know, the whole idea here is, to Ms. 
Mauriello's testimony, was how do you get to that venture 
capital? Well, this might be the best way, getting those 
initial thousand users of Facebook to put in a couple bucks so 
they can buy their first server. You know, that idea of 
crowdfunding to get something initially going, public markets 
are--still, we want the public markets to function. We still 
want folks to, you know, have that opportunity. But how do you 
get that bridge there from idea to rolling?
    Mr. Neiss. Well, I think what you have to do is you have to 
put a structure in place which currently exists on the 
crowdfunding platforms that are out there. You have to 
register, and that requires that, like I said before, that you 
give certain information and then they run background checks on 
you. Then you sort have to do the business model. You have your 
business idea. You've got how it's going to make money, and 
that's where you let the crowd take over and let them decide 
which ideas they think are worthy. If they think it's worthy 
and it hits that funding target, then you've got certain 
mechanisms that are in place. You've got standardized 
subscription review agreements and term sheets that can be used 
across the board to make it easier for everyone to communicate, 
and all of this happens on open platforms where there's this 
communication channel that's freely open to everyone.
    And I think the critical thing to come back to, there is 
technology out there, like on LinkedIn, where you see the 
first-degree connectivity of an individual. What we're talking 
about here is community investment. It's people, it's me going 
to my friends and family, that first degree people. That's part 
of the anti-fraud that takes place. These are tools that are 
new but can be incorporated and that people can see who are the 
first-degree investors going in here, and the more percent of 
those that are going in there, the higher trust that you're 
going to have, because those are the people that know and 
understand the entrepreneur, the investor--the entrepreneur, 
the idea, and the business model.
    Mr. McHenry. So, you know, in terms of a small group of 
folks like on an individual basis, you--do you have this belief 
that you can defraud five people but it might be more difficult 
to defraud 50,000 people? Is that your mindset?
    Mr. Neiss. So I started a company here based in Washington, 
DC, called FLAVORx, and we flavored medicines for children. And 
I went the traditional route of raising money from people, and 
you know what, it wasn't easy. You have to talk to a lot of 
people about what it's that you're trying to do, and I probably 
could have taken advantage of a small group of people, my 
closest friends and family. I don't think I would have done 
that, counterproductive, but the more people I spoke to, the 
more people I had to convince, the harder it was. It's the 
nature of the beast.
    Mr. McHenry. Mr. Lynn, is that your view?
    Mr. Lynn. Absolutely. The wisdom of the crowds is a very 
powerful thing, both in terms of vetting out fraud, sniffing 
out the Mafia broker/dealer, as well as being able to make good 
business judgments about the businesses.
    One of the key features of our platform--and I think this 
is true of most platforms like ours--would be that, you know, 
although we do run certain checks, and although there is an 
intermediary process, we rely on the investors and the 
investors voting with their checkbooks in 200, 300, 500, 1,000 
people at a time to make judgments. We think that's 
tremendously powerful, and it's--you know, the discussion 
earlier about crowdsourcing in general, it really is a big part 
of the power of crowdsourcing.
    Mr. McHenry. Mr. Bullard, in terms of the functionality of 
this, if you have registered intermediaries perhaps at a 
reasonable cost basis to do it with some oversight, would 
that--is that more palatable to you? Is that--you know, how 
would you structure crowdfunding? If we said--what if the 
President's plan said, you know, to raise up to $1 million and 
you have a limitation on a percentage of annual income, or--
what would that look like? What would that dollar amount of 
limitation on the amount you could raise, the limitation on the 
individual, if you believe in that, if you think that's right, 
how would you structure this thing if you were designing not 
just the legislation but the rules for the SEC? Just walk 
through that with us, if you would, indulge me with that. If 
you don't wish to, I mean, I understand.
    Mr. Bullard. When asked to, you know, rule the universe, 
I'm always happy to.
    The first thing I would do is to create two tracks. One I 
would call the de minimis track. Eliminate virtually all of the 
regulation at the registration reporting level and agree on 
what the amount--we're going to allow somebody to blow $250 on 
a dream, and even if it's a scam artist, we're just not going 
to go there with registration and reporting. And as you pointed 
out, we do that in commercial environments all the time. People 
lose money that way in lots of difference scenarios. There's 
nothing about securities market that I think justifies changing 
that.
    It's important to keep it on a separate track to protect it 
from all of the burdens that should be applied when it's 
something other than de minimis. So then I would say, okay, 
let's do our traditional analysis. Using intermediary for 
efficiency reasons that Meredith was describing, they can on a 
one-time basis incur the fixed cost of compliance that can not 
be distributed to all of the crowdfunders. So there is no other 
way to really effectuate true crowdfunding unless you have that 
centralization of fixed cost.
    Then I would say, what's your issuer exemption? If you have 
the accredited investor standard under 506, nothing new is 
needed for the broker/dealer, but if you have something, say, 
like your bill, then what I would add to it would be, okay, you 
want to be a broker/dealer that sells these kinds of issue or 
securities, here are things you need to do it. And audit was an 
idea, but I question whether an audit is going to be feasible 
for somebody raising only $10,000.
    I think the quiz idea is an interesting one because it 
really goes to--not the--I don't think it goes to the 
sophistication of the investor. I think what it goes to is the 
expectations of the investor, and social policy is ultimately 
driven by whether when people lose their shirt, they feel that 
you should have prevented it from happening. That's an 
important aspect of social policy.
    So I also like the idea of the wisdom of crowds. Just to 
give an example, the wisdom of a crowd assumes that you have a 
rule in place that requires what they're apparently doing, 
which is you have to get a minimum number of people to get to a 
minimum amount. I like those kinds of innovative approaches to 
achieving compliance in a different way from the way the SEC 
really even thinks about it. But the point is, that has to be a 
rule because if it's not a rule, the person is going to go in 
not subject to the wisdom of crowds, and only gets to $3,339 
and then will put it in a bank account somewhere and disappear 
off the Internet.
    And as far as the ability to commit fraud on the Internet, 
I mean, I wish that the SEC's Internet fraud person, for which 
they have a specific office, were here, because they would just 
flatly contradict what we're being told about what goes on in 
legitimate Internet-based marketplaces. The amount of fraud 
that it's being used for is rampant. It's the ideal vehicle. If 
I were trying to create a fraud, I would love the opportunity 
to use the Internet to do what some of the proposals that are 
on the table to do, because that's precisely the way to raise 
millions of dollars from 50,000 people.
    Mr. McHenry. So why don't we simply from--for securities 
purposes ban the use of the Internet?
    Mr. Bullard. Because the Internet is also an incredibly 
valuable tool for raising capital.
    Mr. McHenry. Okay.
    Mr. Bullard. So what you do is just--you have only portals 
that have satisfied certain requirements being the places where 
you can do this, and you're also putting the responsibility on 
the portal, slash, broker/dealer, which is the optimal from an 
efficiency point of view to place responsibility. But the 
problem is broker/dealers will unite and say, oh, we don't want 
this responsibility. And that's what you're hearing from Ms. 
Mauriello. It's an institutional difference where they would 
rather have the issuers bear that risk but it's not efficient.
    Mr. McHenry. Ms. Mauriello, I'll let you respond to that.
    Ms. Mauriello. Sir, I think something that has come up is 
the wisdom of the crowds for this protection and how that works 
versus broker/dealer. One slight variation that we have on 
that's around the qualification of purchasers. So what made us 
feel very safe in our issuers and purchasers is that everybody 
knew each other. This was truly communities. And so I think 
there is a variation on crowdfunding, which is community 
funding, which is what we instituted, where you had to verify 
as the issuer when you invited the purchaser, I do know you and 
I know you in this way; we went to school together. And the 
purchaser had to verify, yes, we did go to school, I know about 
your character, I know about your acumen, and then you were 
doing the investing. At no point did we allow for the general 
public or for strangers to be able to invest.
    So that's how we got around--not how we got around but how 
we addressed in most part this fraud issue. We also went 
through background checks, which Mr. Neiss has recommended, but 
the fact you actually--both parties know each other I think is 
the most important starting place, and then you can grow from 
there on reputation.
    Mr. McHenry. If a fee structure were similar to what Mr. 
Lynn discussed--and granted, the pound-to-dollar conversion 
changes that slightly, but not to a great degree. Let's say 
it's a $10,000 registration with SEC. Is that something 
bearable?
    Ms. Mauriello. Sure. It's not the upfront costs that are 
problematic at all. It's the ongoing due diligence requirements 
and ongoing compliance requirements that are necessary for the 
small deals. So I would have no problem paying an upfront fee. 
That's the nature of fund-raising and making that happen. But 
it's how much due diligence I'm responsible for, for even the 
smallest, de minimis, if you will, deals that are happening on 
the other side.
    Mr. McHenry. Okay.
    Mr. Bullard. If I could add just one point. Ms. Mauriello 
is exactly right about the burdens of broker/dealer regulation 
in the United States. Mr. Lynn pointed out one of the 
differences in the U.K., that we just don't have the 
flexibility to say, well, let's see what you're actually doing 
here, and regulate as a broker/dealer on that basis. It's 
pretty much an all-or-nothing system, in contrast with the 
regulation of exchanges.
    The SEC has been very innovative. You haven't heard anybody 
complain about being treated as an exchange which is--the same 
kind of issue arises with respect to being a broker/dealer 
because there is an SEC exemption that applies.
    So what--the solution to Ms. Mauriello's problem and Mr. 
Lynn's problem is to have more sensitive broker/dealer 
regulation that says, well, if you're only doing this and this 
is your business model, this is what we want you to do in 
return, especially if--and this is key--if the custody of 
assets component is removed from their responsibility, then you 
have eliminated a huge amount of broker/dealer regulation.
    It's my understanding all of these models put custody 
somewhere else, and custody is the root of many problems with 
fraud; custody, meaning the person who actually holds the 
dollars. That was the Madoff problem. That's really the problem 
with many broker/dealer abuses.
    Mr. McHenry. You know, this question of fraud, though, is 
interesting because, Mr. Bullard, I was going to respond to you 
before I recognized Ms. Mauriello, because the idea that the 
Internet is a perfect conduit for fraud. Well, let's be honest 
about it, let's shoot straight. Taking advantage of one person 
is much more--you're much more able to do that rather than take 
advantage of 1,000 people.
    I mean, is that--because the example I would use is the 
eBay. You have the exchange of very valuable goods, and 
individuals get to look at that seller and that seller's 
recommendation and all the information about it. So you have 
some confidence with certain people, there is no confidence 
with others, and the thing shakes itself out; versus the 
individual who, in a parking lot, purchased an iPad that turned 
out to be a piece of wood. Right? I mean, so fraud does occur. 
I mean, we have had extensive--you know, the SEC has been 
around for 80 years and provides a wonderful function, 
wonderful amount of safety and security and disclosure and all 
of that, but we also had Madoff and you also had individuals 
following Madoff that submitted information to the SEC. So 
there is some wisdom in crowds. There is some wisdom in crowds.
    But to the question of--that you mentioned before which 
is--you know, is the SEC there to mandate disclosures or to 
prevent dumb people from doing dumb things, you know, for being 
taken advantage of from fraud which is a larger ideological 
question, and you mentioned it in those terms. I think that's 
reasonable.
    I've got a couple of other questions I want to hit, and I'm 
not sure if we have the full--ranking member from the full 
committee returning, but I want to make sure he has an 
opportunity to ask questions if he does.
    So you all have different approaches. So how important is 
it for the SEC to create flexibility and recognize the 
different models? All have some valuable attributes. We will 
start with Mr. Bullard and work backward.
    Mr. Bullard. Again, just--I've been using too much time 
already--just again to reiterate, I think the two-tracks 
approach, one of them being a de minimis approach, is the way 
to really move the ball on this and make progress, at least for 
those who are more into the kind of original crowdsourcing 
approach where it's almost a form of social activism where you 
have the investing going on.
    And then, second, I think we've got to look at this as an 
intermediary issue for efficiency reasons so that you can allow 
crowdsourcing to maximize its potential. You've got to place 
the burdens on the portal, on the central point, and then you 
have to look at the issue where--the burdens you want to 
relieve issuers of. You then have to convert them into a 
broker/dealer context and figure out what do we need to replace 
those with that broker/dealers can do much more efficiently and 
do better?
    And what you're hearing is a description of models that 
they have chosen to adopt that work very well. I do wish the 
SEC would be much more creative at looking at the kinds of ways 
that eBay and these Web sites establish trust and confidence 
that are not really reflected in the securities laws at all.
    Mr. Migliozzi. The way I see this is that I believe that 
having this wide open would allow small businesses absolutely 
to--where you have a possibility of, let's say, going to an 
SBA. It's almost impossible to get a loan from an SBA for a 
small up-and-coming business. This would allow you that access. 
I truly believe that we need to maintain some openness on this. 
Transparency is key, I will have to say that. Constant 
communication is key, and you will end up with--there's no way 
to prevent for absolute fraud. There's going to be some cases 
that are going to slip through, but I truly do believe that 
transparency is absolutely something that will keep clear on 
what we need to do.
    Mr. Neiss. Listen, fraud, investor protection, and capital 
formation were the three things that we looked at at our August 
1st symposium that we held in San Francisco where we brought 
thought leaders together, lawyers, professors, all interested 
parties, even some crowdfunding sites, to work out our 
framework in the startup exemption. That literally crafts the 
rules under which another exemption, a different--like a rule 
507 that would allow this to happen, and it addresses all of 
these points. So it's in my written testimony.
    Mr. McHenry. Thank you.
    Mr. Lynn. I think in answer to the question about the need 
for a flexible form of regulation, absolutely. As I say, we 
have benefited I think from the flexible approach that the FSA 
takes, and I have no doubt that there's a way--I don't know 
what it is, but there's got to be a way to design some form of 
intermediary regulation that's not as burdensome as broker/
dealer, but that nonetheless addresses a lot of these issues. 
And I said in my testimony, I do support some level of 
intermediary regulation. I think it is and can be the most 
effective way to make this market work.
    I would add one quick other point in response to Mr. 
Bullard. In terms of having a separate regime specifically for 
de minimis investments, if when we're talking de minimis we're 
talking about $100 or $250, don't bother. I mean, there's just 
no point in putting it in place. The market will never 
function. Deals won't get done, and we're all wasting our time. 
If de minimis is $1,000, $5,000, $10,000, I'm not sure that I 
support that, but it becomes a little bit more feasible. But if 
we're really expecting crowdfunding platforms to function on 
the basis of $100, $250 caps, it's a waste of time.
    Mr. Bullard. Even though they're already functioning in the 
debt markets on precisely that basis?
    Mr. Lynn. It's simply not going to happen for equity 
investments and startups. People aren't going to be investing 
that small of an amount. It's very different with peer-to-peer 
lending when you have constant returns and a constant cycle of 
interest payments. There will be--I should say--I should 
clarify there will be a lot of people who will invest at that 
level, just not a sufficient number in any given investment, 
given the nature of equity, given the importance of high upside 
versus, you know--you know, high upside versus losses in those 
cases. You know, the deals just won't get completed. We've done 
a lot of research around it, and that's what we'd back.
    Ms. Mauriello. And I would concur at that point for what 
it's worth, and I would add two more that haven't been 
mentioned already about some flexibility in rulemaking which 
would be very useful.
    The first one, which is in the bill that you proposed, is 
national preemption, and although we have automated all the 
State-by-State laws, it's extremely difficult to build a 
scalable platform to facilitate these things if all of the 
States can put in their own laws on top this. So I very 
strongly advocate and support what you said about national 
preemption.
    And secondarily, the most important thing for a lot of the 
businesses that are using these functions, that they can raise 
more capital later, as you said. This is not the end-all, be-
all to capital formation. This is step one. So ensuring that 
the rules that are put in place play well together with the 
other rules.
    So, for example, if you're doing a 504 raise and you can 
only raise up to $1 million and you want to raise a VC round 6 
months later, you can't. You have to wait that appropriate 
period of time. So I would encourage that to be taken into 
account with rulemaking as well.
    Mr. McHenry. Okay. Ms. Cross, let me state the question in 
a different way because I understand the limitations you have 
as an employee of the SEC, and so I know it's a unique 
position, but you've always done very well testifying before 
Congress and being forthright, you know, based on those 
constraints, and I do appreciate that.
    So is the SEC currently looking at recognizing the 
different models in terms of broker/dealers, you know, that 
type of model, and providing some level of flexibility?
    Ms. Cross. What I would say--and I appreciate your kind 
remarks. Thank you. What I would say is that at the staff 
level, as we've been thinking through what would be the best 
way to advise our Commission, we've talked about the fact that 
there may be a need to have scalable regulatory approaches and, 
frankly, to think about this creatively.
    So, yes, from the staff level perspective, we've been 
having meetings pretty regularly recently to talk through what 
would be the safest way to roll this out if the Commission were 
to decide that it wanted to do it on a cost-effective basis, 
and questions around--depending on what the role is of the 
intermediary, could you make the regulation of it scalable so 
that it's cost effective?
    Mr. McHenry. Have you looked at the FSA model in Great 
Britain?
    Ms. Cross. I read all about it last night, and I thought it 
was fascinating actually, and I look forward to discussing it 
with Mr. Lynn. I took his card and I think it will be very 
helpful to hear what the experience is there. I think that's a 
fascinating approach. It gives me less pause than the idea of 
having--what really does scare me is the idea of people just 
opening up sites, stealing people's money, closing the sites, 
and you know, they're not even in our country, they're 
someplace else, and set up fake businesses; and everybody, you 
know, puts in their several hundred dollars and it's just gone. 
I think that would be a real shame and would tar this market, 
and so the approach that the--that he described for the FSA 
sounds quite interesting.
    Mr. McHenry. Even with that great diligence provided by the 
SEC, fraud still does occur, and so, you know, I think it's 
important the SEC keep in mind the cost-benefit analysis of 
potential lost profits and lost opportunities at the same time. 
But you know, is there--well, what are the SEC's regulations on 
peer-to-peer lending?
    Ms. Cross. First of all, I need to start by saying that I 
used to represent one of the two large peer-to-peer lenders 
before I came to the SEC. So I'm recused on talking about 
particular peer-to-peer lenders.
    The regulations that are currently being complied with by 
the peer-to-peer lenders require that they file registration, 
same as to register their securities that are backed by the 
notes that come from the individual borrowers, and I believe 
that they're not regulated as broker/dealers. I believe that 
they--there are alternative trading systems that are associated 
with the peer-to-peer lenders where the members can trade the 
notes and that the ATS is--is run by a broker/dealer. But the 
site itself, I believe the money runs through a bank; people 
put their money in a bank, and so there isn't any concern that 
the money would be stolen, and that's how it's done.
    Mr. McHenry. Okay. And so that's to Mr. Bullard's point of 
who actually possesses the assets in the transaction.
    Ms. Cross. Right. It's in a bank is my understanding.
    Mr. McHenry. Okay. And so that model is different than a 
broker/dealer model for that peer-to-peer lending site or 
account?
    Ms. Cross. That's right. They're not--they're not 
registered as broker/dealers is my understanding. It's been 2 
years since I've been back to the Commission. So I have not 
paid attention to what they've been doing lately. So that was 
what the model was in the past.
    Mr. McHenry. Mr. Lynn, you mentioned something earlier that 
I wanted to touch on, which is you said that larger investors 
should be permitted to invest alongside smaller investors. Why? 
Why do you think that's worthy of beneficial proffer?
    Mr. Lynn. Well, getting to the point I made about the 
problem with the de minimis exemption, the key here is if we 
think crowdfunding is a good thing and if we would like to see 
these platforms function effectively in the market, deals have 
to get completed. And I'm operating under the assumption that 
most platforms will work on an all-or-nothing basis as ours 
will. It's not going to be very appealing to investors to risk 
putting a few hundred dollars into a business and then finding 
that a business can't do anything because it didn't raise the 
rest.
    So assuming that these are $50,000, $100,000, maybe more, 
250, 500 capital raises, they need to get completed for the 
businesses to be able--for crowdfunding platforms to be able to 
function. And our view, based on our research, is that the way 
they will get completed will be through a mix of high volume of 
smaller investors, alongside a number of larger investors being 
able to invest $1,000, $5,000, $10,000, potentially even 
$50,000. And what you will see in this spread across--and you 
do see this to some degree with peer-to-peer lending already, 
but we think it will be more pronounced given the nature and 
appetite for risk in the equity markets--in the private 
equity--private companies.
    We think that the way that deals will get done and the only 
way that they will get done is if you have some large investors 
in there. As I said in response to the ranking member earlier, 
you could set up a bifurcated system if you wanted to, but 
there isn't really a whole lot of benefit in doing so, and it 
adds additional administrative burden.
    And in fact, by having larger investors come in on our 
platform, they're going to go through the same--the exact same 
qualifications, the exact same screening that our smaller 
investors do. So, if anything, they get an additional level of 
protection.
    Mr. McHenry. Does the President's proposal limiting it to 
$1 million raise--does that provide significant investor 
protection?
    Mr. Lynn. No. I mean, I don't know that it necessarily 
does. I think in terms of, you know, switching from the size of 
investment or investor to the size of raised per business, it's 
difficult for me to foresee a whole lot of online crowdfunding 
successes at much above $1 million. It's not to say that they 
won't happen. Certainly, the PBR case is a great exemption and 
there will be others. Our view is that the sweet spot in this 
market, you know, is at hundred--in Britain 100,000 pounds or 
less, here maybe $100,000 or 250- or less. And that that's 
partially because that's where, you know, once you get above 
those levels, that's where venture capitalists become more 
active and there are a lot of other routes to capital. So we 
don't see a tremendous amount of detriment to a $1 million cap, 
but I'm not sure I see the advantage to it either, necessarily.
    Mr. McHenry. Ms. Mauriello, do you see it the same way?
    Ms. Mauriello. I would agree. Our sweet spot is around 
$50,000, and again, it's two different markets. I do think 
there's going to be some really outstanding cases. Eline 
Kickstarter is an outstanding case of raising $1 million or 
more and I applaud those and those are wonderful, but I do 
think the bulk of the market is going to be in that of $50,000 
to $100,000 range.
    Mr. McHenry. Okay. Mr. Neiss.
    Mr. Neiss. All I want to add to that is that I agree that 
it's the $50,000 range, but I think the whole point of having 
the million dollar in there is if you're successful at $50,000 
and that's your proof of concept and you need to go out and 
grow it from there, you can go back and show the crowd what you 
did with that $50,000, be held accountable to that $50,000 in 
an open, transparent platform, and then go out and raise 
$250,000 under this framework, up to $1 million, to really get 
it going. And I think the most critical thing is, the most 
successful companies that come out of this will be the breeding 
grounds for the VCs and the private money.
    Mr. McHenry. Okay. So to go right back through the three of 
you as well. The limitation, 10 percent of your income or 
$10,000, do you think that's wise--a wise limitation? It's the 
President's proposal, which is also in the legislation that I 
filed yesterday.
    Ms. Mauriello. Absolutely. I think it's very wise to have a 
limit there. I would propose that the limit on percentage is 
going to be more protective than the dollar limit. The dollar 
limit is going to be outdated very quickly and constantly need 
to be updated, whereas the percentage limit will always hold.
    And I agree with Mr. Lynn--we've seen the 80/20 rule in 
place--that you do need to have a few investors who are going 
to carry the bulk of this, and they might be investing more 
than $10,000 if that's less than 10 or even less than 5 percent 
of their net worth.
    Mr. Lynn. I agree 100 percent. I think that a percentage-
based limitation is fine. Our own is 20 percent of the 
investor's net worth. An aggregate across the platform, 10 
percent of income, I think that's all arguable. I don't see the 
value and I see a lot of detriment in a dollar limit.
    Mr. McHenry. Okay.
    Mr. Neiss. We're in favor. We actually had it in our 
exemption initially, and we took it out because we thought the 
self-reporting on it was just--we left it up to the person to 
be responsible with what they wanted to invest.
    Mr. McHenry. Mr. Bullard.
    Mr. Bullard. Yeah, I just--I think Mr. Lynn just 
misunderstands my proposal.
    Mr. McHenry. No, no. I wish you to answer the question I 
just proposed, which is the $10,000 or 10 percent of your 
income cap. Do you think that's sufficient or appropriate?
    Mr. Bullard. No. I would take--I would draw a paternalistic 
line that someone living below the poverty line not being 
allowed to put $1,000 or $1,500 into an offering over the 
Internet without substantial additional protections through an 
intermediary platform other than those just voluntarily adopted 
by the firm. But I would draw an income level--maybe it's 
$50,000. I think it's--I agree completely with the structural 
absurdity of the current accredited investor standard. We can 
fix that, but going all the way down to say, you know, persons 
with $10,000 in income, I think that's a mistake.
    Mr. McHenry. Okay. Mr. Migliozzi, how does it make you feel 
when these three crowdfunders to your right say that, you know, 
it's going to be about $50,000 to $100,000 you can raise, and 
with an idea you had, you got $200 million of commitments.
    Mr. Migliozzi. Two hundred eighty-two million.
    Mr. McHenry. Oh, 282, I'm sorry.
    Mr. Migliozzi. Okay. This is--this particular case is 
obviously a think big with, you know, with crowdsourcing a 
brewery. I think limitations is going to limit business growth 
on the amounts. I think that having the opportunity to allow 
businesses to be able to get that brass ring, go a little bit 
further, those opportunities should be there. I don't see why 
we would want to artificially hold back entrepreneurs from 
getting from point A to point B and then be able to put 
themselves into the larger investment market at some point. So 
I would say that in my opinion, obviously, think bigger.
    Mr. McHenry. Okay. In terms of final, you know, wrapping up 
here, just so everyone--for planning purposes, in terms of what 
the economic impact would be if we followed the President's 
proposal, you know, can you go through and just give me your 
estimate? We'll start with you, Mr. Bullard.
    Mr. Bullard. Well, yeah, I think you would see a 
substantial increase in fund-raising over the Internet under 
that approach. There's no question it would assist capital 
formation. It would give investors more options than they 
currently have, and it would be a kind of liberalization that I 
think would be a good thing to some extent. But I think it also 
would, as described in his proposal, which is this unadorned 
$10,000 limit, it would open the door to a substantial amount 
of fraud. I think it would inappropriately sort of eliminate 
any kind of cutoff as to the sophistication and/or income of 
the person investing in unregistered securities.
    Mr. McHenry. Okay. Mr. Neiss.
    Mr. Neiss. I just think preventing investments doesn't 
equal preventing fraud, and the only protection that we can 
give is an informed investor, and that's going come through 
education in an open, transparent platform. I think when we get 
the capital flowing based on our projections, we can create 
500,000 companies in the next 5 years and employ 1.5 million 
jobs--new jobs.
    Mr. McHenry. Mr. Lynn.
    Mr. Lynn. I mean, in terms of economic impact, I can just 
tell you our estimates for Britain, which you can then multiply 
by five, based on population, and maybe assume a slightly 
higher entrepreneurial appetite here. You know, in Britain we 
plan at scale to be able to see 1,000 to 2,000 new businesses 
funded per year. Of those, we assume that somewhere between 20 
and 40 percent will actually turn into something and create 
some number of jobs. And you can work backward from there to 
think about the sort of economic impact, and that's our 
platform alone. There will be other competitors out there, 
other businesses starting.
    We see a vast level of nascent entrepreneurship in Britain, 
in Europe, and the United States and around the world where 
people would love to start a new business, have value-creating 
ideas, but don't have the access to the very first capital they 
need. And we think that platforms like this can help them 
overcome that hurdle and be absolutely transformative for an 
economy.
    Mr. McHenry. Ms. Mauriello.
    Ms. Mauriello. I absolutely agree. One of the statistics 
that got us most excited about the potential for change in this 
industry is that over $100 billion currently transacted between 
friends and family informal investing networks every year. It 
is the second most common way of starting your business after 
your personal credit card, which you mentioned yourself.
    So I see a tremendous potential to both putting more 
protections on that market. Currently it has no protections. 
Those are checks that cross the dinner table, that nothing's 
happening around and growing at substantially the capital is 
there. It just needs to be accessed.
    Mr. McHenry. Thank you all for your testimony. I do 
appreciate it. It is so helpful in forming policy. There is 
some give and take here, but I think the input has been 
absolutely fantastic and unfortunately you're here on one of 
the mornings where Congress had about 20 different things going 
on. And so that has been the attendance question here this 
morning.
    The subject matter is fascinating, absolutely fascinating. 
I look at my father's example where he had a great idea and a 
business partner. He had five kids and he had a garage in the 
backyard. And so he's looking for money to feed those five 
kids. He had an idea with his business partner, who also had 
five kids who was looking for money too. The only way they 
could get lending was through that new invention called the 
credit card. And I still have my father's credit card that he 
founded his business on. Today my brother owns that business 
and runs that business with my father's business partner and he 
employs about 400 people. That is the beauty of innovation and 
small business.
    We want to make sure that those folks have opportunities to 
take their idea from the dinner table out to the markets. And 
so much of the focus and discussion has been about the 
accredited investor. You are talking about the folk, the guy--
Mr. Bullard, in your testimony you mention this and I certainly 
appreciate that, I very much appreciate it. You have a million 
dollars net worth, you're an accredited investor so you have 
great access to startup companies. So Facebook, a lot of these 
tech companies had these folks that had access to it, whereas 
the average investor, even the superior investor who doesn't 
have that high net worth doesn't have that same opportunity.
    I want to make sure, and it's my thought to democratize 
this process, to give the small investors the opportunity for 
that upside potential, not simply to make a contribution to a 
worthy charity over the Internet, but to get the upside in this 
and that's the point of my legislation.
    Now the structure of this I think is the point of the 
discussion today, to make sure we have a proper structure so 
you can root out fraud to the best of our abilities. But making 
sure that investors have information and access to make an 
investment are both very worthy things that I would hope that 
the SEC would look diligently at and we intend here in Congress 
to move forward on that as well.
    Thank for your time. If you have additional remarks, you 
may submit it for the record. And Members will have 7 days to 
submit questions for the record and comments for the record.
    With that, the committee stands adjourned.
    [Whereupon, at 11:45 a.m., the subcommittee was adjourned.]

                                 
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