[Congressional Record Volume 158, Number 47 (Wednesday, March 21, 2012)]
[Senate]
[Pages S1877-S1879]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
CROWDFUNDING
Mr. BENNET. Madam President, in my townhalls we talk about a lot of
things that are very different from what people argue about in this
place. One of the issues we talk about is the economy. And we talk
about these four lines, as shown on this chart.
The first line is our gross domestic product, the economic output of
the United States of America, which is higher today than it was before
we went into this recession. A lot of people do not know that. We are
producing more than we were producing before we went into the
recession.
Our productivity has gone up dramatically since the early 1990s, as
we have responded to competition from China and India and other places,
as we have used technology to enhance our economic output. We have the
most productive economy we have ever seen.
But we also face some very potentially catastrophic circumstances in
this economy, one of which is that median family income has fallen for
the last 10 years--the first time that has happened in our country's
history.
And the other is that we have 23 or 24 million people who are
unemployed or underemployed in an economy that is producing what it was
producing before the recession happened. That is a structural issue. I
have spoken on this floor about the importance of education in that
context because the worst the unemployment rate ever got for people
with a college degree during the worst recession since the Great
Depression was 4\1/2\ percent. That is a pretty good stress test of the
value of a college education.
The other thing we need to make sure we are doing as a country is
continuing to innovate and drive innovation across the United States
because it is those companies--the ones that are created tomorrow, the
ones that are created next week--that are going to create new jobs in
this country. That is going to drive our median family income up
instead of down.
That is why I am on the floor today to talk about a bipartisan bill,
a bill Senator Merkley and Senator Brown and I have worked on, on
crowdfunding. It is an amendment that I hope will come to the floor. I
hope we can get to a vote. Over the past months, we have worked
together in a bipartisan way on a crowdfunding proposal that would
allow crowdfunding to thrive but would also create an appropriate level
of oversight and investor protection.
We have done something very unusual in this town: we took time to
listen to people. We listened to crowdfunding platforms, entrepreneurs,
and investor protection advocates. Many of them support this bill and
have endorsed this bill. We worked hard to incorporate their ideas. As
a result, we have a bipartisan amendment that has the support of both
businesses and consumer advocates. That is something which does not
happen frequently in this town.
I hope we will have a chance to vote on it. I will urge my colleagues
on both sides of the aisle to see this as a real opportunity to take
one step--not a huge step but one important step--forward to filling
this gap we see, to creating an economy again where rising economic
output also means rising wages, and that rising economic output also
means growing jobs. This crowdfunding amendment is a chance to do it.
It is bipartisan.
I have some letters of support, and I ask unanimous consent that they
be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
National Small Business
Association,
Washington, DC, March 15, 2012.
Hon. Harry Reid,
Majority Leader, Hart Senate Office Building,
Washington, DC.
Hon. Mitch McConnell,
Minority Leader, Russell Senate Office Building,
Washington, DC.
Dear Majority Leader Reid and Minority Leader McConnell:
The National Small Business Association (NSBA) supports the
Capital Raising Online While Deterring Fraud and Unethical
Non-Disclosure Act of 2012 (CROWDFUND Act, S. 2190), which
would promote entrepreneurship, job creation and economic
growth by making it much easier for small companies to raise
capital and get new ideas off the ground. This legislation
represents a reasonable effort to accommodate differing
points of view and to move this important idea forward.
Representing over 150,000 small-business owners across the
nation, NSBA is the country's oldest small-business advocacy
organization and greatly appreciates your leadership on such
an important issue for America's entrepreneurs and small-
business community.
This legislation creates a crowdfunding exemption allowing
a company to raise up to $1 million with reasonable per
investor limits. It also pre-empts state level registration
requirements, which is critical if crowdfunding legislation
is to have a meaningful positive impact. Furthermore, it adds
additional regulations designed to safeguard investors.
Under current law, equity markets are largely closed to
entrepreneurs and small businesses because they are generally
only permitted to raise capital from people with whom they
have a pre-existing relationship or through investment
bankers who demand a large share of the company for their
services. Even private placements (usually Regulation D
offerings) involve high legal fees and generally require that
the offering be limited to accredited investors (those with
incomes over $300,000 or a residence exclusive net worth over
$1 million).
The costs associated with starting and growing a business
are significant. According to the Bureau of Labor Statistics
(BLS), from March 2009 March 2010, only 505,473 new
businesses were created in the United States, the lowest rate
of growth since the BLS started compiling data. This bill
would facilitate job creation, incentivize entrepreneurs, and
promote long term economic growth.
Despite our general support for S. 2190, there are a few
areas where we hope this legislation could be further
improved as it moves forward:
We would hope and recommend that the $1 million annual
limit could be increased to $2
[[Page S1878]]
million in conference. There are many small business ideas
that require more than $1 million to get off the ground.
Although we regard most of the investor safeguards as
reasonable, there are a few provisions that we believe should
be amended, as they may increase legal risk and
administrative costs considerably. In particular, the
provision requiring an explanation of the valuation method
used by the issuer creates substantial legal risk and
uncertainty since in retrospect almost any valuation method
will prove incorrect. It is not clear what ``valuation''
would meet this requirement and protect issuers from
litigation risk given the fact that any valuation is going to
prove wrong either on the upside or, more relevantly, on the
downside.
In addition, the provisions granting the Securities and
Exchange Commission almost unfettered discretion to issue
additional regulations governing crowdfunding could prove
highly problematic. The legislation should contain a
provision limiting this discretion and requiring the
Commission to consider the costs of any additional regulation
and its likely impact on the crowdfunding marketplace.
Small businesses are America's economic engine and are the
most dynamic and innovative sector of the U.S. economy. They
comprise 99.7% of all domestic employer firms, employ
approximately 50% of all private sector employees, and have
created roughly 65% of America's new net jobs over the past
17 years.
NSBA is pleased to support the Capital Raising Online While
Deterring Fraud and Unethical Non-Disclosure Act of 2012
(CROWDFUND Act, S. 2190) and thanks Senators Merkley, Bennet,
Brown and Landrieu for their tireless efforts to improve
small-business capital access. We look forward to working
with you to address the concerns outlined and, ultimately,
together help to enact this critical piece of legislation.
Sincerely,
Todd O. McCracken,
President.
____
SoMoLend,
Cincinatti, OH, March 16, 2012.
Senator Jeff Merkley,
Hart Senate Office Building,
Washington, DC.
Dear Senator Merkley: It is with great pleasure that I, on
behalf of my company, SoMoLend, write to you today in support
of your most recent compromise bill with Senators Brown and
Bennett. As a platform that has been developed to eventually
allow peer to peer lending (debt only), we applaud your
efforts to allow for new small business borrowing
opportunities while also protecting the lender and borrower.
Specifically, we appreciate the language that lifts the
financial limits on investment to be robust enough to support
the borrower industries we serve. Additionally, the new
disclosure/regulatory requirements are robust enough to
provide guidance to a new industry, but will also benefit the
crowd-funding industry in the long-term (as compared to a
possible race to the bottom with a ``no regulatory''
approach). Finally, we believe the disclosure/regulatory
requirements will provide adequate information to investors,
advising of risk but also deterring fraud. Again, this has
long-term benefits to the industry as a whole.
We also recognize a shift from your original bill and thank
you for removing the requirement for audited and reviewed
financials for businesses raising small amounts of money, as
this requirement would have been so cost-prohibitive that it
would have served as a dis-incentive for small business
participation.
While I believe that your legislation is much stronger than
previous bills, I do still have concerns regarding
requirements that do not adequately consider the different
role debt plays in the capital structure, and hope that we
have the opportunity to address these differences in the rule
making process (we appreciate your guidance in drafting
potential legislative history to this effect). We also
believe that the current requirements still take a one size
fits all approach, and we ask that the rule makers consider
the cost/benefit of additional disclosure for very small
offerings. In addition, the existing requirement for portals
to belong to a national securities association provides a
potential obstacle to our industry (time/cost), with no real
benefit, since existing associations do not have any specific
rules for crowd funding sites. We do realize, however, that
our industry will need to quickly form its own self-
regulatory association.
We believe that rule making should permit portals/issuers
to rely on investor representations to comply with funding
limits. Finally, the rule making process with the Securities
and Exchange Commission will take time--we believe that
someone should address what occurs in transition.
Overall, we are very supportive of your most recent
legislation, and we are happy to help in any way to assist in
advocating its passage.
Please let me know if I can do any more to be of
assistance, and we look forward to working with your team to
create an exciting new opportunity for small business access
to capital.
Sincerely,
Candace Klein,
Founder/CEO.
____
Fund Democracy,
March 14, 2012.
Hon. Harry Reid,
Majority Leader, U.S. Senate,
Washington, DC.
Hon. Mitch McConnell,
Minority Leader, U.S. Senate,
Washington, DC.
Dear Majority Leader Reid and Minority Leader McConnell: I
am writing on behalf of Fund Democracy to express my support
for the Capital Raising Online While Deterring Fraud and
Unethical Disclosure Act of 2012 (``CROWDFUND Act''). As the
Act's title suggests, an exemption from registration
requirements for very small securities offerings creates
significant potential for fraud and unethical conduct. The
CROWDFUND Act addresses this concern by providing significant
regulatory relief to very small issuers without unreasonably
compromising the investor protection provisions on which the
federal securities laws are grounded and the long-term
success of the U.S. securities markets has been based.
In particular, I note the substantial improvements over the
crowdfunding exemption contained in Title III of the
Jumpstart Our Business Startups Act (``JOBS Act'') recently
approved by the House. The JOBS Act's crowdfunding exemption,
aptly referred to by Columbia Law School Professor John
Coffee as the ``The Boiler Room Legalization Act,'' removes
fundamental investor protection measures that are essential
to the successful operation of the U.S. securities markets.
Most notably, the JOBS Act would grant broker-dealers who
act as intermediaries in crowdfunding offerings a complete
exemption from registration as brokers. Such an exemption is
grossly overbroad and removes an entire regulatory structure
for precisely the kind of small offerings where experience
has demonstrated a high risk of fraud. In contrast, the
CROWDFUND Act provides a reasonable alternative to broker
registration by permitting crowdfunding intermediaries to be
lightly regulated as ``funding portals.'' These portals would
continue to be subject to essential investor protection rules
while relieving them of regulation that is unnecessary in the
crowdfunding context.
Furthermore, the CROWDFUND Act requires that issuers
provide appropriately limited financial disclosures depending
on the size of the offering, whereas the JOBS Act provides a
one-size-fits-all blanket exemption from providing any
financial information for offerings of up to $1 million. The
CROWDFUND Act also provides regulators with 21-day advance
notice of crowdfunding offerings. In contrast, the JOBS Act
allows for notice with the making of the first offer, at
which point regulatory action will often be too late.
Notwithstanding the CROWDFUND Act's significant
improvements over the JOBS Act's crowdfunding exemption, I
remain concerned regarding the potential for fraud in
crowdfunding markets. I strongly encourage the
reconsideration of the $2,000 investment limit as applied to
low-income individuals and recommend that investments not
exceed the greater of $500 or 5% of income. I also encourage
a thoroughgoing re-evaluation of the operation of the
crowdfunding exemption in practice following the delivery of
each of the SEC reports required in Section 6 of the Act.
In conclusion, I applaud the CROWDFUND Act's reasonable
balancing of the costs of raising capital for the smallest
issuers, and the benefits of adequately protecting both
investors and the integrity of the U.S. securities markets.
Sincerely,
Mercer Bullard,
President and Founder.
____
The Startup Exemption,
Miami Beach, FL, March 14, 2012.
Senator Harry Reid,
Senate Majority Leader, Hart Senate Office Bldg., Washington,
DC.
Dear Senator Reid: We began this process over a year ago
with the goal of creating a system under which entrepreneurs
can raise capital to create jobs. We understand there are
major differences between the House and Senate versions of
the Crowdfunding bills and we desire for the Senate Banking
Committee to have a chance to work these issues out there so
that both Houses of Congress can pass this legislation.
In January 2011, we proposed the regulatory framework,
which is the basis for all the Crowdfunding bills currently
under consideration in Washington, DC. After a year of
dedicated work we are comforted by the fact that the Senate,
House and President understand how important capital is to
our nation's entrepreneurs for innovation and job creation.
The passage of the House Crowdfunding Bill (H.R. 2930),
coupled with the President's very strong leadership and
support was a great demonstration of bipartisanship. The
active debate in the Senate, further reinforces the
commitment to updating securities regulations that were
written at a time when we didn't have the technology to
better enable the free flow of information and investor
protection. Once legalized, Crowdfund Investing (CFI) will
allow a limited amount of community-based capital to flow
into the hands of our nation's job creators and innovators,
while providing prudent investor protections.
We are three successful MBA entrepreneurs having raised in
excess of $100M in venture and private equity capital and
deeply understand the capital markets, and their risks and
rewards. In drafting our framework, we worked hard to balance
the interests of the
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entrepreneur, investor, intermediary and regulator. We
endorsed H.R. 2930, as it is aligned with our framework.
Since then, we worked closely with the Senate to understand
their concerns and work on a bill to include provisions that
can yield bipartisan support while creating an regulatory
environment in which a Crowdfund Investing industry can grow
and succeed.
It is with this in mind that we write to suggest that if
you consider the House version of the bill you consider
adding the following crucial components:
1. Crowdfund Investing intermediaries that are SEC-
regulated to provide appropriate oversight
2. All or nothing financing so that an entrepreneur must
hit 100% of his funding target or no funds will be exchanged
3. State notification, rather than state registration, so
the states are aware of who is crowdfunding in their states.
This ensures they retain their enforcement ability while
creating an efficient marketplace.
Senators Merkley, Bennett, Brown and Landrieu should be
commended for their thoughtfulness in crafting a bipartisan
compromise bill. Passage of Crowdfund Investing legislation
this session will create the American jobs and innovation
that our economy so desperately needs. Please consider taking
up this bill.
Sincerely,
Sherwood Neiss, Jason Best &
Zak Cassady-Dorion,
Co-founders.
____
March 15, 2012.
Senator Harry Reid,
Senate Majority Leader, Hart Senate Office Building,
Washington DC.
Dear Senator Reid: I write to express support for the
bipartisan CROWDFUND Act recently proposed by Senators
Merkley, S. Brown, Bennet and Landrieu.
CrowdCheck, Inc. was formed to support entrepreneurs
seeking crowdfunding by giving them a way to establish their
legitimacy in a field that many have predicted will be
vulnerable to fraud, and to give investors a tool to
recognize and avoid fraud. Our founders include several
business lawyers, and I am a securities lawyer with three
decades of experience helping companies comply with SEC
disclosure requirements. I thus understand the burdens such
regulations can impose on entrepreneurs, and also the
information investors need to make an informed investment
decision. I am therefore pleased to see the careful balance
in the bill between investor protection and burden on the
entrepreneur.
While we have some concerns with respect to interpretation
of certain provisions in the bill, we look forward to working
with the sponsors of the bill to address these. We therefore
urge you to support this bipartisan effort to pass the
CROWDFUND Act.
Sincerely,
Sara Hanks,
CEO, CrowdCheck, Inc.
Mr. BENNET. It moves this ball down the field. I hope it establishes
a model for how we can work together to make sure that we are actually
addressing things I am hearing about in the townhalls and that we are
driving wage growth and job growth here in the United States.
I yield the floor.
The ACTING PRESIDENT pro tempore. The Senator from Mississippi.
Mr. WICKER. Madam President, are we in morning business?
The ACTING PRESIDENT pro tempore. We are.
____________________