[Congressional Record (Bound Edition), Volume 158 (2012), Part 3]
[Senate]
[Pages 3757-3759]
[From the U.S. 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 50 5,473 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 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

[[Page 3758]]

     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 09reports 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 entrepreneur, investor, intermediary and 
     regulator. We endorsed H.R. 2930, as it is aligned with our 
     framework. Since then, we

[[Page 3759]]

     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.

                          ____________________