This post is part of the capital markets open letter project by MBA students at Presidio Graduate School.
October 26, 2011
An Open Letter to Mary L. Schapiro, SEC Chairman
RE: Support for Proposed Crowdfunding Exemptions
Dear Chairman Schapiro,
We are Presidio Graduate School MBA students working with small businesses and organizations dedicated to fostering the growth of start-up firms. We are writing in support of the proposed crowdfunding exemptions that would increase access to capital for small firms and social ventures and provide more people with the opportunity to invest in such businesses. As entrepreneurs looking to build businesses and contribute to our local economies, we are interested in having increased access to capital from unaccredited investors who are willing to contribute funds in smaller amounts. As investors, we have also experienced frustration from the lack of opportunities to fund local community businesses and emerging sustainable companies.
Small businesses are the backbone of America’s employment and essential to the recovery of our economy. Their growth depends on access to capital. In the wake of the financial crisis, bank loans have become increasingly difficult to obtain. Securing equity financing is even more challenging due to onerous and costly securities regulations. The result is billions of dollars of unmet capital needs every year.
Community-based businesses and social ventures face additional obstacles to attracting capital, as their low growth models do not appeal to traditional angel and venture capital investors. Meanwhile, Main Street’s interest in funding these types of businesses is on the rise, as evidenced by the growing popularity of donation-based and no-interest loan funding via websites like Kiva and Kickstarter. Loosening the restrictions on small scale equity investment for the nearly 99 percent of Americans who do not qualify as Accredited Investors would draw even more support to these small businesses by allowing investors to share more directly in the value being created.
While the aim of the Securities Act of 1933 to protect investors from fraud remains a worthy goal, the act requires a revamp for today’s wired world. The current regulations do not sufficiently recognize that physical boundaries are no longer the sole determinants of community. Nor do they recognize that the information necessary to vet potential investments is available at the fingertips of all educated investors, regardless of personal income or wealth. While it is impossible to completely eliminate fraud, there are more mechanisms available today to minimize and identify fraud than ever before.
After reviewing the various proposals, comments, and testimony, on crowdfunding exemptions, we have focused on a few basic recommendations.
There should be two maximum limits for the investment amount per individual. The first would max out at $1,000, and no income requirements or verification would be required. For individuals that want to invest more than $1,000, there could be an upper limit of $10,000 subject to minimum income verification. These limits would protect investors from losing more capital than they can afford. We also recommend strict verification of identity for those raising capital and limits on the total amount of investment any firm can seek in a given year, up to $1,000,000.
In addition, we recommend regulatory oversight of the online platforms connecting these parties. We propose a new category, with separate rules and regulations, to reinforce the anti-fraud mechanism provided by the Securities Act of 1933. Sites should be subject to a less burdensome licensing process than typical broker/dealers. Business which register for funding through online platforms should face a simple registration process standardized across all states.
Finally, the SEC should require that crowdfunding facilitators provide mandatory investor education modules that investors would be required to complete before being able to invest on the site.
Thank you for reviewing our comments on the proposed crowdfunding exemptions. If you have any questions, please feel free to contact us.