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  government reform committee with that i want to thank our witnesses for being here and i will begin by recognizing myself for five minutes for an opening statement over hyears into an uncertain economic recovery america's labor and capital markets continue to face unprecedented challenges nearly fourteen million americans remain officially unemployed with an additional eleven 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 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  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 taking 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  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  in the first step to finance their business the difficulty with this is twofold 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 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 regulation for today's economy conventional barriers for raising capital could be a thing of the past  crowdfunding they were able to raise over hmillion in pledges from over five million individuals through social networking sites such as facebook the average pledge was just forty dollars demonstrating the impact of even small donations however the sec shut it down due to outdatedh 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 two thousand nine hundred and thirty 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 socalled 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 got such a great panel i look forward to your 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 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 hpercent 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 i 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 jumpstart 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  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 exempt  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 wh 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 mister 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   so in order to have time for a discussion and questions if could you please keep your opening statement to hminutes 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 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 regulation 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 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  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 the offerings could be observed should securities purchased be freely tradable should websites 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  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 very tight community about three hundred and fifty students so we know each other well after hyears of being in class together and within hhours sixty people in that class said they wanted to put in the one thousand dollars cap that those entrepreneurs had set to invest this seems like a beautiful story but unfortunately their lawyers let them know that this was in possible in their words and when the entrepreneurs pressed as entrepreneurs tend to do they found out that it was quote unquote impossible because those investors were unaccredited we had student debt we did no meet the accreditation requirements the also more people than their lawyers felt could contribute the entrepreneurs pushed and eventually lawyers came back with reg d five hundred and six which would allow thirty five of those investors to contribute that one thousand dollars minimum that answer took hmonths and twenty thousand dollars to achieve that was 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 counsel was regulation d five hundred and four 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 statebystate 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 ten 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 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 fifty four thousand dollars from nineteen 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 fifty thousand dollars from sixteen 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 a 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 brokerdealer 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 brokerdealers 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 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 s 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 one hundred thousand 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 we examined both the u s 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 u s 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  need to be highly burdensome there are categories of regulation currently in existence that small businesses have been able to comply with such as brokerdealer 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  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 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 am both encouraged and excited by the prospect of equity crowdfunding becoming a reality in the u s 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 at the appear before you today and i would 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 time inc five time inc five hundred entrepreneur zachary cassidydorion 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 x 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 exchanged the funding rounds will occur via sec regulated websites 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 one dollar 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 ten thousand dollars fourth because of the size of the crowd and the anticipated small dollar amounts invested we propose eliminating the five hundred investor rule as well as brokerdealer 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 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 forty three vc's and banks so they created a short video on a web site and solicited money via their twitter linkdin and facebook communities they raised over twenty four thousand dollars 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 tshirt kiosk to a larger store but was unable to raise capital through traditional means so she created a video and raised fifteen thousand dollars now she has a standalone store and has hired more employees these are just twohstories but thousands are waiting based on estimates from the sba and the kauffman foundation we believe cfi can generate over five hundred thousand companies and over one hmillion net new jobs over the next hyears 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 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 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 oregon creating campaigns for sneakers sodas sports teams credit cards casinos hotels beer and many 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 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 antifraud provisions that apply to all businesses on the second level securities transactions are subject to security specific antifraud provisions that provide increase 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 securit 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 one hundred dollars or two hundred and fifty dollars the total amount of the offering did not exceed for example one hundred thousand dollars for such de minimis investment amounts registration and reporting requirements should not apply other requirements should be imposed including enhanced requirements for crowdfunding brokerdealers to combat the heightened risk of fraud other types of crowdfunding micro crowdfunding finance macro finance crowdfunding if you will raise very different concerns a ten thousand dollars 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 costbenefit analysis traditionally used to valuate registration and reporting requirements this costbenefit 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  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 fifty dollars 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 five hundred 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 five hundred 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  facebook's two and a half 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 hyears and they are structurally nonsensical a young investor with nine hundred thousand dollars cannot put ten of it in a hedge fund but a retired auto workers with a million dollar portfolio living on say forty thousand dollars a year that the portfolio generates can drop the whole million in a hedge fun 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 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 t 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 will go on to buy a beer this is fun 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 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 or 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 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 two thousand and nine the amount of pledges had exceeded hmillion christmas new year passed i was certain with the new year this would be old news by februaryhnd two thousand and ten over hmillion was pledged what was just an experiment was now taking up far too much of my time with press requests some one hundred and fifty articles written radio interviews by that point there was an interest by media users et cetera 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 at the time of closing buyabeercompany com over two hundred and eighty two dollars million was pledged by over seven million users averaging thirty eight dollars per pledge 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 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 gives 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 mister 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 hminutes 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  requirements for firms raising less than one dollar million with individual investments limited to ten thousand dollars or hpercent of the investor's annual income and raising the cap on many offerings reg a that mister bullard testified 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 w 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 whether it could be crafted so that there could be cost effective crowdfunding exemption that could beh that wouldn't present significant concerns of  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 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 happen without the sec preserving and protecting against fraud i'm not asking you to answer but what's the time frame for the sec to review this recommendation and  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 five hundred 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 chairman mr hlynn make sure i have 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 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 ten one hundred dollars 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 fifty thousand dollars or one hundred thousand dollars on the back of ten dollars 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 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 mo 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 handson 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 offline method of investing as well we want the choice to be there for them 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  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 l 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 securit 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 costbenefit 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 andh then i think it does provide an get the thoughts of all the participants unfortunately we are now heading to the floor mister 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 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 and i quote 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 that is the end of his quote 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 hash he believes that it will be marketing the riskiest most speculative investments to some of the least sophisticated so i would like to hear your response mister mchenry the gentlelady's time has expired we have just enough time for me to get 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 questions and so i will recognize myself well actually i will let the panel answer my colleague mrs hmaloney's question which pertains to fraud 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 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 requirement 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 brokerdealer 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 mister 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 ish 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 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 highrisk highly illiquid form of asset and we think that a wide range of people are capable of and qualify to do so mister 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 mister migliozzi i come from the same position as yourself as far as ebay is concerned i look at state lotter 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  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 bullard the answer to the ebay question which is a good question is really a structural one the answer is that for more than a hundred 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 requirementsh you know unaccredited investors are an assault on the intelligence of americansh 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 goodfaith 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 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 thinkh 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 mister 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 hbullard in your opinion how do we ensure that  we open this areah 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 questionh that concern of fraud mister bullard well i think that the analogy to 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'sh 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  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 goodfaith 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 ten thousand dollars exemption would do without the right kind of restrictions and myh and so the most specific answer would 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  think there are two key points here one in terms of you know the qualification to be allowed to investh and i agree with the previous commentsh and just want to emphasize that you know regardless of what the system has been since one thousand nine hundred and thirty three and regardless of whether we're opening up a broader debate here or not there is a serious sort of over and underinclusiveness 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 yourh 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 mister neiss and i would agree with mr hlynn 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 onetoone 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 thinkh and a third point in an allornothing 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 mister mchenry mr hbullard would you like to respond to any of those is there some way to get some consensus about how we achieve this mister bullard the way to achieve i you first have to start with the member of the mafia who decides to become a brokerdealer 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 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 costeffective way to deal with this because for an individual company raising fifty thousand dollars 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 hpercent 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 fifty thousand dollars that might be the harder question that's just a personal view as to what might be a way forward so would they be brokerdealers ms cross the question of brokerdealer registration requirements depends on what their functions are if theyh 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 mauriello by the department of corporations in california so through that process we did learn a lot from approaching many brokerdealers 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 fifty thousand dollars so the requirements in the compliance that they would need to do as a brokerdealer 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 hmillion or more they were not interested so that's what we're trying to flexible one that looks specifically at exactly what a business is doing and then imposes a series of requirements and regulations on it so farh and i say this as a business that has not yet completed the processh 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 ten and fifteen zero pounds and our ongoing costs would be something like five thousand pounds a year which if compared to our marketing and operating budgets aren't that overwhelming mister mchenry that's reasonable i 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 your experience with this how can we confront this issue of fraud what's the legitimate wayh 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 agreementh 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 thish 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 hmauriello'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 areh 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 mister 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 firstdegree 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 antifraud that takes place these are tools that are new but can be incorporated and that people can see who are the firstdegree 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 investorh the entrepreneur the idea and the business model so you know in terms of a small group of folks like on an individual basis youh do you have this belief that you can defraud five people but it might be more difficult to defraud fifty thousand people is that 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 being able to make good business judgments about the businesses one of the key features of our platformh and i think this is true of most platforms like oursh 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 two hundred three hundred five hundred one thousand people at a time to make judgments we think that's tremendously powerful and it'sh you know the discussion earlier about crowdsourcing in general it really is a big part of the power of crowdsourcing mister mchenry mr hbullard 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  thath is that more palatable to you is thath you know how would you structure crowdfunding if we saidh what if the president's plan said you know to raise up to hmillion 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  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 amounth we're going to allow somebody to blow two hundred and fifty bucks 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 onetime 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 five hundred and six nothing new is needed for the brokerdealer but if you have something say like your bill then what i would add to it would be okay you want to be a brokerdealer 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 ten thousand dollars i think the quiz idea is an interesting one because it really goes toh not theh 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 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 internetbased 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 fifty thousand people mister mchenry so why don't we simply fromh for responsibility on the portal slash brokerdealer which is the optimal from an efficiency point of view to place responsibility but the problem is brokerdealers 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 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 aroundh not how we got around but how we addressed in most part this fraud issue we also went through background checks which mr hneiss has recommended but the fact you actuallyh both parties know each other i think is the most important starting point and then you can grow from there on reputation 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 fundraising and making that happen but it's how much due diligence i'm responsible for for let's see what you're actually doing here and regulate as a brokerdealer on that basis it's pretty much an allornothing 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 ish the same kind of issue arises with to being a brokerdealer because there is an sec exemption that applies so whath the solution to ms mauriello's problem and mr hlynn's problem is to have more sensitive brokerdealer 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 ifh and this is keyh if the custody of assets component is removed from their responsibility then you have eliminated a huge amount of brokerdealer 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 brokerdealer abuses mister mchenry you know this question of fraud though is interesting because  hbullard 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 moreh you're much more able to do that rather than take advantage of one thousand 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 extensiveh you know the sec has been around for hyears and provides a wonderful function wonderful amount of safety and security and disclosure and a that you mentioned before which ish 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 fullh ranking member from the full committee returning but i want to make sure he has an opportunity to ask questions  just i've been using too much time alreadyh just again to reiterate i think the twotracks 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 on the central point and then you have to look at the issue whereh the burdens you want to relieve issuers of you then have to convert them into a brokerdealer context and figure out what do we need to replace those withhthat brokerdealers 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 securit sba it's almost impossible to get a loan from an sba for a small upandcoming 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 withh 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 mister neiss listen fraud investor protection and capital formation were the three things that we looked at at our augusth 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 five hundred and seven that would allow this to happen and it addresses all of these points doubt that there's a wayh 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 brokerdealer 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 hbullard in terms of having a separate regime specifically for de minimis investments if when we're talking de minimis we're talking about one hundred dollars or two hundred and fifty dollars 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 one thousand dollars five thousand dollars ten thousand dollars i'm not sure that i support that but it becomes a 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 peertopeer lending when you have constant returns and a constant cycle of interest payments there will beh i should sayh 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 knowh 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 statebystate 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 endall beall 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 five hundred and four raise and you can only raise up to one dollar constraints and i do appreciate that so is the sec currently looking at recognizing the different models in terms of brokerdealers  know that type of model and providing some level of flexibility ms cross what i would sayh 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 costeffective 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 mister mchenry have you looked at the fsa model in great britain  i read all about it last night and i thought it was fascinating actually and i look forward to discussing it with mr hlynn 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 havingh 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 theh that he described for the fsa sounds quite interesting 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 costbenefit analysis of potential lost profits and lost opportunities at the same time but you know is thereh well what are the sec's regulations on peertopeer lending cross first of all i need to start by saying that i used to represent one of the two large peertopeer lenders before i came to the sec so i'm recused on talking about particular peertopeer lenders the regulations that are currently being complied 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 mister 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 allornothing 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 fifty thousand dollars one hundred thousand dollars maybe more two hundred and fifty five hundred capital raises they need to get completed for the businesses to be ableh 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 some degree with peertopeer lending already but we think it will be more pronounced given the nature and appetite for risk in the equity marketsh 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 o platform they're going to go through the sameh the exact same qualifications the exact same screening that our smaller investors do so if anything they get an additional level of protection mister mchenry does the president's proposal limiting it to one dollar million raiseh does that provide significant investor protection mister 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 one dollar 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 hundredh in britain one hundred thousand pounds or less here maybe one hundred thousand dollars or two hundred and fifty 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 agree that it's the fifty thousand dollars range but i think the whole point of having the million dollar in there is if you're successful at fifty thousand dollars 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 fifty thousand dollars be held accountable to that fifty thousand  open transparent platform and then go out and raise two hundred and fifty thousand dollars under this framework up to one dollar 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 so to go right back through the three of you as well the limitation hpercent of your income or ten thousand dollars do you think that's wiseh 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 hlynn we've seen the 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 ten thousand dollars if that's less than ten or even less than hpercent of their net lynn i agree one hundred percent i think that a percentagebased limitation is fine our own is hpercent of the investor's net worth an aggregate across the platform hpercent 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 mister mchenry okay mister neiss we're in favor we actually had it in our exemption initially and we took it out because we thought the selfreporting on it was justh we left it up to the person to be responsible with what they wanted to invest m or appropriate mister bullard no i would takeh i would draw a paternalistic line that someone living below the poverty line not being allowed to put one thousand dollars or one thousand five hundred dollars 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 levelh maybe it's fifty thousand dollars 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 ten thousand dollars in income i think that's a mistake mister mchenry okay mr hmigliozzi how does it make you feel when these three crowdfunders to your right say that you know it's going to be about fifty to one hundred thousand dollars you can raise and with an 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 mchenry okay in terms of final you know wrapping up here just so everyoneh 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 hbullard mister bullard well yeah i think you would see a substantial increase in fundraising 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 ten thousand dollars 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 andor income of the person investing in unregistered securities  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 five hundred thousand companies in the next five years and employ one five million jobsh new jobs mister mchenry mister lynn mister lynn i mean in terms of economic impact i can just tell you our estimates for britain which 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 one thousand to two zero new businesses funded per year of those we assume that somewhere between twenty and hpercent 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 valuecreating 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 transform 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 access unfortunately you're here on one of the mornings where congress had about twenty 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 four hundred 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 talking about the folk thehguy mr hbullard 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 got great access to startup companies so face book 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 abil 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