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CROWDFUNDING: CONNECTING INVESTORS AND

JOB CREATORS

HEARING

BEFORE THE

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES

AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

SEPTEMBER 15, 2011

Serial No. 112–118

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

(

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

http://www.house.gov/reform
(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND BAILOUTS OF PUBLIC AND

PRIVATE PROGRAMS

PATRICK T. MCHENRY, North Carolina, Chairman

FRANK C. GUINTA, New Hampshire, Vice

Chairman

ANN MARIE BUERKLE, New York

JUSTIN AMASH, Michigan

PATRICK MEEHAN, Pennsylvania

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

MIKE QUIGLEY, Illinois, Ranking Minority

Member

CAROLYN B. MALONEY, New York

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

JACKIE SPEIER, California

JIM COOPER, Tennessee
(III)

C O N T E N T S

Page

Hearing held on September 15, 2011 ..................................................................... 1

Statement of:

Cross, Meredith, Director, Division of Corporation Finance, Securities

and Exchange Commission; Dana Mauriello, founder and president,

Profounder; Jeff Lynn, chief executive officer, Seedrs Limited; Sherwood Neiss, cofounder, FLAVORx; Micheal Migliozzi, managing partner, Forza Migliozzi, LLC; and Mercer Bullard, associate professor

of law, the University of Mississippi ........................................................... 5

Bullard, Mercer ......................................................................................... 62

Cross, Meredith ......................................................................................... 5

Lynn, Jeff ................................................................................................... 36

Mauriello, Dana ......................................................................................... 22

Migliozzi, Micheal ...................................................................................... 62

Neiss, Sherwood ........................................................................................ 45

Letters, statements, etc., submitted for the record by:

Bullard, Mercer, associate professor of law, the University of Mississippi,

prepared statement of ................................................................................... 65

Cross, Meredith, Director, Division of Corporation Finance, Securities

and Exchange Commission, prepared statement of ................................... 7

Lynn, Jeff, chief executive officer, Seedrs Limited, prepared statement

of ..................................................................................................................... 38

Mauriello, Dana, founder and president, Profounder, prepared statement

of ..................................................................................................................... 24

Migliozzi, Micheal, managing partner, Forza Migliozzi, LLC, prepared

statement of ................................................................................................... 85

Neiss, Sherwood, cofounder, FLAVORx, prepared statement of .................. 47

(1)

CROWDFUNDING: CONNECTING INVESTORS

AND JOB CREATORS

THURSDAY, SEPTEMBER 15, 2011

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND

BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 9:34 a.m., in room

2154, Rayburn House Office Building, Hon. Patrick T. McHenry

(chairman of the subcommittee) presiding.

Present: Representatives McHenry, Quigley, Cummings, and

Maloney.

Staff present: Molly Boyl, parliamentarian; Drew Colliatie, staff

assistant; Peter Haller, senior counsel; Ryan M. Hambleton, professional staff member; Christopher Hixon, deputy chief counsel, oversight; Rebecca Watkins, press secretary; Jaron Bourke, minority director of administration; Devon Hill, minority staff assistant; Jennifer Hoffman, minority press secretary; Carla Hultberg, minority

chief clerk; Lucinda Lessley, minority policy director; Jason Powell

and Steven Rangel, minority senior counsels; and Brian Quinn, minority counsel.

Mr. MCHENRY. The committee will come to order. This is the

Subcommittee on TARP, Financial Services and Bailouts of Public

and Private Programs. This hearing is entitled, ‘‘Crowdfunding:

Connecting Investors and Job Creators.’’

It is the practice of the Oversight and Government Reform committee to begin with a mission statement of this committee. We

exist to secure two fundamental principles. First, Americans have

a right to know that the money Washington takes from them is

well spent. And second, Americans deserve an efficient, effective

government that works for them. Our duty on the Oversight and

Government Reform Committee is to protect these rights. Our solemn responsibility is to hold government accountable to taxpayers,

because taxpayers have a right to know what they get from their

government. We will work tirelessly in partnership with citizen

watchdogs to deliver the facts to the American people and bring

genuine reform to the Federal bureaucracy. This is the mission of

the Oversight and Government Reform Committee.

With that, I want to thank our witnesses for being here, and I

will begin by recognizing myself for 5 minutes for an opening statement.

Over 2 years into an uncertain economic recovery America’s labor

and capital markets continue to face unprecedented challenges.
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Nearly 14 million Americans remain officially unemployed, with an

additional 11 million underemployed. And small businesses continue to struggle to access capital despite an endless number of

Federal initiatives.

Fixing this mess will not occur overnight, nor will it be a race

by more government regulation. The purpose of today’s oversight

hearing is simple: In an economic environment in which lending to

job creators and entrepreneurs remains dismal, we must find new

and modern means for capital formation to ignite our sputtering

economy.

An existing and innovative means to connect investors and job

creators is crowdfunding. Many folks have not heard this terminology before, but crowdfunding is essentially the ability of individuals to pool their money in support of a common cause.

Crowdfunding has traditionally taken place in the realm of charity

and the arts, but also online communities and social networking

where it could have a very positive implication for America’s small

businesses and investors.

If crowdfunding sounds familiar because politicians have been

doing it for a few generations now, but it has been called something different. In the 2008 Presidential election then candidate

Senator Barack Obama through small contributions alone raised

over $100 million. Now that is quite advanced crowdfunding. So

this makes sense, if crowdfunding can finance a candidate’s campaign and really show a matter of grassroots support for what you

are trying to achieve, if it could make a difference there, then certainly under the Securities and Exchange Commission we should

be able it permit crowdfunding to empower citizens to invest seed

money for American entrepreneurs and innovators.

During President Obama’s speech last week I was happy to hear

when he said, ‘‘We’re also planning to cut away the red tape that

prevents too many rapidly growing startup companies from raising

capital and going public.’’

The first thing I thought of when he said that was today’s hearing. I thought: Well, of course not, that is not exactly what he is

going to be talking about. The next day when the White House released the details of the President’s plan in bullet point form, I

mean sort of the broad brush of it, he used the term

‘‘crowdfunding.’’ And so it is very timely that we’re having this

hearing, and I don’t think the White House coordinated with my

schedule. But I applaud the President for finally recognizing that

regulatory red tape has kept American startups from raising capital and hiring workers. This has never been a secret.

Unfortunately, news and information travels a bit slower over at

the SEC. Despite recent efforts to relax rules on general solicitation

and quiet periods, overall, the SEC has resisted calls to modernize

securities regulations to meet the needs of today’s economy.

For instance, recent studies show that most startups use lines of

credit, such as credit cards or home equity lines, as the first step

to finance their business. The difficulty with this is two-fold: Fewer

people have access to credit lines or home equity sufficient to start

a business. And second, small businesses using a credit card with

high interest rates, it makes it tremendously difficult to finance a

new business. That’s exactly how my dad started his business.
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But these ideas often don’t make it past the dinner table for

small businesses. We want to make sure that they have this access,

this opportunity to get their friends and their neighbors involved

in this process.

By updating regulations for today’s economy, conventional barriers for raising capital could be a thing of the past. Recently as

2009, two ad executives started a crowdfunding campaign called

buyabeercompany.com to buy Pabst Blue Ribbon Beer Co. Many

folks call it PBR. By illustrating the true potential of crowdfunding

they were able to raise over $200 million in pledges from over 5

million individuals through social networking sites such as

Facebook. The average pledge was just $40, demonstrating the impact of even small donations. However, the SEC shut it down due

to outdated—what I believe were outdated—regulations.

This example and thousands like it highlight the fact that America does not lack the ideas or creativity to get this economy moving

again. It simply lacks access to capital. To rectify this tragedy in

American innovation I introduced the Entrepreneurial Access to

Capital Act, H.R. 2930, yesterday. This bill simply heeds the President’s call to cut red tape for startups and allow everyday investors

to connect with entrepreneurs.

In today’s fast-paced world of innovation and innovators, all

Americans rather than just banks and venture capitalists and 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 such a great panel. I look forward to your testimony.

With that, I recognize the ranking member, Mr. Quigley of Illinois, for 5 minutes.

Mr. QUIGLEY. Thank you, Mr. Chairman. Thank you for calling

this hearing and for our witnesses being here today. We are in

agreement: job creation must be the number one priority of Congress. But for businesses to expand and hire new workers they

need resources, they need capital. Unfortunately, billions of dollars

of capital are sitting on the sidelines because potential investors

aren’t confident enough to invest. Investors are worried of investing

capital when our growth prospects are so uncertain.

As Secretary Geithner said last week, the world economy is in

the midst of a second economic slowdown of this recovery from the

financial crisis. This is why last month zero jobs were created and

the unemployment rate remained over 9 percent.

What this means is that we have to consider any and all ideas

for raising capital to invest in new businesses and hire American

workers. Crowdfunding is one such idea. It is an innovative proposal for raising private capital through the power of the Internet.

Crowdfunding uses small investments from often nontraditional investors to fund startup ventures. This is extremely important because these smaller startups often go unnoticed by bigger institutional investors.

To the extent that crowdfunding can match ready capital with

quality investment opportunities it will be a success. I believe our

witnesses will convince even the skeptics among us that there is
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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 Schapiro, the SEC has a dual mandate to facilitate capital formation and protect investors. In facilitating capital formation, we must ensure that we do not leave investors vulnerable to fraudulent financial products. That’s why the

SEC maintains strict registration disclosure requirements for securities advertised through a general solicitation. In the words of the

Supreme Court Justice Louis Brandeis, sunlight is the best disinfectant.

Exempting securities from these registration and disclosure requirements is a decision that cannot be taken lightly. The key is

finding the balance between the two objectives of capital formation

and investor protection.

Crowdfunding might also expose ordinary investors to a level of

risk that is unacceptable when not accompanied by standard registration and disclosure. The reality is that many of these startups

will fail and cause the investor to lose his or her entire investment.

We have to be careful to ensure that investors fully understand the

risk of investing in these financial products.

My goal today is to find answers to some of these unresolved

questions. What is crowdfunding’s potential for capital formation

and job creation? What is the potential for fraud through

crowdfunding? What common sense steps can we take to minimize

fraud and protect investors? What risk will investors be exposed to

through crowdfunding? And are these risks acceptable? What other

steps can we take to facilitate capital formation and job creation?

I again want to thank the chairman for calling this timely hearing, and I yield back.

Mr. MCHENRY. I thank the ranking member. I’m going to keep

the introductions short since we have such a substantial panel.

Suffice it to say we have an academic, we have folks involved in

crowdfunding, and then we have a representative from the SEC. So

I will go through the introductions and then we will swear you in

and we will get started with opening statements.

Ms. Meredith Cross is the Director of the Division of Corporate

Finance at the Securities and Exchange Commission. Miss Dana

Mauriello is cofounder and president of Profunder—ProFounder,

I’m sorry. Mr. Jeff Lynn is chief executive officer of Seedrs Limited.

Mr. Sherwood Neiss—Neiss, Lord, I’m sorry—is cofounder of

FLAVORx. Mr. Michael Migliozzi is the managing partner of

Forma Migliozzi. He can correct me on that.

Mr. MIGLIOZZI. Forza Migliozzi.

Mr. MCHENRY. Okay, I’m sorry. I have it written down wrong.

But Professor Mercer Bullard is the associate professor of law at

the University of Mississippi School of Law.
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Thank you all for being here. It is the policy of the Oversight and

Government Reform committee that all witnesses be sworn in, so

if you will please stand and raise your right hands.

[Witnesses sworn.]

Mr. MCHENRY. Let the record reflect the witnesses answered in

the affirmative. You may be seated.

So in order to have time for a discussion and questions if you

could please keep your opening statement to 5 minutes. You’ll see

by the lights in front of you, green means go, yellow means whoa,

and red means stop. Whoa is a technical term, I’m sorry to use

that. But we will first begin with Ms. Cross, you are recognized for

5 minutes.

STATEMENTS OF MEREDITH CROSS, DIRECTOR, DIVISION OF

CORPORATION FINANCE, SECURITIES AND EXCHANGE COMMISSION; DANA MAURIELLO, FOUNDER AND PRESIDENT,

PROFOUNDER; JEFF LYNN, CHIEF EXECUTIVE OFFICER,

SEEDRS LIMITED; SHERWOOD NEISS, COFOUNDER,

FLAVORX; MICHEAL MIGLIOZZI, MANAGING PARTNER,

FORZA MIGLIOZZI, LLC; AND MERCER BULLARD, ASSOCIATE

PROFESSOR OF LAW, THE UNIVERSITY OF MISSISSIPPI

STATEMENT OF MEREDITH CROSS

Ms. CROSS. Chairman McHenry, Ranking Member Quigley and

members of the committee. I’m pleased to testify on behalf of the

Commission on the topics of crowdfunding and capital formation.

The SEC’s mission is to protect investors, maintain fair, orderly

and efficient markets, and facilitate capital formation.

As you know, Chairman Schapiro and I appeared before the

Oversight and Government Reform committee in May to testify on

the topic of capital formation. We noted that a critical goal of the

SEC is to facilitate companies’ access to capital while at the same

time protecting investors. Companies of all sizes need cost effective

access to capital to grow and develop. And the Commission recognizes that any unnecessary regulations may impede their ability to

do that.

At the same time the Commission must seek to ensure that investors have the information and protections necessary to give

them confidence they need to invest in our markets. Investor confidence and the fairness and honesty of our markets is critical to

capital formation.

To further our goals a few months ago Chairman Schapiro instructed the staff to take a fresh look at some of our offering rules

to develop ideas for the Commission to consider that may reduce

the regulatory burdens on small business capital formation in a

manner consistent with investor protection. The staff is in the process of conducting that review, and in doing so, is considering the

regulatory questions posed by new capital raising strategies, including crowdfunding.

Interesting crowdfunding as a capital raising strategy that could

offer investors an ownership interest in developing business is

growing. As you know, proponents of crowdfunding are advocating

for exemptions from Securities Act registration requirements for
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this type of capital raising activity in an effort to assist, early stage

companies and small businesses.

The staff has been discussing crowdfunding among other capital

raising strategies with business owners, representatives of small

business industry organizations and State regulators. For example,

the staff has met with the representatives of the Small Business

and Entrepreneurship Council and from the North American Securities Administrators Association.

In addition, we anticipate that crowdfunding will be considered

by the Commission’s recently announced Advisory Committee on

Small and Emerging Companies.

Current technology allows small businesses owners to easily

reach a large number of possible investors across the country and

throughout the world as a potential source of funding to help grow

and develop their businesses or ideas. This source of capital and

the ease with which an individual can communicate with potential

investors presents an opportunity for smaller companies in need of

funds. At the same time an exemption from registration and the investor protections that come from our disclosure requirements also

could present an enticing opportunity for the unscrupulous to engage in fraudulent activities that could undermine investor confidence.

As a result in considering whether to provide an exemption from

Securities Act registration requirements for capital raising strategies like crowdfunding, the Commission needs to be mindful of its

responsibilities both to facilitate capital formation and protect investors.

In considering crowdfunding, some of the questions to consider

include: Should certain minimum information be provided to investors? For example, should investors know the names of the entrepreneurs, a summary of the business plan, have a plan to use the

money they raise? Should individuals or firms with a history of securities fraud violations be allowed to use the exemption? Should

an SEC notice filing be required so that activities in these offerings

could be observed? Should securities purchased be freely tradable?

Should Web sites to facilitate crowdfunding investing be subject to

regulatory oversight?

While the small amount of any potential crowdfunding investment should generally limit the extent of any individual’s losses,

these are issues that are among those the Commission would need

to consider in connection with any future proposal.

In addition to looking at new capital raising strategies, including

crowdfunding, at the chairman’s request the staff is also looking at

the triggers for when a company has to begin public reporting, the

restrictions on general solicitation and private offerings and the

rules governing communications in connection with public offering.

My written testimony provides an update on our efforts. We are

committed to carefully considering these areas and developing

thoughtful recommendations for the Commission consistent with

the goals of facilitating capital formation and protecting investors.

Thank you for inviting me here today. I look forward to answering your questions.

[The prepared statement of Ms. Cross follows:]
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Mr. MCHENRY. Thank you.

Ms. Mauriello.

STATEMENT OF DANA MAURIELLO

Ms. MAURIELLO. Good morning, Chairman McHenry, Ranking

Member Quigley. Thank you for having me here this morning. My

name is Dana Mauriello. I’m cofounder and president of

ProFounder, which I started with my cofounder, Jessica Jackley,

who is also the founder of Kiva, one of the first peer-to-peer microlending sites.

We started in August 2009 a platform to allow entrepreneurs to

raise investment capital from their communities.

One of case studies that we saw that inspired us to start this

business was two of our classmates at the Stanford Graduate

School of Business that had a new technology startup that they

were beginning, and they were looking to the classmates to see if

those classmates wanted to contribute investment capital. We are

a very tight community, about 350 students. So we know each

other well after 2 years of being in class together. And within 24

hours 60 people in that class said they wanted to put in the $1,000

cap that those entrepreneurs had set to invest. This seems like a

beautiful story, but unfortunately their lawyers let them know that

this was impossible, in their words. And when the entrepreneurs

pressed, as entrepreneurs tend to do, they found out that it was

‘‘impossible because those investors were unaccredited.’’

We had student debt, we did no meet the accreditation requirements. There were also more people than their lawyers felt could

contribute. The entrepreneurs pushed and eventually lawyers came

back with Reg D 506, which would allow 35 of those investors to

contribute that $1,000 minimum.

That answer took 4 months and $20,000 to achieve. That was an

incredible inefficiency that Jessica and I witnessed. And that’s

what really got us thinking about how could this be possible that

an entrepreneur with a great idea, and a community that has the

capital and wants to support them, would have something standing

in the way of being able to meet each other. And looking back at

my own personal history with small family businesses, none of

them would have gotten off the ground if not Uncle Joe and Uncle

Gene and a lot of other friends and family members contributing.

So this seemed like a very logical answer.

So we started ProFounder with the vision of allowing businesses

to access capital and access resources that supported their community. The solution that we came to after a year of legal research

with many counsels was Regulation D 504, a Securities exemption

that allows entrepreneurs to raise the capital if it is less than a

million dollars. It is coming from people you have a substantial

preexisting relationship with, and you follow state-by-state Blue

Sky laws.

Here’s how we did that. Entrepreneurs came to our platform, created a pitch, they created their term sheets. We offered two term

sheet templates, either equity or revenue share. It could have been

anything that was a security. And then we had a compliance calculator that allowed entrepreneurs to say here are the people who I

want to invite. And we would spit out here are the laws, here are
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the notice filings, here are the filing fees that you need to pay. And

that was no easy task because these Blue Sky laws, which are different in every State, are completely interdependent on each other

as well. You have one investor from Connecticut, you can only have

10 investors in Colorado. So that was a bear to both navigate,

make a technical solution for and explain to our entrepreneurs, but

we did.

We had some amazing success stories that I’m very proud to

share. Bronson and the Chang family in Honolulu, they were able

to open their second shaved ice store by raising $54,000 from 19

investors that included Bronson’s freshman year roommate at USC,

their best customers at the shop, and all of their friends and family.

Mark at Cubic Motors was able to start a motorcycle company in

San Francisco with the help of his fellow motorcycle enthusiast

friends to raise $50,000 from 16 investors that all got these businesses started and off the ground. They are now raising additional

rounds of capital. At least two of our entrepreneurs have gone on

to raise additional capital now.

We also faced challenges, we faced a lot of challenges. And the

one that I’m most eager to talk about as an expert here is the challenges that these companies like ours that are facilitating

crowdfunding face and how those challenges can be alleviated. We

were approached by the Department of Corporations of the State

of California to investigate our operations, and they came to the

conclusion after months of conversation that we needed to be a

broker-dealer to be facilitating these transactions on the site because we were providing form templates, because we had term

sheets that people could take advantage of on the site.

Whatever regulations ultimately goes into place for crowdfunding

I think it is critical to consider what can be done for companies like

ours to help facilitate. If we need to be broker-dealers there is no

way that we can help the small entrepreneurs like Bronson and his

family’s shaved ice shop in Honolulu because these due diligence

requirements on us will be too high and too onerous for us to be

able to serve that smaller client who has the greatest potential to

really make a difference, create jobs and spur the economy.

Furthermore, another problem that we faced was definitions.

There with a no clear definition for us of friends and family, of substantial preexisting relationship. There was no definition of sophisticated investor. Because of this lack of definitions it made the law

extremely difficult to implement. And it made it very difficult for

the counsel of the entrepreneurs that we were working with to get

on board and feel comfortable with these changes.

In conclusion, thank you for having me here today and I look forward to answering your questions.

[The prepared statement of Ms. Mauriello follows:]
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Mr. MCHENRY. Thank you.

Mr. Lynn.

STATEMENT OF JEFF LYNN

Mr. LYNN. Chairman McHenry, Ranking Member Quigley, honorable members of the subcommittee. My name is Jeff Lynn and I am

CEO and cofounder of Seedrs, a forthcoming equity crowdfunding

platform based in London. I’m also a U.S. securities and corporate

lawyer by background, having practiced with the international firm

of Sullivan & Cromwell in both New York and London. I want to

thank you for inviting me to testify today on this very important

and timely topic.

Seedrs will allow entrepreneurs to raise up 100,000 pounds in equity capital from the crowds through an online platform. We like

to think of it as kickstarter with returns instead of donations or

lending club with equity instead of debt. Details of how the platform works are set forth in my written testimony.

We have applied for Seedrs to be authorized by Britain’s Financial Services Authority, and assuming we are successful it will be

the first equity crowdfunding platform anywhere in the world to be

expressly approved by a major securities regulator. We will launch

initially in Britain only, with the aim of rolling out through the

rest of the European Union shortly thereafter.

When my cofounder and I designed this model, we examined

both the United States and Britain as our potential first target

market. Both had positives and negatives, but the overriding consideration was the current U.S. securities laws would present an

insurmountable obstacle, where securities regulation in Britain is

significantly better suited for this financial innovation.

We are very excited about making crowdfunded equity finance

available in Britain and eventually across Europe. Nevertheless, it

is highly encouraging to see that some lawmakers want to consider

rule changes that would allow equity crowdfunding platforms like

Seedrs to operate in the United States as well.

I believe this is a very positive development, as it will open a

powerful tool to American entrepreneurs and investors alike, and

could prove to be a key factor in boosting the economy and creating

jobs throughout the country.

At the same time it is important that any rule changes be considered carefully, and in particular that a balance be struck between

keeping administrative burdens low enough for these platforms to

be viable while still maintaining sufficient investor protections.

I’ve laid out in my written testimony a few thoughts on how best

to strike that balance based on our experience on building Seedrs.

I would like to briefly summarize the three main ones here.

First, we think it is important that equity crowdfunding platforms be subject to some degree of regulation. This does not need

to be highly burdensome. There are categories of regulation currently in existence that small businesses have been able to comply

with, such as broker-dealer registration and SEC investment adviser registration, and those could be used as a starting point, albeit they would need significant adaptation.

In the absence of any form of supervision though, there’s too

much scope for crowdfunding platforms that lack sufficient systems
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and controls to cause harm to investors. And as importantly, many

investors simply will not use platforms that lack a regulatory seal

of approval. We have been told repeatedly about potential Seedrs

investors that the fact that we will launch only after becoming FSA

authorized is absolutely crucial to their decision to use us.

Second, we would be against imposing a limit on how much an

investor can invest in a particular startup. These platforms can

only function if larger investors are able to participate alongside

smaller ones. And a per investment cap risks unnecessarily excluding larger investors.

At the same time, there are better ways of making sure that investors understand the risks involved and do not get in over their

heads, such as capping aggregate investment based on the investor’s declared net worth, and requiring investors to complete a

questionnaire showing their understanding of the risks. Seedrs will

do both of these.

Finally, we think that equity crowdfunding platforms will be

most effective when they are actively involved in executing the investment transaction and managing the investment after completion.

The greatest risk to investors when investing in a startup comes

not when the startup fails but rather when it succeeds. Any sensible investor knows and accepts that the odds are significant that

the business will not work out and there will be no return of capital. However, if the startup succeeds but due to a flaw in the way

the investment was structured or managed the investor does not

get the benefit of that success, that is a much bigger problem. This

is why Seedrs will provide a substantial level of intermediation as

part of its service, including legal due diligence, subscription agreement negotiation, and post completion management. We expect

that other successful platforms are likely to do the same.

We do not think that these services need to be required by law,

but it is important that whatever set of rules is adopted for

crowdfunding they at least allow for and perhaps even explicitly

authorize a meaningful level of intermediation.

To conclude, Mr. Chairman, I am both encouraged and excited by

the prospect of equity crowdfunding becoming a reality in the

United States. I hope the thoughts and insights I have shared from

our experience will prove helpful as consideration of rule changes

moves forward.

Thank you for the opportunity to appear before you today, and

I would welcome the chance to respond to your questions or to amplify or clarify these statements at any time.

[The prepared statement of Mr. Lynn follows:]
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Mr. MCHENRY. Thank you, Mr. Lynn. Mr. Neiss.

STATEMENT OF SHERWOOD NEISS

Mr. NEISS. Chairman McHenry, Ranking Member Quigley, and

members of the committee, thank you for holding this hearing

today and allowing me to share an entrepreneur’s perspective on

how crowdfunding investing will spur innovation among your constituents, create jobs and help our economy grow. This framework

was just endorsed by President Obama in the American Jobs Act.

My name is Sherwood Neiss, and I’m a entrepreneur who started

and sold the 3-time Inc 500 company and is trying to raise capital

for two more. This is my third time I have given congressional testimony on the hurdles related to capital formation for entrepreneurs and small businesses. This testimony was written in conjunction with my cofounders at the startup exemption, Jason Best,

a 2-time Inc 500 entrepreneur, Zachary Cassidy-Dorion, and Karen

Kerrigan of the Small Business and Entrepreneurship Council.

I’m going to discuss three things: First, how crowdfund investing

solves a problem of connecting entrepreneurs to capital; second, the

framework under which we suggested this should take place; and,

third, provide two examples.

As someone who has tried to raise capital in the past few years

I know how hard it is. Try going into a bank to get a loan or a

line of credit. Try finding a credit card company that will give you

a decent interest rate or try peddling your idea to venture or private equity. They aren’t focused on who will create the majority of

net new jobs, but who has the greatest chance for a 10X return in

the shortest period of time.

So the point is there is no capital out there for the majority of

businesses. We need to hire Americans and get us out of this recession.

A solution is crowdfunding investing. Crowdfund investing is

using equity to pool small amounts of capital from a large number

of Americans to start and expand at businesses. Crowdfunding is

nothing new to America. The Statue of Liberty was even built

thanks to thousands of small donations from Americans. On

crowdfunding investing sites entrepreneurs will their pitch ideas,

and investors decide which ideas they think are worthy of backing.

If a startup doesn’t hit its funding target, no money is exchanged.

The funding rounds will occur via SEC regulated Web sites

where entrepreneurs will be vetted and their ideas discussed freely

with other investors. Anyone with deceptive practices and false

moves will be documented and discussed by the thousands on

Facebook, Twitter and other platforms. Time and again we see if

you make a false move on the Internet it will only take hours before millions of people know about it.

Successfully funded businesses will not only benefit from the capital but the collective knowledge, experience and marketing power

of the people who have a vested interest in making sure the entrepreneur succeeds. Successful businesses will also create jobs.

The complete rules of our framework are in my written testimony, but here are six main points. First, we propose the creation

of a funding window of up to $1 million for entrepreneurs and

small businesses.
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Second, investors would have to acknowledge the risk involved in

this type of investment and that there is no guarantee of return.

Third, once they acknowledge the above they can choose to invest. However, investments via this window would be limited to

$10,000.

Fourth, because of the size of the crowd and the anticipated

small dollar amounts invested, we propose eliminating the 500 investor rule, as well as broker-dealer license requirements.

Fifth, due to the limited size these offerings should be exempt

from costly State registration.

And sixth, general solicitation should be allowed only on registered Internet platforms where entrepreneurs and investors can

meet and people and ideas can be vetted by the crowd.

Standardized base reporting will be used to submit information

to the SEC about small businesses utilizing these platforms.

CFI is being using in other countries successfully, including the

U.K., France, Hong Kong, and China. Over the last 5 years over

$300 million has been donated on U.S. crowdfunding sites for art

related projects or entrepreneurs in the developing world. Just

think what could have been accomplished if we used the same dollars to fund jobs and innovation in the United States.

Here are two examples of where people have donated money to

support an entrepreneur. Imagine how many more companies we

could fund if the same investors were given potential for a return

on their investment. Three engineers created a product that greatly

improved mobile video cameras. They were turned down by 43 vc’s

and banks. So they created a short video on a Web site and solicited money via their Twitter, LinkedIn and Facebook communities.

They raised over $24,000 and announced selling the products, creating jobs and have gained investor interest from vc’s.

And Brooke from Lancaster, Pennsylvania wanted to expand

from a small T-shirt kiosk to a larger store, but was unable to raise

capital through traditional means. So she created a video and

raised $15,000. Now she has a stand alone store and has hired

more employees.

These are just two stories but thousands are waiting based on estimates from the SBA and the Kauffman Foundation. We believe

CFI can generate over 500,000 companies and over 1.5 million net

new jobs over the next 5 years.

Americans should be allowed to invest in their communities.

Today technology makes this a possibility. The Internet with its

transparency and accountability will make this concept thrive. In

turn, the crowd will fund ideas they believe in and these ideas will

be the launching pad for thousands of worthwhile businesses. Both

parties agree on the importance of getting capital to our entrepreneurs; our framework is at zero government cost proposal to accomplish this.

Thank you for your time. I look forward to your questions.

[The prepared statement of Mr. Neiss follows:]
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Mr. MCHENRY. Thank you. Mr. Migliozzi.

STATEMENT OF MICHEAL MIGLIOZZI

Mr. MIGLIOZZI. Good morning and thank you, Chairman

McHenry, Ranking Member Quigley, and members of the committee. My name is Micheal Migliozzi. I am the creative director

and managing partner of Forza Migliozzi, an advertising and brand

content agency. I am honored to have my presence requested by

this body for any assistance regardless of how small that I am able

to contribute with ideas to unleash our economy, leading to job creation and financial recovery. I am without question absolutely

humbled to contribute what experience I have.

From my earliest memories my father told me that America is

the land of opportunity, or that you can become whatever you want

to become, through hard work you will succeed. I’m passing this on

to my two little girls. I chose advertising.

I have had the unique opportunity to work with some of the

smartest pioneering dream chasers and passionate people in business. As an ad man, it is though I am part psychologist, part bartender, and part clergy. It is my work to sell their work. My career

path has taken me all around this great Nation, northwest, east

and south, working for some of the best advertising agencies in the

world from New York City to Portland, OR, creating campaigns for

sneakers, sodas, sports teams, credit cards, casinos, hotels, beer

and many other categories.

For an ad man the struggle and battle was to get to the reward

of the big idea, the 24/7 quest to solve the problem at hand is never

ending.

I came to realize that this is the struggle of the entrepreneur as

well, a 24/7 cycle of commitment to your dream, the risk that might

never see a reward, the fight to battle, or maybe to look failure in

the face and fail it to take a hike. A few years back I took my own

advice and became an entrepreneur by opening my own advertising

agency.

I’m going to get on to crowd sourcing. What is crowd sourcing?

The best definition I have ever found—excuse me, give me a moment.

Mr. MCHENRY. Sure.

Mr. MIGLIOZZI. What is crowd sourcing, the best definition I’ve

ever found—I’m going to have to pass for a moment.

Mr. MCHENRY. We will come back to you to finish up, if that’s

all right. If you need some more water——

Mr. MIGLIOZZI. Thank you.

Mr. MCHENRY. Mr. Bullard.

STATEMENT OF MERCER BULLARD

Mr. BULLARD. Chairman McHenry, Ranking Member Quigley,

members of the subcommittee, thank you for the opportunity to appear today to discuss the regulation of crowdfunding.

I would like to start by laying out the structure of securities regulation in order to put crowdfunding regulation in context. Securities transactions are generally regulated on three levels. On the

first level securities transactions are subject to the same general

commercial anti-fraud provisions that apply to all businesses.
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On the second level securities transactions are subject to security

specific anti-fraud provisions that provide increased investor protection.

There is some general agreement that crowdfunding triggers the

first two levels of regulation which provides some degree of investor protection. On the third level, securities transactions are subject to public registration or reporting requirements, and this is

where crowdfunding runs into trouble. Public registration, reporting requirements are generally impracticable for crowdfunding. In

fact many issuers find them to be impracticable.

Congress and the SEC have created a variety of exemptions from

public registration and primary public registration requirements,

but these exemptions are also impracticable for many forms of

crowdfunding. And the most significant problems are generally that

some form of disclosure document is required and there is a general prohibition against solicitations and advertising in connection

with the sale of securities. So the regulatory question as to

crowdfunding is whether it would be appropriate to liberalize one

or more existing exemptions or create a new exemption to accommodate crowdfunding.

I think the answer should be yes for the archetypal crowdfunding

program. This would be offerings in which investors, individual investments were limited to a small amount, $100 or $250. The total

amount of the offering did not exceed for example $100,000. For

such de minimis investment amounts registration and reporting requirements should not apply. Other requirements should be imposed, including enhanced requirements for crowdfunding brokerdealers to combat the heightened risk of fraud.

Other types of crowdfunding, macro crowdfunding finance,—

macro finance crowdfunding if you will, raise very different concerns. A $10,000 investment, for example, is not a de minimis

amount, it is a significant amount for many investors and should

be subject to some degree of registration and reporting. Making it

much easier for scam artists to sell unregistered securities to families living below the poverty line or seniors barely surviving on Social Security is usually not good public policy.

Any macro finance crowdfunding exemption should be subject to

the regulatory cost-benefit analysis traditionally used to evaluate

registration and reporting requirements. This cost-benefit analysis

generally considers the increased risk of fraud and the benefits to

capital markets and to investors. It also considers the relationship

of any new exemption to existing exemptions and the interest of all

issuers, not solely those of crowd funders.

The areas where reform is needed in macro finance grant funding would be easier. Increasing the Reg A limit to $50 million is

an example of why I don’t believe there would be that much dispute. But let’s not do that to make crowdfunding easier, let’s do

that to make Reg A work better for all types of capital raising.

Similarly, the 500 investor trigger for reporting obligations, the

ban on general solicitation in advertising, and the qualifications for

accredited investors all need to be reformed, but not to accommodate macro finance crowdfunding. They need to be reformed to accommodate the full range of issuers. The 500 investor trigger is

routinely honored in the breach. Firms with thousands of beneficial
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owners are often permitted to cease public reporting. At the same

time other firms with thousands of beneficial owners are never required to file public reports in the first place.

The ban on general solicitation and advertising is fundamentally

inconsistent with the Information Age. The frenzied and very public trading of Facebook’s 21⁄2 billion shares makes a mockery of this

prohibition, as did the failure of the U.S. segment of a Facebook

private offering earlier this year.

The wealth and income test for accredited investors have not

been adjusted for 20 years, and they are structurally nonsensical.

A young investor with $900,000 cannot put 10 of it in a hedge fund,

but a retired auto workers with a million dollar portfolio living on

say $40,000 a year that the portfolio generates can drop the whole

million in a hedge fund. The investor who can afford to lose his

shirt cannot invest, but the investor who cannot afford to lose his

shirt can.

In conclusion, there is micro finance crowdfunding that simply

does not implicate the public policy concerns underlying the third

level of securities regulation, registration and reporting. The exemptions for other small issuers where investors are risking more

than de minimis amounts are appropriate only to the extent of the

cost of increased fraud, if any, is outweighed by the benefits.

Thank you again, and I would be happy to take any questions

you might have.

[The prepared statement of Mr. Bullard follows:]
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Mr. MCHENRY. Thank you, Mr. Bullard.

Mr. Migliozzi, we will return to you, if you can summarize. I

think 4 minutes left.

Mr. MIGLIOZZI. I will pick up if I may with regards to the entrepreneur.

So a few years back I did, I took my own advice and became an

entrepreneur by opening my own advertising agency. I now share

the same challenges and same roadblocks that many entrepreneurs

face regardless of size, purpose or industry. My business is wholly

dependent on other businesses who need to sell their products or

services. They are dependent on an end consumer to sell to, the

consumer a paycheck to spend with. As we have seen, the cycle or

the gears of this cycle have locked up.

Crowd sourcing and advertising. What is crowd sourcing? The

best definition I ever found goes something like this. It is a neologistic compound of crowd and outsourcing for the act of taking

tasks traditionally performed by an employer contractor and

outsourcing them through a group of people or community through

an open call to a large group of people, a crowd asking for contributions.

Apparently I’ve been doing this for quite some time. We will go

on to buy a beer. This is fun.

In the fall of 2009 I read a——

Mr. MCHENRY. Just take your time, it is okay.

Mr. MIGLIOZZI. All right. I’m having an allergic reaction to medication.

Mr. MCHENRY. I’m sorry, I know that’s very convenient for the

day you are having.

Mr. MIGLIOZZI. Huh?

Mr. MCHENRY. So sorry. I know having an allergic reaction is

very convenient for testifying before Congress.

Mr. MIGLIOZZI. Yes, I’ll finish it.

Mr. MCHENRY. I say that with sarcasm but just take your time.

It is fine.

Mr. MIGLIOZZI. Okay. In the fall of 2009 I read a New York Post

article about Pabst Brewing Co. was up for sale, and the asking

price was $300 million. In jest via a corporate Twitter account I

tweeted maybe we can crowd source this. And before I could even

hit the ‘‘send’’ button I knew this would be at the very least a great

case study to evaluate crowd sourcing, its behavior, its magnitude.

My expertise is not finance, economics or law. My expertise is in

effective branding, marketing consumer behavior and possibly a little side show regardless of medium.

I’m not here to confirm nor deny any of the findings of the Securities and Exchange Commission’s cease and desist order. I was

asked to be here to recount the important aspects of my experiment

as it relates to funding companies without traditional financial outlets and to highlight the success it had not in theory but in actuality.

Crowd sourcing means crowdfunding. This experiment was to answer my questions about crowd sourcing. With such a large

amount, a $300 million asking price it would require the crowd

sourcing vehicle to be easily partaken by all, exclusively online.
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Excuse me. The goal was to stay as the focal point, a countdown starting at a mind boggling $300 million may not be so mind boggling as we’re hearing about trillions of dollars every day, but a

very large amount just the same. What was being asked of them,

their interest to join in the largest ever crowd sourced audience,

that was their interest, came in the form of pledging their name,

email address and an unbinding amount they were pledging and in

caps ‘‘send no money.’’

It is important for me to state here that at no time was any

money ever received, nor was there any way for users to send the

money nor any way for us to collect money. How to create enough

buzz to get this into the hands of others would be required, how

long could the buzz be sustained, how would the user take control

of the conversation to generate buzz. Transparency, any questions

and their answers needed to be anticipated and answered by viewing the site.

Of course at the onset of the experiment there was simply no

way to predict a positive outcome, far too many variables. A one

page Web site is created with full disclosure, a Twitter account created, a press release circulated, this on or about November 10,

2009. By December 1, 2009, over $14.75 million was pledged.

I’m getting into the red, if I may ask for additional time.

The amount of press, press about the concept, the ease of understanding, the genius of the experiment generated buzz traffic sharing that by the end of 2009, the amount of pledges had exceeded

$100 million. Christmas, New Year’s passed. I was certain with the

new year this would be old news. By February 22, 2010, over $200

million was pledged. What was just an experiment was now taking

up far too much of my time with press requests, some 150 articles

written, radio interviews by that point. There was an interest by

media users, etc., that this could happen. Could it? How? What

steps would need to be taken? Pledges were still coming in. Press

was still writing about this. This experiment was turning into a

solid case study and an award winning one at that as it won for

most innovative in the crowd sourcing competition at South By

Southwest in 2010.

On March 24, 2010, I received a FedEx from the SEC which led

to the shuttering of buyabeercompany.com. Those proceedings concluded on June 8, 2011. Pabst Brewing was purchased on May 26th

purchased 2010 for about $250 million, according to the Wall Street

Journal, by investor C. Dean Metropoulos. At the time of closing

buyabeercompany.com, over $282 million was pledged by over 7

million users, averaging $38 per pledge.

My conclusion is coming. I believe this illustrates the power of

crowd sourcing or rather as it is referred here specifically as

crowdfunding. What a powerful tool whereby the investor now becomes purchaser, brand steward, evangelist where the brand must

answer to them and live up to their every expectation, not as a

simple financial tool but as their expansion of buying into the

brand. This process could have been easily used for the sale of

Hummer GM, as seeking to shed their division was selling this

American icon to China. While that $150 million fell through, I

can’t help but imagine if crowdfunding could not have only saved

this brand but the jobs, the dealerships and the money spent on
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R&D, the equity built into the marketing brand loyalty by simply

opening this up to the general public.

What started out as an experiment to test for hypothesis or the

power of social media and the propelling of a crowd toward a common goal had become a concrete and plausible way to do business

in a landscape which moves rapidly and without harness. For my

purposes it gave me invaluable information on consumer behavior.

Hopefully other aspects of this can provide light on how we can utilize this to fund, build, expand businesses, the economy, leading to

job creation. The possibilities of crowdfunding for starting expanding and purchasing companies are never ending.

Thank you.

[The prepared statement of Mr. Migliozzi follows:]
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Mr. MCHENRY. Thank you. I understand the pressure of testifying and at the same time having a health issue as well. So we

certainly understand that.

I will begin my questions and recognize myself for 5 minutes.

Votes are called on the floor, so we’re going to try to get through

our first round of questions and come back for more.

Ms. Cross, the President outlined in his speech and then the administration issued the following: Reducing regulatory burdens on

small business capital formation. The administration also supports

‘‘crowdfunding’’ exemption from SEC registration requirements for

firms raising less than $1 million with individual investments limited to $10,000, or 10 percent of the investor’s annual income, and

raising the cap on many offerings Reg A, that Mr. Bullard testified

about from $5 million to $50 million. This will make it easier for

entrepreneurs to raise capital and create jobs.

Can you describe the SEC’s perspective on the President’s recommendation in terms of the crowdfunding portion, not the Reg A,

but if you could describe the SEC’s perspective on this.

Ms. CROSS. Thank you for your question. I have to say first the

Commission hasn’t taken a position yet. These statements were

just made. So we’re discussing the matter internally at the Commission. I’m sure we will be having more discussions in light of the

interest in the topic.

From my personal perspective I think that the key to such an exemption would be whether it could be crafted so that there could

be cost effective crowdfunding exemption that could be—that

wouldn’t present significant concerns of fraud. If so, then I could

see real benefits.

The issue you’ve got to watch out for is that if it becomes viewed

as a tainted market where people go to fraudulently steal money,

then that won’t help anyone. So there needs to be some sort of balancing happening on a cost effective basis where some level of requirements, what kind of information might be required, are there

notice filings, things of that nature, what the caps are, how much

money for any individual, all of those issues would be important so

this isn’t a place where just bad actors go to steal money from people.

Mr. MCHENRY. Okay. And so would an annual audit be one of

those?

Ms. CROSS. That’s an interesting question. I don’t know if an

audit is what I would be thinking of. I was thinking more in terms

of oversight of those operating the site so that at least someone is

keeping track that these companies actually exist, that the money

is coming from investors to these companies, those sorts of things

that would give you pause. If somebody just opened up a Web site

and took money and then disappeared that would be pretty awful.

So what——

Mr. MCHENRY. Which—not to use sarcasm, which never happens

today?

Ms. CROSS. Well, I can’t say whether it happens today or not.

Mr. MCHENRY. Really? So I would just propose this. So based on

this the SEC would think that the eBay exchange where I offer my

used pickup truck for sale, that that transaction would never happen without the SEC preserving and protecting against fraud.
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I’m not asking you to answer, but what’s the timeframe for the

SEC to review this recommendation and how long would that take

to implement?

Ms. CROSS. We’re currently discussing it internally. I don’t have

a timeframe, but I would expect we would want to consider it deliberately in the near future.

Mr. MCHENRY. Is that 2 years, 1 year, is it 6 months?

Ms. CROSS. As I said, I can’t commit the Commission to a timeframe but I would expect that it would be in the near future.

Mr. MCHENRY. Back in May I asked a similar question about accredited investors, the 500 investor cap. Any update there?

Ms. CROSS. Yes. We’re deep into the various work streams that

we discussed back in May. One of them is the 500 shareholder cap.

We have a study underway at the Commission now to get all the

data that we need in order to be able to determine what revisions

to the cap there should be. So that’s deep underway right now.

We also are working on concept release on how to address the

issues with regard to a ban on general solicitation and looking at

targeted offering reforms around these issues and in addition we

just announced this week the formation of our Small and Emerging

Co. Advisory Committee so we can get their input there as well.

Mr. MCHENRY. What was the impetus for creating that group?

Ms. CROSS. For the committee? We’ve been working on forming

a committee. It is complicated to form committees under the advisory committee rules. The purpose of it is to get—to be able to try

out ideas.

Mr. MCHENRY. I understand the purpose. What was the impetus

for creating it?

Ms. CROSS. In order to be able to get—I’m sorry, we’ve been in

the process of forming it since many months ago.

Mr. MCHENRY. Okay, okay. Do you have a timeframe for when

this 500 investor cap will—there will be some resolution to it?

Ms. CROSS. I would say because we have to do the study to get

the data that we need to do an appropriate analysis it would take

a significant period of time. It would be sometime in 2012.

Mr. MCHENRY. Mr. Quigley is recognized for 5 minutes.

Mr. QUIGLEY. Thank you, Mr. Chairman.

Mr. Lynn, make sure I get this right, you talked about allowing

a dual set of investors, high end as well as the low. Are you talking

about the high end ones being under the normal rules or also

under crowdfunding?

Mr. LYNN. No, on our platform they will all be under the exact

same set of rules. Everybody will come in through the platform

whether they are investing 10 pounds or 10,000 pounds or 100,000

pounds, directly to the platform.

The key point, just to try to elucidate slightly why it is important

that we have the big investors alongside the smaller ones, is that

platforms like this will not succeed if it is only $10 or $100 investments being made through them. What will happen is the business

that is seeking capital, we will get a lot of interest, there will be

a high volume of investors, but to try to raise $50,000 or $100,000

on the back of $10 or similar size investments the deals simply

won’t get closed.
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So for these platforms to function for a marketplace to exist, we

think that we need to be able to go after both the smaller investors,

but also people who might traditionally be angels but see a value

proposition in investing through a platform like ours alongside the

smaller investor.

Mr. QUIGLEY. Why can’t you do this in a system, a dual system

for the same sort of investment? The whole point of the high end

investors having so much more regulation and control is because

you are dealing with a lot more money. At least it is one of the elements of this. Don’t you now run the risk, why would anybody go

under the normal rules if the big one could go under crowdfunding?

Mr. LYNN. Two answers. Yes, first of all, you could do two separate systems, absolutely. You could do a system where the smaller

investors receive an additional level of protection and the larger investors do something on a different track, different plane. It just

adds administrative complexity, and there is no particular reason

when you could have everything under the same system where effectively, as I’ve said in my testimony, we’re looking at a platform

where all investors get a much more significant level of protection

than they would if they went off and bought shares in their friend’s

company.

The second point is investing through a platform like ours has

both advantages and disadvantages to high net worth investors.

The advantage is it is simple, it is easy and straightforward and

they don’t have to do a lot of administrative work. Many angels

prefer to be able to invest in a hands-on way, to be able to interact

directly with the entrepreneurs, to be able to go on the board, provide advice. And we think that many angels will continue to want

to use the traditional off-line method of investing as well. We want

the choice to be there for them.

Mr. QUIGLEY. Ms. Cross, we’re on limited time because we’re due

on the floor a few minutes ago. How do you begin to balance this?

You talk about the notion of at least having some rules about this,

you ticked off quite a few points. But at what point are we right

back to where we are now anyway with all the rules and regulations that the President sort of referred to that we want to pull

away so that we encourage this kind of investment at the small

level?

Ms. CROSS. That’s a very important question, and I think any

rulemaking would have an appropriate balancing of the cost and

benefits. I think that the smaller the amount of money that people

could risk losing, the less regulation you would need, the less impact it could have across the markets.

Mr. QUIGLEY. Let me interrupt you again because we are short.

I guess the crux of my concern is that the smaller investor—doesn’t

it seem like that is the less sophisticated, less knowledge, less ability perhaps; perhaps the very person who needs the most protection? I mean, is that a glimmer in your mind or is that just wrong.

Ms. CROSS. That’s certainly a concern and you would need to

think about that. I think the notion of crowdfunding, which again

the Commission has not taken a position on, but the notion of it

is at some de minimis level, one would argue that there isn’t a

need for the full panoply of regulations that comes from securities

registration, even though the particular people may be on the less
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sophisticated range because they have less to lose. And the question really is a cost-benefit analysis.

I think it’s important, though, that if it turns out all the unsophisticated investors who don’t get the information registration

would require end up defrauded, then it’s going to be an unsuccessful experiment. If, instead, it’s a success, and—then I think it does

provide an opportunity for—and this is my personal view—for another avenue to raise money cost effectively, but it’s—it’s an interesting experiment that we would need to at least keep a close eye

on.

Mr. QUIGLEY. Mr. Chairman, these are thoughts that I’d like to

get the thoughts of all the participants unfortunately, we are now

heading to the floor.

Mr. MCHENRY. And the chair would announce that we have votes

on the floor. It’s the intention of the chair to go cast the first vote,

return back here, try to get a few more rounds of questioning in,

at which point we’ll have two additional votes thereafter.

There are Members that will be sworn in between the first and

second vote here. So we should be able to get back and have an

additional 30 minutes.

Mrs. MALONEY. Point of information, Mr. Chairman. May I ask

my question and make a bolt to the floor because I don’t think I

can come back?

Mr. MCHENRY. Yeah, I would just ask indulgence of the Member

to come back after this first series of votes because the——

Mrs. MALONEY. It is really hard for me. I can just do it really

quick right now.

Mr. MCHENRY. I have to go get to the floor and vote so I can get

back here. Go ahead, I will give the gentlelady a minute.

Mrs. MALONEY. First, I want to thank you for holding this hearing. It is tremendously important, looking at the crowdfunding exemption and how it is implemented.

An offer, a startup mentor and angel investor in the district that

I represent by the name of Marty Zwilling wrote an interesting

blog calling into question some of the virtues of crowdfunding, and

I would like to quote what he said, ‘‘He warns that crowdfunding

places the focus on the product, not the business model. When

pitching to consumers online or off line, the feedback will likely be

on features and design. The key success factors of the business

model, meaning how you make money, management expertise, and

financial projections, will likely get overlooked.’’

And I would just like to know how the panel would respond to

what he said. He also warns that investors are not prepared for the

high risk of startups and he has—he believes that it will be marketing to the riskiest, most speculative investments to some of the

least sophisticated. So I would like to hear your response.

Mr. MCHENRY. The gentlelady’s time has expired. We have just

enough time for me to get to the floor—for us to get to the floor

to vote. When we return, I will let the panel answer that question.

The committee is in recess.

[Recess.]

Mr. MCHENRY. The committee will come back to order. We do

have two new Members that won special elections on Tuesday

being sworn in on the floor today, right now at this moment. So we
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have some time to have additional rounds of questions, and so I

will recognize myself.

Well, actually, I will let the panel answer my colleague Mrs.

Maloney’s question, which pertains to fraud. If you could begin

with that, if you can recall her question from 15 minutes ago, Ms.

Cross, and we will just go right down the panel.

Ms. CROSS. Yeah, I will just quickly respond. I think that her

question points out the point about whether investors will have access to the kind of information that they need, whether it is focused

on the idea or the company in which they would be investing, and

so whether that is through the rules of the platform or any other

regulations, what kind of information would be needed at a minimum is an important issue.

Mr. MCHENRY. How would the SEC deal with that?

Ms. CROSS. I think it depends on the costs and benefits. I think

at the lower levels of investing, fewer requirements may make

sense. Higher levels, you would think perhaps you would need

more robust disclosure requirements.

Mr. MCHENRY. All right.

Ms. MAURIELLO. So just to address the general issue of fraud, the

idea has come up from numerous people about broker dealership or

the responsibilities of the facilitating party to do something. And,

Chairman McHenry, I think you brought up a good analogy with

eBay that if I am going to buy a car on eBay, I am not going to

ask eBay to verify that the seller of that is legitimate. I am going

to look at the reviews. I am perhaps going to call, get references

on his reputation.

So this issue of fraud is certainly not a new one that we are facing with the idea of crowdfunding. It is a very old idea, and while

it is been well tested and well proven what the solutions can be online, improvement of those solutions are more based on reputation

and based on crowdsourcing information than on the facilitating

party.

So, for example, if we had been a broker/dealer at the time that

some of these deals had gone through on our site and had to do

due diligence, for example, I would have had to call to do reference

checks the very same people who are doing investments in the deal

in the first place. They had more much more information than I did

at that particular time.

Mr. LYNN. I mean, I think I agree with Dana and I think an important point as well about fraud, generally, is it is in the interest

of every one of these platforms like ours to do everything we can

to minimize the levels of fraud that occur. Is it bad for the market?

If this becomes, as Ms. Cross said, if this becomes an environment

in which sort of bad or fraudulent companies see this as a way to

raise money, I am out of business. So there is—whatever the regulation may be, we have a tremendous incentive and we have with

Seedrs put in place a number of very significant protections to try

to limit that.

Also, just quickly to address Congresswoman Maloney’s point

about investors not being sufficiently sophisticated or not understanding what they are getting into, I firmly disagree with that. I

think that while we do have a level of screening on the test to

make sure that truly vulnerable people do not invest through the
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platform, it is not that hard to understand that investing in

startups is a very high-risk, highly illiquid form of asset, and we

think that a wide range of people are capable of and qualify to do

so.

Mr. NEISS. I concur with that. I think Congresswoman Maloney

was talking about people focusing on the product and the business

model. I just don’t get why we have to keep on pushing people

down with the relentless assaults on their intelligence. I mean, we

are pretty smart people. I am going to be partaking in these platforms. I have money tied up in an investment group. I know how

to ask questions and I know how to educate other people that will

be investing as well.

So by people like me partaking in this, we are just going to be

educating more people, which is going to raise the bar and make

it even safer for everyone.

Mr. MIGLIOZZI. I come from the same position as yourself as far

as eBay is concerned. I look at State lotteries. A dollar and a

dream is probably one of the best tag lines in New York State in

many, many years, and most of those people funding the lottery are

not exactly sophisticated investors, nor are they sophisticated investors in casinos. Now they are all hoping to gain.

What we are doing, at least from what I an understanding here,

is we are preventing people from the possibility of huge opportunities to either elevate themselves up, whether it is a small amount

of money or a large amount of money, and preventing them making

this—what we have, the land of opportunity, is now protecting you

from fraud and therefore curtailing any possibility of getting yourself involved in a crowdfunding or a startup or riding it all the way

up.

Mr. MCHENRY. Mr. Bullard.

Mr. BULLARD. The answer to the eBay question, which is a good

question, is really a structural one. The answer is that for going

on 100 years legislators and regulators have treated securities

transactions differently from other transactions. If they are not different, we should repeal the Federal securities laws, but this isn’t

a matter of crowdfunding regulation. That is fundamentally a matter of whether securities transactions are different, and I think

they are.

As to whether, for example, private offering requirements—you

know, unaccredited investors are an assault on the intelligence of

Americans—again, it is so deeply embedded in the structure of the

Federal securities laws to make paternalistic judgments about who

is going to be allowed to invest in unregistered offerings. The idea

that that is somehow just fundamentally questionable is not a

crowdfunding issue. That is an attack on the very structure of the

Federal securities laws, and maybe that is the way Congress wants

to go, but let’s not pretend it is anything other than what it is.

It also shows I think, you know, the ignorance of people who, you

know, I think have good-faith businesses and want to raise capital

with respect to the amount of fraud that goes on on the Internet,

and specifically with respect to securities. And there is no question

that any liberalization of the exemption rules will result in some

incremental increase in fraud. And you know, no one likes to say

it except for someone who is somewhat of a free agent, but the big-
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ger issue is about figuring what the optimum level of fraud is, and

you are going to get a lot of fraud.

And if the bill, which I appreciate, you know, starts the conversation, is as written made into law, you’ll have a massive amount of

fraud. And I can tell you, your crowdfunding market will cease to

exist because the level of fraud will simply destroy any confidence

in anyone, other than an unsophisticated investor would be willing

to participate in.

So, you know, there is a level of discussion that we are just not

recognizing here. It is about some of the fundamental assumptions

about how securities transactions are regulated, and if that is what

you object to, I think we need to put that on the table and have

the conversation about that.

Mr. MCHENRY. I recognize myself for 5 minutes. Thank you for

answering that question.

Ms. Cross, is this—the number one concern is fraud?

Ms. CROSS. That’s certainly a very important concern. We’re not

talking about regulating just for regulating sake.

Mr. MCHENRY. What are the key concerns?

Ms. CROSS. The key concern would be that investors would part

with their money to unscrupulous business operators who just take

the money and run, and that we all watched that happen and

didn’t take the time and effort needed to come up with a system

that would provide a level of safety, disclosure, oversight, some

ability to watch what’s going on. I think—you know, I worry about,

as I mentioned, Web sites popping up all over the place and then

disappearing, and people put in money and then it is gone, and I

think those are the concerns that I would have.

Mr. MCHENRY. Okay, okay. So, for instance, as a former wise investor in pets.com, this has happened with registered securities

where the business plan was bad. And so how do we, Mr. Bullard,

in your opinion, how do we ensure that we open this area—it

sounds like that you are willing to go with the idea of

crowdfunding with some exemption. How do we do that while at

the same time dealing with that question—that concern of fraud?

Mr. BULLARD. Well, I think that the analogy to pets.com is a very

apt one because, you know, we are sort of revisiting the way we

have structured the Federal securities laws, and it comes down to

the question of, you know, how much paternalism are we going to

have because it’s—I would have to disagree with Ms. Cross. It’s

really not about getting information into investors’ hands because

the way securities laws work is there’s no amount of information

you get into some people’s hands that’s going to allow us to allow

them to invest. It is a prophylactic rule. It is not a do you have

enough information? A lot of these people, simply no matter how

much information you give them, the Federal securities laws have

decided they’re not going to be allowed to invest in certain offerings.

Pets.com jumps through a bunch of hoops, but there are still people who lose their shirts, sophisticated or otherwise.

So I think the answer is you’ve got to draw that line and say,

for example, on a de minimis level you’re making a decision that

we are going to allow a lot of losses to go on. We are also going

to allow an increase in fraudulent losses, not just people investing
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in pipe dreams, but good-faith pipe dreams. We’re are also going

to be allowing people to lose to scam artists.

There’s a question about confidence in the markets. There’s a

question about, you know, how much do you want to make decisions for people based on individual liberty interests, which is a

real value at issue here, and I think it’s appropriate to draw a line

and say were just not going to step in at some point. But above

that, I think that you’ve got to think more carefully about the effect

on the structure of the markets and, you know, and what, let’s say,

a $10,000 exemption would do without the right kind of restrictions.

And my—and so the most specific answer would be I think we

need to move generally more into intermediary regulation as one

of the solutions to capital raising.

Mr. MCHENRY. Okay.

Mr. BULLARD. And the second answer, it’s got to be kind of

crowdfunding specific which may militate for changing the triggers

for registerings of broker/dealers. As I mentioned in my testimony,

that’s pretty much an all-or-nothing game.

Mr. MCHENRY. My time is short.

Mr. BULLARD. Right.

Mr. MCHENRY. So, Ms. Mauriello, Mr. Lynn, Mr. Neiss, can you

respond to this concern?

Ms. MAURIELLO. Absolutely. I think if we’re going to put in protections, which you are right, there’s a balance to strike, the most

effective party to be doing this—this is not the facilitating party,

it is the people themselves. So, for example, the way that purchasers are qualified now by their net worth, whether they’re accredited or unaccredited, is that really the best way to determine

that someone can make a smart investment decision just based on

how much money they have in the bank? I would argue not at all.

So redefining what qualified investors are in this context of

crowdfunding I think is an apt path an to go. For example, the sophistication laws, great intention there, but if they’re not defined,

they can’t be used. Define sophistication allows the sophisticated

investors regardless of net worth to be able to invest.

Someone who’s local should be a qualified purchaser. If I live

next door to the coffee shop, I know more about that coffee shop

than anybody else, regardless of how much money they have in the

bank. I should be a qualified purchaser if I know that person, so

liberalizing what substantial preexisting relationship is. The classmate example I gave earlier, if we went to school together, I know

more about you. Regardless of what my net worth is, I should be

a qualified purchaser. That’s how I would prevent fraud as well.

Mr. LYNN. I think there are two key points here. One, in terms

of, you know, the qualification to be allowed to invest—and I agree

with the previous comments—and just want to emphasize that, you

know, regardless of what the system has been since 1933 and regardless of whether we’re opening up a broader debate here or not,

there is a serious sort of over- and under-inclusiveness to the accredited investor rules. It is a loose proxy that has always been

based on just, you know, a very sort of loose cutoff, but it doesn’t

necessarily say anything about whether people are really qualified

to invest as, Congressman, I believe you said earlier.
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One of the things we do on Seedrs is before you can invest, you

take a quiz, and the quiz is a multiple choice questionnaire and it

says things like most startups succeed or fail. Well, we think that

people can get through that and it gets to dilution and couple of

other issues. We think most people can get through that. That’s a

pretty good indicator, regardless of how much money they have, of

whether they will be able to make the investment decision.

On the fraud point, which is a little different. I mean, the qualification of investors is about whether you know your—the risks involved and are able to take them. On the fraud point, I disagree

with you, Professor. I think that the amount of fraud that occurs

in this marketplace among good crowdfunding platforms is actually

going to be very minimal.

In our case, we are going to have substantial legal protections in

place, and we will go after, very, very quickly and very publicly,

any entrepreneur who does try to defraud the investors. We will

press criminal fraud charges against them and we will quickly establish reputation as one of the least favorable places to try to run

a scam. I think most other platforms are going to do very similar

things, and this is going to be a market in that environment under

which very little fraud occurs. It’s yet to be seen but that’s our

view.

Mr. NEISS. And I would agree with Mr. Lynn and disagree with

the professor as well.

I think first and foremost anyone that’s going to register on these

platforms is going to have to give over their personal information:

Social Security number, address, date of birth, and they’re going to

have go through a background check to see if they’ve committed

any fraud. So, boom, if you’ve got a checkered history, you’re out.

Second of all, I personally believe most fraud to date has been

committed on a one-to-one basis where you don’t have this open

network that we are advocating for on these platforms, where the

communities can come together and give a combined opinion. Lots

of voices are going to go into this, and that’s going to whittle out

people from committing fraud and it’s going to expose the people

that are trying to take advantage of people on these platforms.

So I just think—and a third point, in an all-or-nothing fashion,

which is what we’re advocating on these platforms, you have to act

to raise the entire amount or you get no money. You have to hit

the bar pretty high and convince everyone before you get a dollar.

Mr. MCHENRY. Mr. Bullard, would you like to respond to any of

those? Is there some way to get some consensus about how we

achieve this?

Mr. BULLARD. The way to achieve is you first have to start with

the member of the Mafia who decides to become a broker/dealer

and runs one of these businesses. I mean, if you want to have a

discussion about what’s going to happen, put them on the panel,

because we’re not talking about legitimate businesses and what

they’re going to do as a matter of business practice.

What was just described here was business practices. If you want

to write them into the law, then it will work, but they’re not going

to be part of the law. You say you’re going to do certain checks——

Mr. MCHENRY. That’s why I’m asking. So to this point——
99

Mr. BULLARD. Right. So I look to the effect of what’s the minimum necessary, and I think it’s intermediary requirements where

the burden has to be placed on the intermediary. There is no way

you can make this function where you’re always putting the burden

on the issuer. That’s just inconsistent with the whole idea of

crowdsourcing.

Mr. MCHENRY. So Mr. Bullard and Ms. Cross had mentioned

this, which is establishing some criteria for intermediaries, right?

That that would be the onus of regulation and that would be sort

of an initial view of how this could work best?

Mr. BULLARD. Right.

Ms. CROSS. If I could, I just want to be clear. I was expressing

my views. The Commission hasn’t taken this up yet. So I view

intermediary regulation as perhaps a cost-effective way to deal

with this because, for an individual company raising $50,000, for

example, putting all of the requirements on them may be cost prohibitive. So if someone is running a site and is, for example, taking

5 percent commission and is running a site where they’re raising

billions of dollars, perhaps, if it turned out great, then they could

afford to deal with intermediary regulation; whereas the individual

company raising $50,000, that might be the harder question. That’s

just a personal view as to what might be a way forward.

Mr. MCHENRY. So would they be broker/dealers?

Ms. CROSS. The question of broker/dealer registration requirements depends on what their functions are. If they—under the

rules now, if they have a salesman stake, which is, for example,

commission for success, and if they deal with client funds and securities, then they may come within the definition. Then you would

have to look and see how would regulation work. If they’re not engaging in those sorts of activities under the Federal securities laws,

it’s not clear that they would be broker/dealers, and so then maybe

you would come up with an alternative mechanism of regulation

that’s an oversight-type role. It’s an interesting question, what

would be the right way to approach it.

Mr. MCHENRY. So that broker/dealer status, Ms. Mauriello, is

that too onerous and expensive?

Ms. MAURIELLO. Yes. So we have no salesman stake, no commission being charged. We’re basically making no money and still

would be told that we need to be a broker/dealer but not by the

SEC, but—so I do have experience——

Mr. MCHENRY. You’ve been told that by your legal counsel?

Ms. MAURIELLO. By the Department of Corporations in California. So through that process, we did learn a lot from approaching many broker/dealers and trying to partner with their license

and learned what their criteria was and, most important, education. We were told across the board that it was not advantageous

for them to work with us because our average deal size was under

$50,000. So the requirements in the compliance that they would

need to do as a broker/dealer, it would not behoove them to do

deals that small. So unless we’re willing to bring our deal size up

to an average of, say, $5 million or more, they were not interested.

So that’s what we’re trying to navigate now.

Mr. MCHENRY. Mr. Lynn, is that your experience in Great Britain?
100

Mr. LYNN. Well, it’s actually the opposite. And without having

detailed knowledge of what is required of broker/dealer registration, the FSA authorization process is a very flexible one that looks

specifically at exactly what a business is doing and then imposes

a series of requirements and regulations on it. So far—and I say

this as a business that has not yet completed the process—that authorization process seems to have been a very happy medium for

us. The costs are not very substantial.

To give you a sense, the entire cost of preparing the application

and filing it would be between 10,000 and 15,000 pounds, and our

ongoing costs would be something like 5,000 pounds a year, which

if compared to our marketing and operating budgets aren’t that

overwhelming.

Mr. MCHENRY. That’s reasonable. Is the SEC—is the question of

being a broker/dealer—how many broker/dealers do we have in the

United States roughly?

Ms. CROSS. I’m going to have to get back to you with answers

to those questions. That’s the trading and markets division, so I’m

not—I’m really not qualified to answer that question. You know, I

think that, to the point——

Mr. MCHENRY. But the cost is substantially more to be a broker/

dealer in the United States.

Ms. CROSS. I would assume so. So I think, again, one of the

points I was trying to make was that in crafting a regulatory approach, if there isn’t one that’s already appropriate, you would perhaps be able to, depending on what the functions are of the intermediary, craft regulation that fits best on a cost-benefit basis. So

I think—it may be that’s it scalable the way that it’s in London.

I think that’s a question that would need to be discussed.

Mr. MCHENRY. Okay. Mr. Neiss, in terms of your experience with

this, how can we confront this issue of fraud? What’s the legitimate

way—we’re looking for public policy here and that’s the idea here.

I mean, the whole panel, we have a minority witness, we have a

witness from the SEC, and the whole panel is in agreement—well,

Ms. Cross has not stated an opinion on that because that’s a matter of SEC policy that she wouldn’t come forward on—on that type

of whether this is a good idea or not. So, just to state that clearly.

But even minority witness agrees that this idea of crowdfunding

is a worthy one. The structure of it really is the question here, and

so I do want to get to the structural question. How do we structurally allow this to take place because this—having a conduit between small investors and small businesses I think is a worthy one.

It’s not the full answer.

I mean, you know, the whole idea here is, to Ms. Mauriello’s testimony, was how do you get to that venture capital? Well, this

might be the best way, getting those initial thousand users of

Facebook to put in a couple bucks so they can buy their first server. You know, that idea of crowdfunding to get something initially

going, public markets are—still, we want the public markets to

function. We still want folks to, you know, have that opportunity.

But how do you get that bridge there from idea to rolling?

Mr. NEISS. Well, I think what you have to do is you have to put

a structure in place which currently exists on the crowdfunding

platforms that are out there. You have to register, and that re-
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quires that, like I said before, that you give certain information

and then they run background checks on you. Then you sort have

to do the business model. You have your business idea. You’ve got

how it’s going to make money, and that’s where you let the crowd

take over and let them decide which ideas they think are worthy.

If they think it’s worthy and it hits that funding target, then you’ve

got certain mechanisms that are in place. You’ve got standardized

subscription review agreements and term sheets that can be used

across the board to make it easier for everyone to communicate,

and all of this happens on open platforms where there’s this communication channel that’s freely open to everyone.

And I think the critical thing to come back to, there is technology

out there, like on LinkedIn, where you see the first-degree

connectivity of an individual. What we’re talking about here is community investment. It’s people, it’s me going to my friends and

family, that first degree people. That’s part of the anti-fraud that

takes place. These are tools that are new but can be incorporated

and that people can see who are the first-degree investors going in

here, and the more percent of those that are going in there, the

higher trust that you’re going to have, because those are the people

that know and understand the entrepreneur, the investor—the entrepreneur, the idea, and the business model.

Mr. MCHENRY. So, you know, in terms of a small group of folks

like on an individual basis, you—do you have this belief that you

can defraud five people but it might be more difficult to defraud

50,000 people? Is that your mindset?

Mr. NEISS. So I started a company here based in Washington,

DC, called FLAVORx, and we flavored medicines for children. And

I went the traditional route of raising money from people, and you

know what, it wasn’t easy. You have to talk to a lot of people about

what it’s that you’re trying to do, and I probably could have taken

advantage of a small group of people, my closest friends and family. I don’t think I would have done that, counterproductive, but the

more people I spoke to, the more people I had to convince, the

harder it was. It’s the nature of the beast.

Mr. MCHENRY. Mr. Lynn, is that your view?

Mr. LYNN. Absolutely. The wisdom of the crowds is a very powerful thing, both in terms of vetting out fraud, sniffing out the Mafia

broker/dealer, as well as being able to make good business judgments about the businesses.

One of the key features of our platform—and I think this is true

of most platforms like ours—would be that, you know, although we

do run certain checks, and although there is an intermediary process, we rely on the investors and the investors voting with their

checkbooks in 200, 300, 500, 1,000 people at a time to make judgments. We think that’s tremendously powerful, and it’s—you know,

the discussion earlier about crowdsourcing in general, it really is

a big part of the power of crowdsourcing.

Mr. MCHENRY. Mr. Bullard, in terms of the functionality of this,

if you have registered intermediaries perhaps at a reasonable cost

basis to do it with some oversight, would that—is that more palatable to you? Is that—you know, how would you structure

crowdfunding? If we said—what if the President’s plan said, you

know, to raise up to $1 million and you have a limitation on a per-
102

centage of annual income, or—what would that look like? What

would that dollar amount of limitation on the amount you could

raise, the limitation on the individual, if you believe in that, if you

think that’s right, how would you structure this thing if you were

designing not just the legislation but the rules for the SEC? Just

walk through that with us, if you would, indulge me with that. If

you don’t wish to, I mean, I understand.

Mr. BULLARD. When asked to, you know, rule the universe, I’m

always happy to.

The first thing I would do is to create two tracks. One I would

call the de minimis track. Eliminate virtually all of the regulation

at the registration reporting level and agree on what the amount—

we’re going to allow somebody to blow $250 on a dream, and even

if it’s a scam artist, we’re just not going to go there with registration and reporting. And as you pointed out, we do that in commercial environments all the time. People lose money that way in lots

of difference scenarios. There’s nothing about securities market

that I think justifies changing that.

It’s important to keep it on a separate track to protect it from

all of the burdens that should be applied when it’s something other

than de minimis. So then I would say, okay, let’s do our traditional

analysis. Using intermediary for efficiency reasons that Meredith

was describing, they can on a one-time basis incur the fixed cost

of compliance that can not be distributed to all of the

crowdfunders. So there is no other way to really effectuate true

crowdfunding unless you have that centralization of fixed cost.

Then I would say, what’s your issuer exemption? If you have the

accredited investor standard under 506, nothing new is needed for

the broker/dealer, but if you have something, say, like your bill,

then what I would add to it would be, okay, you want to be a

broker/dealer that sells these kinds of issue or securities, here are

things you need to do it. And audit was an idea, but I question

whether an audit is going to be feasible for somebody raising only

$10,000.

I think the quiz idea is an interesting one because it really goes

to—not the—I don’t think it goes to the sophistication of the investor. I think what it goes to is the expectations of the investor, and

social policy is ultimately driven by whether when people lose their

shirt, they feel that you should have prevented it from happening.

That’s an important aspect of social policy.

So I also like the idea of the wisdom of crowds. Just to give an

example, the wisdom of a crowd assumes that you have a rule in

place that requires what they’re apparently doing, which is you

have to get a minimum number of people to get to a minimum

amount. I like those kinds of innovative approaches to achieving

compliance in a different way from the way the SEC really even

thinks about it. But the point is, that has to be a rule because if

it’s not a rule, the person is going to go in not subject to the wisdom of crowds, and only gets to $3,339 and then will put it in a

bank account somewhere and disappear off the Internet.

And as far as the ability to commit fraud on the Internet, I

mean, I wish that the SEC’s Internet fraud person, for which they

have a specific office, were here, because they would just flatly contradict what we’re being told about what goes on in legitimate
103

Internet-based marketplaces. The amount of fraud that it’s being

used for is rampant. It’s the ideal vehicle. If I were trying to create

a fraud, I would love the opportunity to use the Internet to do what

some of the proposals that are on the table to do, because that’s

precisely the way to raise millions of dollars from 50,000 people.

Mr. MCHENRY. So why don’t we simply from—for securities purposes ban the use of the Internet?

Mr. BULLARD. Because the Internet is also an incredibly valuable

tool for raising capital.

Mr. MCHENRY. Okay.

Mr. BULLARD. So what you do is just—you have only portals that

have satisfied certain requirements being the places where you can

do this, and you’re also putting the responsibility on the portal,

slash, broker/dealer, which is the optimal from an efficiency point

of view to place responsibility. But the problem is broker/dealers

will unite and say, oh, we don’t want this responsibility. And that’s

what you’re hearing from Ms. Mauriello. It’s an institutional difference where they would rather have the issuers bear that risk

but it’s not efficient.

Mr. MCHENRY. Ms. Mauriello, I’ll let you respond to that.

Ms. MAURIELLO. Sir, I think something that has come up is the

wisdom of the crowds for this protection and how that works versus

broker/dealer. One slight variation that we have on that’s around

the qualification of purchasers. So what made us feel very safe in

our issuers and purchasers is that everybody knew each other. This

was truly communities. And so I think there is a variation on

crowdfunding, which is community funding, which is what we instituted, where you had to verify as the issuer when you invited the

purchaser, I do know you and I know you in this way; we went to

school together. And the purchaser had to verify, yes, we did go to

school, I know about your character, I know about your acumen,

and then you were doing the investing. At no point did we allow

for the general public or for strangers to be able to invest.

So that’s how we got around—not how we got around but how

we addressed in most part this fraud issue. We also went through

background checks, which Mr. Neiss has recommended, but the

fact you actually—both parties know each other I think is the most

important starting place, and then you can grow from there on reputation.

Mr. MCHENRY. If a fee structure were similar to what Mr. Lynn

discussed—and granted, the pound-to-dollar conversion changes

that slightly, but not to a great degree. Let’s say it’s a $10,000 registration with SEC. Is that something bearable?

Ms. MAURIELLO. Sure. It’s not the upfront costs that are problematic at all. It’s the ongoing due diligence requirements and ongoing compliance requirements that are necessary for the small

deals. So I would have no problem paying an upfront fee. That’s

the nature of fund-raising and making that happen. But it’s how

much due diligence I’m responsible for, for even the smallest, de

minimis, if you will, deals that are happening on the other side.

Mr. MCHENRY. Okay.

Mr. BULLARD. If I could add just one point. Ms. Mauriello is exactly right about the burdens of broker/dealer regulation in the

United States. Mr. Lynn pointed out one of the differences in the
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U.K., that we just don’t have the flexibility to say, well, let’s see

what you’re actually doing here, and regulate as a broker/dealer on

that basis. It’s pretty much an all-or-nothing system, in contrast

with the regulation of exchanges.

The SEC has been very innovative. You haven’t heard anybody

complain about being treated as an exchange which is—the same

kind of issue arises with respect to being a broker/dealer because

there is an SEC exemption that applies.

So what—the solution to Ms. Mauriello’s problem and Mr. Lynn’s

problem is to have more sensitive broker/dealer regulation that

says, well, if you’re only doing this and this is your business model,

this is what we want you to do in return, especially if—and this

is key—if the custody of assets component is removed from their

responsibility, then you have eliminated a huge amount of broker/

dealer regulation.

It’s my understanding all of these models put custody somewhere

else, and custody is the root of many problems with fraud; custody,

meaning the person who actually holds the dollars. That was the

Madoff problem. That’s really the problem with many broker/dealer

abuses.

Mr. MCHENRY. You know, this question of fraud, though, is interesting because, Mr. Bullard, I was going to respond to you before

I recognized Ms. Mauriello, because the idea that the Internet is

a perfect conduit for fraud. Well, let’s be honest about it, let’s shoot

straight. Taking advantage of one person is much more—you’re

much more able to do that rather than take advantage of 1,000

people.

I mean, is that—because the example I would use is the eBay.

You have the exchange of very valuable goods, and individuals get

to look at that seller and that seller’s recommendation and all the

information about it. So you have some confidence with certain people, there is no confidence with others, and the thing shakes itself

out; versus the individual who, in a parking lot, purchased an iPad

that turned out to be a piece of wood. Right? I mean, so fraud does

occur. I mean, we have had extensive—you know, the SEC has

been around for 80 years and provides a wonderful function, wonderful amount of safety and security and disclosure and all of that,

but we also had Madoff and you also had individuals following

Madoff that submitted information to the SEC. So there is some

wisdom in crowds. There is some wisdom in crowds.

But to the question of—that you mentioned before which is—you

know, is the SEC there to mandate disclosures or to prevent dumb

people from doing dumb things, you know, for being taken advantage of from fraud which is a larger ideological question, and you

mentioned it in those terms. I think that’s reasonable.

I’ve got a couple of other questions I want to hit, and I’m not

sure if we have the full—ranking member from the full committee

returning, but I want to make sure he has an opportunity to ask

questions if he does.

So you all have different approaches. So how important is it for

the SEC to create flexibility and recognize the different models? All

have some valuable attributes. We will start with Mr. Bullard and

work backward.
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Mr. BULLARD. Again, just—I’ve been using too much time already—just again to reiterate, I think the two-tracks approach, one

of them being a de minimis approach, is the way to really move the

ball on this and make progress, at least for those who are more

into the kind of original crowdsourcing approach where it’s almost

a form of social activism where you have the investing going on.

And then, second, I think we’ve got to look at this as an intermediary issue for efficiency reasons so that you can allow

crowdsourcing to maximize its potential. You’ve got to place the

burdens on the portal, on the central point, and then you have to

look at the issue where—the burdens you want to relieve issuers

of. You then have to convert them into a broker/dealer context and

figure out what do we need to replace those with that broker/dealers can do much more efficiently and do better?

And what you’re hearing is a description of models that they

have chosen to adopt that work very well. I do wish the SEC would

be much more creative at looking at the kinds of ways that eBay

and these Web sites establish trust and confidence that are not

really reflected in the securities laws at all.

Mr. MIGLIOZZI. The way I see this is that I believe that having

this wide open would allow small businesses absolutely to—where

you have a possibility of, let’s say, going to an SBA. It’s almost impossible to get a loan from an SBA for a small up-and-coming business. This would allow you that access. I truly believe that we need

to maintain some openness on this. Transparency is key, I will

have to say that. Constant communication is key, and you will end

up with—there’s no way to prevent for absolute fraud. There’s

going to be some cases that are going to slip through, but I truly

do believe that transparency is absolutely something that will keep

clear on what we need to do.

Mr. NEISS. Listen, fraud, investor protection, and capital formation were the three things that we looked at at our August 1st

symposium that we held in San Francisco where we brought

thought leaders together, lawyers, professors, all interested parties,

even some crowdfunding sites, to work out our framework in the

startup exemption. That literally crafts the rules under which another exemption, a different—like a rule 507 that would allow this

to happen, and it addresses all of these points. So it’s in my written

testimony.

Mr. MCHENRY. Thank you.

Mr. LYNN. I think in answer to the question about the need for

a flexible form of regulation, absolutely. As I say, we have benefited I think from the flexible approach that the FSA takes, and I

have no doubt that there’s a way—I don’t know what it is, but

there’s got to be a way to design some form of intermediary regulation that’s not as burdensome as broker/dealer, but that nonetheless addresses a lot of these issues. And I said in my testimony, I

do support some level of intermediary regulation. I think it is and

can be the most effective way to make this market work.

I would add one quick other point in response to Mr. Bullard. In

terms of having a separate regime specifically for de minimis investments, if when we’re talking de minimis we’re talking about

$100 or $250, don’t bother. I mean, there’s just no point in putting

it in place. The market will never function. Deals won’t get done,
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and we’re all wasting our time. If de minimis is $1,000, $5,000,

$10,000, I’m not sure that I support that, but it becomes a little

bit more feasible. But if we’re really expecting crowdfunding platforms to function on the basis of $100, $250 caps, it’s a waste of

time.

Mr. BULLARD. Even though they’re already functioning in the

debt markets on precisely that basis?

Mr. LYNN. It’s simply not going to happen for equity investments

and startups. People aren’t going to be investing that small of an

amount. It’s very different with peer-to-peer lending when you have

constant returns and a constant cycle of interest payments. There

will be—I should say—I should clarify there will be a lot of people

who will invest at that level, just not a sufficient number in any

given investment, given the nature of equity, given the importance

of high upside versus, you know—you know, high upside versus

losses in those cases. You know, the deals just won’t get completed.

We’ve done a lot of research around it, and that’s what we’d back.

Ms. MAURIELLO. And I would concur at that point for what it’s

worth, and I would add two more that haven’t been mentioned already about some flexibility in rulemaking which would be very

useful.

The first one, which is in the bill that you proposed, is national

preemption, and although we have automated all the State-byState laws, it’s extremely difficult to build a scalable platform to

facilitate these things if all of the States can put in their own laws

on top this. So I very strongly advocate and support what you said

about national preemption.

And secondarily, the most important thing for a lot of the businesses that are using these functions, that they can raise more capital later, as you said. This is not the end-all, be-all to capital formation. This is step one. So ensuring that the rules that are put

in place play well together with the other rules.

So, for example, if you’re doing a 504 raise and you can only raise up to $1 million and you want to raise a VC round 6 months

later, you can’t. You have to wait that appropriate period of time.

So I would encourage that to be taken into account with rulemaking as well.

Mr. MCHENRY. Okay. Ms. Cross, let me state the question in a

different way because I understand the limitations you have as an

employee of the SEC, and so I know it’s a unique position, but

you’ve always done very well testifying before Congress and being

forthright, you know, based on those constraints, and I do appreciate that.

So is the SEC currently looking at recognizing the different models in terms of broker/dealers, you know, that type of model, and

providing some level of flexibility?

Ms. CROSS. What I would say—and I appreciate your kind remarks. Thank you. What I would say is that at the staff level, as

we’ve been thinking through what would be the best way to advise

our Commission, we’ve talked about the fact that there may be a

need to have scalable regulatory approaches and, frankly, to think

about this creatively.

So, yes, from the staff level perspective, we’ve been having meetings pretty regularly recently to talk through what would be the
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safest way to roll this out if the Commission were to decide that

it wanted to do it on a cost-effective basis, and questions around—

depending on what the role is of the intermediary, could you make

the regulation of it scalable so that it’s cost effective?

Mr. MCHENRY. Have you looked at the FSA model in Great Britain?

Ms. CROSS. I read all about it last night, and I thought it was

fascinating actually, and I look forward to discussing it with Mr.

Lynn. I took his card and I think it will be very helpful to hear

what the experience is there. I think that’s a fascinating approach.

It gives me less pause than the idea of having—what really does

scare me is the idea of people just opening up sites, stealing people’s money, closing the sites, and you know, they’re not even in

our country, they’re someplace else, and set up fake businesses;

and everybody, you know, puts in their several hundred dollars and

it’s just gone. I think that would be a real shame and would tar

this market, and so the approach that the—that he described for

the FSA sounds quite interesting.

Mr. MCHENRY. Even with that great diligence provided by the

SEC, fraud still does occur, and so, you know, I think it’s important

the SEC keep in mind the cost-benefit analysis of potential lost

profits and lost opportunities at the same time. But you know, is

there—well, what are the SEC’s regulations on peer-to-peer lending?

Ms. CROSS. First of all, I need to start by saying that I used to

represent one of the two large peer-to-peer lenders before I came

to the SEC. So I’m recused on talking about particular peer-to-peer

lenders.

The regulations that are currently being complied with by the

peer-to-peer lenders require that they file registration, same as to

register their securities that are backed by the notes that come

from the individual borrowers, and I believe that they’re not regulated as broker/dealers. I believe that they—there are alternative

trading systems that are associated with the peer-to-peer lenders

where the members can trade the notes and that the ATS is—is

run by a broker/dealer. But the site itself, I believe the money runs

through a bank; people put their money in a bank, and so there

isn’t any concern that the money would be stolen, and that’s how

it’s done.

Mr. MCHENRY. Okay. And so that’s to Mr. Bullard’s point of who

actually possesses the assets in the transaction.

Ms. CROSS. Right. It’s in a bank is my understanding.

Mr. MCHENRY. Okay. And so that model is different than a

broker/dealer model for that peer-to-peer lending site or account?

Ms. CROSS. That’s right. They’re not—they’re not registered as

broker/dealers is my understanding. It’s been 2 years since I’ve

been back to the Commission. So I have not paid attention to what

they’ve been doing lately. So that was what the model was in the

past.

Mr. MCHENRY. Mr. Lynn, you mentioned something earlier that

I wanted to touch on, which is you said that larger investors should

be permitted to invest alongside smaller investors. Why? Why do

you think that’s worthy of beneficial proffer?
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Mr. LYNN. Well, getting to the point I made about the problem

with the de minimis exemption, the key here is if we think

crowdfunding is a good thing and if we would like to see these platforms function effectively in the market, deals have to get completed. And I’m operating under the assumption that most platforms will work on an all-or-nothing basis as ours will. It’s not

going to be very appealing to investors to risk putting a few hundred dollars into a business and then finding that a business can’t

do anything because it didn’t raise the rest. So assuming that these are $50,000, $100,000, maybe more, 250,

500 capital raises, they need to get completed for the businesses to

be able—for crowdfunding platforms to be able to function. And our

view, based on our research, is that the way they will get completed will be through a mix of high volume of smaller investors,

alongside a number of larger investors being able to invest $1,000,

$5,000, $10,000, potentially even $50,000. And what you will see in

this spread across—and you do see this to some degree with peerto-peer lending already, but we think it will be more pronounced

given the nature and appetite for risk in the equity markets—in

the private equity—private companies.

We think that the way that deals will get done and the only way

that they will get done is if you have some large investors in there.

As I said in response to the ranking member earlier, you could set

up a bifurcated system if you wanted to, but there isn’t really a

whole lot of benefit in doing so, and it adds additional administrative burden.

And in fact, by having larger investors come in on our platform,

they’re going to go through the same—the exact same qualifications, the exact same screening that our smaller investors do. So,

if anything, they get an additional level of protection.

Mr. MCHENRY. Does the President’s proposal limiting it to $1

million raise—does that provide significant investor protection?

Mr. LYNN. No. I mean, I don’t know that it necessarily does. I

think in terms of, you know, switching from the size of investment

or investor to the size of raised per business, it’s difficult for me

to foresee a whole lot of online crowdfunding successes at much

above $1 million. It’s not to say that they won’t happen. Certainly,

the PBR case is a great exemption and there will be others. Our

view is that the sweet spot in this market, you know, is at hundred—in Britain 100,000 pounds or less, here maybe $100,000 or

250- or less. And that that’s partially because that’s where, you

know, once you get above those levels, that’s where venture capitalists become more active and there are a lot of other routes to capital. So we don’t see a tremendous amount of detriment to a $1 million cap, but I’m not sure I see the advantage to it either, necessarily.

Mr. MCHENRY. Ms. Mauriello, do you see it the same way?

Ms. MAURIELLO. I would agree. Our sweet spot is around

$50,000, and again, it’s two different markets. I do think there’s

going to be some really outstanding cases. Eline Kickstarter is an

outstanding case of raising $1 million or more and I applaud those

and those are wonderful, but I do think the bulk of the market is

going to be in that of $50,000 to $100,000 range.

Mr. MCHENRY. Okay. Mr. Neiss.
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Mr. NEISS. All I want to add to that is that I agree that it’s the $50,000 range, but I think the whole point of having the million

dollar in there is if you’re successful at $50,000 and that’s your

proof of concept and you need to go out and grow it from there, you

can go back and show the crowd what you did with that $50,000,

be held accountable to that $50,000 in an open, transparent platform, and then go out and raise $250,000 under this framework, up

to $1 million, to really get it going. And I think the most critical

thing is, the most successful companies that come out of this will

be the breeding grounds for the VCs and the private money.

Mr. MCHENRY. Okay. So to go right back through the three of you as well. The limitation, 10 percent of your income or $10,000,

do you think that’s wise—a wise limitation? It’s the President’s proposal, which is also in the legislation that I filed yesterday.

Ms. MAURIELLO. Absolutely. I think it’s very wise to have a limit

there. I would propose that the limit on percentage is going to be

more protective than the dollar limit. The dollar limit is going to

be outdated very quickly and constantly need to be updated, whereas the percentage limit will always hold.

And I agree with Mr. Lynn—we’ve seen the 80/20 rule in place—

that you do need to have a few investors who are going to carry

the bulk of this, and they might be investing more than $10,000

if that’s less than 10 or even less than 5 percent of their net worth.

Mr. LYNN. I agree 100 percent. I think that a percentage-based

limitation is fine. Our own is 20 percent of the investor’s net worth.

An aggregate across the platform, 10 percent of income, I think

that’s all arguable. I don’t see the value and I see a lot of detriment

in a dollar limit.

Mr. MCHENRY. Okay.

Mr. NEISS. We’re in favor. We actually had it in our exemption

initially, and we took it out because we thought the self-reporting

on it was just—we left it up to the person to be responsible with

what they wanted to invest.

Mr. MCHENRY. Mr. Bullard.

Mr. BULLARD. Yeah, I just—I think Mr. Lynn just misunderstands my proposal.

Mr. MCHENRY. No, no. I wish you to answer the question I just proposed, which is the $10,000 or 10 percent of your income cap.

Do you think that’s sufficient or appropriate?

Mr. BULLARD. No. I would take—I would draw a paternalistic

line that someone living below the poverty line not being allowed

to put $1,000 or $1,500 into an offering over the Internet without

substantial additional protections through an intermediary platform other than those just voluntarily adopted by the firm. But I

would draw an income level—maybe it’s $50,000. I think it’s—I

agree completely with the structural absurdity of the current accredited investor standard. We can fix that, but going all the way

down to say, you know, persons with $10,000 in income, I think

that’s a mistake.

Mr. MCHENRY. Okay. Mr. Migliozzi, how does it make you feel

when these three crowdfunders to your right say that, you know,

it’s going to be about $50,000 to $100,000 you can raise, and with

an idea you had, you got $200 million of commitments.

Mr. MIGLIOZZI. Two hundred eighty-two million.
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Mr. MCHENRY. Oh, 282, I’m sorry.

Mr. MIGLIOZZI. Okay. This is—this particular case is obviously a

think big with, you know, with crowdsourcing a brewery. I think

limitations is going to limit business growth on the amounts. I

think that having the opportunity to allow businesses to be able to

get that brass ring, go a little bit further, those opportunities

should be there. I don’t see why we would want to artificially hold

back entrepreneurs from getting from point A to point B and then

be able to put themselves into the larger investment market at

some point. So I would say that in my opinion, obviously, think bigger.

Mr. MCHENRY. Okay. In terms of final, you know, wrapping up

here, just so everyone—for planning purposes, in terms of what the

economic impact would be if we followed the President’s proposal,

you know, can you go through and just give me your estimate?

We’ll start with you, Mr. Bullard.

Mr. BULLARD. Well, yeah, I think you would see a substantial increase in fund-raising over the Internet under that approach.

There’s no question it would assist capital formation. It would give

investors more options than they currently have, and it would be

a kind of liberalization that I think would be a good thing to some

extent. But I think it also would, as described in his proposal,

which is this unadorned $10,000 limit, it would open the door to

a substantial amount of fraud. I think it would inappropriately sort

of eliminate any kind of cutoff as to the sophistication and/or income of the person investing in unregistered securities.

Mr. MCHENRY. Okay. Mr. Neiss.

Mr. NEISS. I just think preventing investments doesn’t equal preventing fraud, and the only protection that we can give is an informed investor, and that’s going come through education in an

open, transparent platform. I think when we get the capital flowing

based on our projections, we can create 500,000 companies in the

next 5 years and employ 1.5 million jobs—new jobs.

Mr. MCHENRY. Mr. Lynn.

Mr. LYNN. I mean, in terms of economic impact, I can just tell

you our estimates for Britain, which you can then multiply by five,

based on population, and maybe assume a slightly higher entrepreneurial appetite here. You know, in Britain we plan at scale to be

able to see 1,000 to 2,000 new businesses funded per year. Of

those, we assume that somewhere between 20 and 40 percent will

actually turn into something and create some number of jobs. And

you can work backward from there to think about the sort of economic impact, and that’s our platform alone. There will be other

competitors out there, other businesses starting.

We see a vast level of nascent entrepreneurship in Britain, in

Europe, and the United States and around the world where people

would love to start a new business, have value-creating ideas, but

don’t have the access to the very first capital they need. And we

think that platforms like this can help them overcome that hurdle

and be absolutely transformative for an economy.

Mr. MCHENRY. Ms. Mauriello.

Ms. MAURIELLO. I absolutely agree. One of the statistics that got

us most excited about the potential for change in this industry is

that over $100 billion currently transacted between friends and
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family informal investing networks every year. It is the second

most common way of starting your business after your personal

credit card, which you mentioned yourself.

So I see a tremendous potential to both putting more protections

on that market. Currently it has no protections. Those are checks

that cross the dinner table, that nothing’s happening around and

growing at substantially the capital is there. It just needs to be

accessed.

Mr. MCHENRY. Thank you all for your testimony. I do appreciate

it. It is so helpful in forming policy. There is some give and take

here, but I think the input has been absolutely fantastic and unfortunately you’re here on one of the mornings where Congress had

about 20 different things going on. And so that has been the attendance question here this morning.

The subject matter is fascinating, absolutely fascinating. I look

at my father’s example where he had a great idea and a business

partner. He had five kids and he had a garage in the backyard.

And so he’s looking for money to feed those five kids. He had an

idea with his business partner, who also had five kids who was

looking for money too. The only way they could get lending was

through that new invention called the credit card. And I still have

my father’s credit card that he founded his business on. Today my

brother owns that business and runs that business with my father’s business partner and he employs about 400 people. That is

the beauty of innovation and small business.

We want to make sure that those folks have opportunities to

take their idea from the dinner table out to the markets. And so

much of the focus and discussion has been about the accredited investor. You are talking about the folk, the guy—Mr. Bullard, in

your testimony you mention this and I certainly appreciate that, I

very much appreciate it. You have a million dollars net worth,

you’re an accredited investor so you have great access to startup

companies. So Facebook, a lot of these tech companies had these

folks that had access to it, whereas the average investor, even the

superior investor who doesn’t have that high net worth doesn’t

have that same opportunity.

I want to make sure, and it’s my thought to democratize this

process, to give the small investors the opportunity for that upside

potential, not simply to make a contribution to a worthy charity

over the Internet, but to get the upside in this and that’s the point

of my legislation.

Now the structure of this I think is the point of the discussion

today, to make sure we have a proper structure so you can root out

fraud to the best of our abilities. But making sure that investors

have information and access to make an investment are both very

worthy things that I would hope that the SEC would look diligently

at and we intend here in Congress to move forward on that as well.

Thank for your time. If you have additional remarks, you may

submit it for the record. And Members will have 7 days to submit

questions for the record and comments for the record.

With that, the committee stands adjourned.

[Whereupon, at 11:45 a.m., the subcommittee was adjourned.]

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