September 24, 2019
Regarding: SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 210, 227, 230, 239, 240, 249, 270, 274, and 275 Release Nos. 33-10649; 34-86129; IA-5256; IC-33512; File No. S7-08-19 RIN 3235-AM27 CONCEPT RELEASE ON HARMONIZATION OF SECURITIES OFFERING EXEMPTIONS My Role I’m a Business Systems Consultant at Silicon Prairie Portal and Exchange – an Intrastate Regulation Investment Crowdfunding Portal founded in 2016 with FINRA Portal Status in 2018 . We are primarily a financial technology company, but Silicon Prairie has a suite of business entities and I have a variety of different roles within each of those units. My comments here are intended to provide narrative from the Portal “boots on the ground” perspective and these comments should not serve as a definition of my specific relationship to any of those entities. Summary The current framework is too difficult for issuers to navigate! As portal operator, we have heard about 1,000 business pitches to date. We are a software company, but the majority of our marketing efforts are spent performing remedial financial security education. The vast majority of first-time entrepreneurs are very surprised to learn that there are laws around publicly asking for investment, let alone exemptions from those laws! Regarding the Burden on Small Businesses The framework excludes many small businesses by overwhelming their ability to manage the complexity of acquiring an exemption in practical terms. Take off your regulator/lawyer hat and imagine you are a small brewery that wants to open a second location. It should be obvious that this punchlist is too much: · Be good at their current business/service, AND… · Plan the logistical next steps/contingencies for growth, AND… · Navigate fundraising options as well as an Accountant, AND… · Become as knowledgeable as a specialist Securities Attorney, AND… · Understand the electronic banking enough to engage a Technology vendor, AND… · Attract potential Investors without turning them off with the process, AND… · Assign internal personnel to regulatory Compliance, AND… · Absorb the operational costs while Leadership is distracted, AND… · Be able to afford the financial costs of Legal, Financial, and Technology vendors REGARDLESS of success with fundraising efforts Excessive complexity is causing the crib death of small businesses and the usefulness of the exemption laws. No reasonable person will use a tool they don’t understand because it feels dangerous. Operating an investable business is hard enough, the other factors combine to exclude most small businesses. Cost of Compliance As a small business ourselves we are intimately aware of the above pain points of the Issuers. We have survived into year three as a Portal operator and consider ourselves “lucky” to have lived long enough to look back at our expenses. The cost has been high. If there was greater harmonization between the exemptions, we believe we would have saved hundreds of thousands of dollars in time and resources. As a software company we should be mostly focused on writing code, stabilizing our development environments, and getting customers. Instead, we have had to buy help from top legal/financial experts to fight some regulatory & legislative battles. That money should have gone towards growing our team (by about five people). NOTE: Issuers using our Portal must engage a securities Attorney directly, meaning the costs mentioned here are COMPLIANCE costs of our Portal, not issuer costs for an offering. We raised $250K for our Portal, three years ago with an intrastate exemption ourselves, so we have been through the process. We have written about a million dollars’ worth of software, hosted about a dozen deals to date, and may possibly break even this year. The ability to absorb this cost and find vendors willing to contribute is also an elitist high bar, no other portal our size could withstand this regulatory burden. Our Portal is only about a dozen technical personnel, but we have had to engage the expensive experts below to help us with confusion about exempt securities and portal operators: · Lawyer 1, a Securities Attorney who was a co-author of our Intrastate Exemption (MNvest) · Lawyer 2, a Securities Attorney who is also a Former MN Department of Commerce Regulator · Lawyer 3 (the mentor to Lawyer 2), a supremely accomplished Securities Attorney, who is also a former State Department of Commerce Regulator, plus has dozens of Stockbroker exams and who also contributed to the writing of the Series 7 stockbroker exam · Broker-Dealer 1, the oldest Broker Dealer in our state · Broker-Dealer 2, a control person for Broker-Dealer 1 and consultant to over 20 FINRA BDs The significant difficulty with our State Regulators is they do not have a securities expert on staff, and so they lack confidence to take appropriate actions around exempt securities requiring nuance. Our state regulators have limited bandwidth and have essentially expressed ignorance of relevant statutes and their authority and responsibilities towards this specialty. They seem able to perform “paint by numbers” actions but are completely uncomfortable with anything that requires interpretation. We believe the newness of the exemptions and the lack of harmonization has created analysis paralysis, as our regulators regularly ask for more time to review our requests even after statutory deadlines have passed. These delays starve small businesses by making it harder to form capital. The purpose of investment crowdfunding is to provide a simplified and less expensive path for capital formation – our local regulators have stumbled into adding a layer of unwritten standards that pulls on practices from all other types of financial professionals: Broker-Dealers/ Agents, Investment Advisors/ IAR, Investment Banks, etc. Frankly, the process has been expensive because of the excessive complexity. The earnest feeling is that us small businesses are compelled to “lawyer up” and “pay to play” – that the burden is on us to assuage the fear of an institution with a theory of harm (to investors) that has not manifested materially. Meanwhile, we watch nascent businesses starve due to the confusion around capital formation with exempt securities. Access to Capital As a Portal Operator we have spent approximately 20 hours every month (for the last three years) performing public education with a handful of Securities Attorneys in our State. However, both Portals and Lawyer are service providers. There is no funding for relevant education that is reaching the masses, this means the businesses most likely to receive help are those who already spends time with technologists, lawyers, or financial professionals. The layman entrepreneur has almost zero chance of navigating successfully without these expensive team members. Sadly, this elitist pre-sorting is effectively invisible to the public record. Regarding communication restrictions, specifically advertisements - As a Portal Operator that has heard business pitches from nearly 1,000 companies AND as individuals with deep expertise in Blockchain/ Cryptocurrency: The communication restrictions need to be unified between different exemptions so that issuers performing “do-it-yourself” investment marketing can be confident that they are making compliant advertisements. Although we have not personally witnessed any investor harm, we have concerns with the marketing strategy of both overly nervous and overly confident potential issuers: · Some issuers lose momentum because one member of their internal team is familiar with rumors that they must “get advertisement approval” first to offer shares, but they are unsure of when this approval happen or who gives it, and it never bubbles up to the level where they discuss it, so they just hold back from acting. We believe these businesses are at risk for failed campaigns because the issuer is responsible for attracting investors, but they lack the confidence to take action. · Others potential issuers assume it’s fine to play “fast and loose” with ads because they have personally viewed many abusive web advertisements for investment. They assume that cryptocurrency businesses get away with the overt scams, so as long as they have good intentions and their team is conscientious then there is no need to bother with research of “ad reg” that will just hobble themselves AND be a waste of time. As long as there is specific wording that the templates are suggestions only and not mandatory… It would be helpful for issuers to have a harmonized specific example of acceptable ad copy for these: · Investor full page “one-sheet” summary, also suitable for outbound email · Half-page page magazine advertisement, also suitable for “long format” blogs · Social media post (i.e. picture with approx. 40 words) · Website Banner ad (i.e. 3 lines with 30 characters each) Regarding communication restrictions, specifically Solicitation - As a Portal Operator that has heard business pitches from nearly 1,000 companies AND as technology professionals with deep expertise in the ISP (Internet Service Provider) /Telecom industry, we believe the exemption wording should be unified AND updated to reflect that internet communication makes it impractical to police the act of solicitation (at this scale), especially when compared to the actual point of sale. The attempt to police solicitation seems to be counterproductive to the fundamental goals of crowdfunding. At this scale, the ROI for attempting to police the flow of information is futile at best and oppressive at worse - the public protection is just too remote here. While the intent to control of solicitation may have noble goals in large offerings, the horse is already out of the barn for these tiny “fly under the radar” deals with a small number of investors. We do believe investors need protection, but that belongs at the point-of-sale. · Investment Crowdfunding is intended to open the door for small business capital formation. The ability to assemble a crowd of authentic fans is one of the few advantages that small business have over larger corporations. It seems un-sporting to kill their nimble advantage by holding them to the compliance standards of someone with dedicated compliance divisions and large safety nets of cash. · On the mirror side of the coin, it’s classist censorship to keep the average joe from even hearing about the opportunities. When considering Investment Crowdfunding exemptions, some traditional investment professionals use the phrase “…LET the non-accredited investor participate…” without ever considering the inverse phrase is “…Keep the average person out…”. Any reasonable person would recoil at those optics, so let’s not perpetuate it. Regarding size of offering - As a Portal Operator that has heard business pitches from nearly 1,000 companies, we believe the maximum amount for Reg CF should be raised to match the maximum of the other exemptions. Otherwise Issuers will avoid Reg CF in favor of the largest dollar amount available. This is because trying to identify the appropriate exemption is not intuitive, logical, or self-evident to the layman. We attempt to reduce the confusion by narrowing their options with two questions: “How much money do you need to raise?” and “Where geographically are your investors”. That combination of questions helps our team shunt the potential issuer into the more-favorable option, but we had to come up with that screening ourselves. These questions are not listed/recommended widely and the securities attorneys often forget to ask the second question because they expect the issuer to volunteer the locations of their hypothetical future investors. Essentially potential issuers are seeking money, and look to us for guidance on how to raise money. They ask for a menu of choices(exemptions), but it’s inscrutable to the layman entrepreneur, so in answer something like: “I’ll have one ‘large money’ please… whichever that is.” Upon closer inspection it’s absurd to expect the fundraising layman to make the logical leap that access to money will be based on the physical geography of individuals they have not yet identified or nor met. This type of information asymmetry further distances the small business from formation of capital. Regarding type of Investor - As a Portal Operator that has heard business pitches from nearly 1,000 companies and has well over a 1,000 investors on our platform we would like more guidance on HOW Issuers should handle international investments. As long as the wording is phrased as a suggestion and not a mandatory obligation, it would be helpful to have an example of how an Issuer should handle international investors, i.e. investors geographically located Canada or China: The lack of clarity may be harming the ability of Issuers to form capital, for example one of our Issuers (Reg CF) had willing investors from outside the US, but the Issuer turned away the capital because they lacked confidence that they understood the tax implications. Numerous legal and financial professionals were consulted, but we were not 100% confident either. In the end it was easiest to turn away the capital rather than put the whole thing into question. Regarding Investment Amount - As a Portal Operator that has heard business pitches from nearly 1,000 companies and has well over a 1,000 investors on our platform we believe the restrictions around the sophistication of the investor are too restrictive to the point of being offensive, as well as being un-necessarily complex from a calculation standpoint. Most of our issuers and their investors are absolutely confused about WHY there is such a tight restriction on Reg CF maximum investments, and WHY it’s not in simple banded dollar amounts. It’s so ridiculous that they often think we’re joking at first. We wrote software to handle the calculation but that shouldn’t be needed, it’s like accounting for every band-aid in a hospital – not worth the cost of enforcement. We believe that the maximum investment for the non-accredited investor could safely be raised to match intrastate exemptions like MNvest at $10,000 or even the “suitability test” of SCOR. It feels absurd that the average person can buy a $5,000 wedding cake and sit down in front of the bakery to eat the whole thing in one sitting… BUT they cannot invest that same amount in a technology business. People make bad financial decisions every day: drive cars they can’t afford, blow their whole paycheck at the casino, have a $50,000 wedding followed by a $50,000 divorce a year later… and the law is silent! Investments are the one place where their money can actually turn into more money – but that is somehow the one place “regular people” can’t spend it? The optics are terrible because it’s silly paternalism that doesn’t actually protect the little guy from getting swindled. The fact is the bad actors have much easier and less visible ways to bilk people, people are not buying a fake gold-mines in the regulation crowdfunding format. Meanwhile, the strict limits also keep regular people from being able to participate in a meaningful way. A 10% return on a $2,000 investment is only like $200… the person would do better to just pick up an extra couple shifts as a Lyft driver and keep their cash as a safety cushion. Meanwhile, the rich person who invests $50,000 gets a chunk of cash big enough to buy their kid a car, so it’s probably worth it to them. Both investors exercise the same type of discernment, but the outcomes are vastly different. Since Issuers have discretion to select whom they will accept as investors, its worth noting that is the sentiment of the real estate professionals. Real estate deals often have very easy to understand business models with attractive return. The best professionals have a large following of interested investors, so the Issuer has some choice to include or exclude investors at will. The small dollar amounts are just not as attractive to the issuer, so the tight strict restriction on maximum investment from the non-accredited investor effectively excludes them from a large pool of investment opportunities in real estate. This is another strange place where a non-intuitive metric forces the choice of exemption. If a real estate deal has non-accredited investors they want to include at a meaningful level, they have to choose between catering for a couple hand-picked non accredited investors, or the ability to gather investors from all the states. In reality, this dichotomy does nothing to protect investors, it just makes capital formation more confusing. Upon closer inspection, Net-worth is a poor proxy for sophistication, technically a person who is a bumbling fool but inherits well would be called sophisticated until they have poured their fortune down enough rat-holes. Meanwhile, an accountant that became a financial security attorney wouldn’t make the cut if they experienced a particularly devastating divorce? Absurd. This type of language is an embarrassing leftover from a classist divide of white collar vs. blue collar. We should consider the more inclusive “certified investor” language from Wisconsin. This would also provide more latitude for young investors who might be acutely knowledgeable or trained, (such as MBAs, Software Engineers, Lawyers), but too early in their investment career to have amassed net worth yet. Often, they are investing hundreds of thousands of dollars into their own education. Technically, they should be able to absorb the risk of startup investment more than an accredited senior who should be reducing risk because time to recover has diminished. And after all, the young professional is probably on their way to qualifying as an accredited at some point later. This highlights the ridiculousness of “sophistication” – how is current wealth a measure of good judgement, when it’s a temporary state with many people moving in and out? The strict dollar maximum on the non-accredited investor is also not enforceable as it stands, because there is no data coordination between the Portals, so the regulators have no visibility to the total number of deals the investor has made, and it all depends on self-reporting. An investor could theoretically make multiple Reg CF investments across several portals to go around the rules. We are not aware of any harm created this way, so it just seems to be a red tape rule. Regarding disclosure – As a Portal Operator that has heard business pitches from nearly 1,000 companies and has well over 1,000 investors on our platform we would welcome an sample of universally acceptable compliant disclosure documents. Our potential issuers are often haggard professionals short on time, it would be a kindness to provide an example of a Do-it-yourself set of documents. We believe most people will still need a securities attorney, but the availability of an example may help small businesses to believe the exemption process is within reach. Regarding Secondary Markets - As a Portal Operator that has heard business pitches from nearly 1,000 companies and as Financial Software Technology Experts with Blockchain Expertise we are very interested in clear guidance on improving the secondary market for liquidity. We believe the ability to exit a position (simply) will increase the number of potential investors that are willing to participate in exempt deals. Historically, investors typically expect to get stuck into a private deal for 5-7 years, meaning every investment they make the bears the weight of the opportunity cost of the investments they can’t make during that time. Angel investors mitigate that risk by making ten deals at a time, the secondary market could provide everyone the same type of safety-hatch. With our smart document technology combined with one of our business units it is possible to programmatically control the transfer of these exempt securities to ensure any right-of-first refusal is executed and that issue maturity restrictions are obeyed. The ability use a portal to resell the exempt shares is very exciting! We look forward to sensible rules that do not place an excessive burden on small technology companies able to support this functionality. We have already begun legislative discussions in our own state, but based on the friction we’ve experience to date - we welcome clear guidelines that explicitly allow for a secondary market. As a technology company we have the ability to provide many types of compliance reports quite easily, this is usually surprising to bankers, lawyers, and insurers because they typically not the creators. To clarify, reports are the easy part for us! Knowing what the regulators want/need is not. We have expended a lot of resources trying to ensure we are compliant, and we greatly value the opportunity to receive greater clarity and confidence in our compliance in multiple jurisdictions. We believe this will allow us to serve small businesses with capital formation in the spirit of the JOBS act and provide balanced access/protection for exemption investors. We’re grateful for the chance to comment and look forward to the harmonization, Jade Barker Silicon Prairie Portal and Exchange St. Paul, MN