Top Ten Issues Raised at Texas Crowdfunding Conference

The CrowdfundTX Conference featured an impressive assemblage of crowdfunding leaders from around the country. Organizer, Chris Camillo Founding Board Member of the Crowdfunding Professionals Association, noted that bringing this group of “speakers together may never happen again.” The conference kept participants glued to their seats as real issues were discussed, leaving everyone feeling updated and excited about investment crowdfunding.

The top ten issues discussed at the conference were:

1. Jobs: Investment crowdfunding was approved in 2012 when President Obama signed the JOBS Act into law; implementation still awaits regulations from the SEC and FINRA. The jobs, however, aren’t waiting. Heather Lopes, CEO of EarlyShares, noted that the “JOBS Act has already created 1,500 to 2,000 jobs” from firms that have been launched to do investment crowdfunding and provide related services since the law passed. This represents a mere drop in the bucket compared to the potential jobs impact from unleashing investment crowdfunding, panelists suggested.
2. Investment Crowdfunding: Perks or reward-based crowdfunding arguably goes back hundreds of years though its popularity on the internet goes back only about five years. Camillo noted that some companies can make little use of rewards-based crowdfunding, suggesting that a “If a physician has an idea for a new medical device, that is a better fit for equity.” Lopes also noted that the kindness that led to a New York community raising $75,000 to help a restaurant destroyed by Hurricane Sandy will also influence equity investments in crowdfunding.
3. Race and Gender: Visiting one-on-one with Jonathan Sandlund of TheCrowdCafe while being filmed for a segment in the upcoming documentary film Crowd of Angels, Sandlund agreed that crowdfunding would largely eliminate cultural biases observed in angel and venture capital financing, which are dominated by men making investments in businesses controlled by men. Crowdfunding deals go to women in the roughly the same proportion that women own businesses, according to The Crowdfunding Revolution. Sandlund expressed the belief that racial bias is also being eliminated by crowdfunding.  Rodney Sampson, author of Kingonomics, said, “If you don’t know what crowdfunding is, you can’t seek it out. We need an onramp of over-, over-education.” He added that for venture capitalists, crowdfunding “success will come first; race and gender will become secondary.”

4. Brian Meece and Jed Cohen

   Regulations for Title II: The SEC is required to issue regulations governing both Titles II and III of the JOBS Act. Title II relates to new rules for the general solicitation of offerings for accredited investors. Panelists Candace Klein, CEO of SomoLend; Maurice Lopes, founder of EarlyShares; DJ Paul, founder of Crowdfunder; Scott Purcell, founder of Arctic Island; and Kim Wales, of Wales Capital reached a loose consensus that regulation for Title II would be completed before the regulations for the more anticipated Title III provisions related to consumer crowdfunding. Wales was essentially alone in her optimistic view that regulations would be issued either late in the first quarter or early in the second quarter.

5. Regulations for Title III: The same panel concluded that regulations for crowdfunding won’t likely be issued by the SEC and FINRA before the end of the third quarter or possibly into the fourth quarter. Klein praised the regulators, saying, “We love the SEC.” Most agreed that the SEC has worked in a spirit of cooperation to establish the rules required by the JOBS Act.
6. Deal Size: Rewards based crowdfunding campaigns, according to Brian Meece and Jed Cohen, founders of RocketHub, typically range from $3,500 to $35,000. Sandlund said that data from CrowdCube, and equity platform in the U.K., had an average deal size of $88,000, suggesting that the average equity deal would be about four to five times as large as the typical rewards-based crowdfunding campaign.
7. Costs: Maurice Lopes, founder of EarlyShares, said to expect platforms to charge “5 to 10 percent” of funds raised to cover the costs of issuing shares through crowdfunding. Doug Ellenoff of Ellenoff, Grossman and Schole, noted that with legal and accounting fees, the costs could reach as high as “20 percent” of the proceeds. Of course, several panelists noted that such calculations were dependent on a wide variety of factors including the size of the offering.

8. Heather Lopes

   International Crowdfunding: Jason Best, of Crowdfund Capital Advisors, said, “Make no mistake, crowdfunding is a global movement.While the U.S. still represents the largest market for crowdfunding, Carl Espositi of Crowdfunder.org noted that the number of crowdfunding platforms, while smaller in Europe, they are “growing at twice the rate of the U.S.” Sandlund also observed that investment crowdfunding is legal in Australia and the U.K., among other countries. He noted that the U.K. site FundingCircle funded two $80,000 loans in under 29 minutes. Best also noted that because charging interest is prohibited under Islamic law, “The Muslim world is working to implement equity crowdfunding.”

9. Crowdfund History: Sherwood Neiss, of Crowdfund Capital Advisors, described the naiveté with which he and Jason Best approached Washington to begin lobbying for the passage of the JOBS Act. He said, “We literally started knocking on doors asking to speak with the representatives and Senators; people looked at us like we were nuts. So, we asked, 'Who is in charge of jobs?'" They’re naïve approach ultimately worked with their legislation passing the House with overwhelming bipartisan support and a vote of 407-17. Their coordination of industry leaders working with the SEC and FINRA through the Crowdfunding Intermediaries Regulatory Association demonstrates how much they’ve learned in a short period of time.
10. Fraud: One theme that came up several times during the day is the fear of regulators and some detractors of crowdfunding about the potential for fraud at the expense of small investors. Sandlund noted that in a careful review of $250 million of crowdfunding transactions, he found not a single case of fraud. Ellenoff said, "Crowdfunding is at worst friends and family financing done better." He pointed out that the use of crowdfunding platforms will enhance transparency and accountability for transactions that are happening to some degree anyway.

Richard Seline, a native Texan and former advisor to President George H.W. Bush, said, “Texans don’t like to finish second.” It is clear that Texas is ready for crowdfunding; the question is when will crowdfunding be ready for Texas?