Is the JOBS Act evil? We had a debate on that at Bullpen Capital and Vator's Venture Shift last night, and it was amazing. 500 Startups founder Dave McClure and securities lawyer Michael Stocker from Labaton Sucharow LLP went head-to-head, and there was a surprising lack of F-bombs (until the very end). It probably goes without saying that Dave McClure was pro, and Michael Stocker was con.
Just to give you a taste of where they stand, here's their view in a nutshell:
McClure: "Get your laws off my startup!"
Stocker: Crowd-funding has "the PeeWee Herman Challenge. if you love crowdfunding, you might have to marry it."
For a little texture to the issue at hand: the JOBS Act would allow companies to not only receive donations, but to use crowdfunding platforms to sell securities to anyone—accredited and unaccredited investors alike. There will be no net worth requirement, no sophistication requirement—nothing, other than limits on how much they can invest based on their income. It’s more or less what ProFounder was trying to do ahead of its time.
Roger Royse from Royse Law Firm moderated. Each debater got two minutes to respond to a question and one minute to rebut.
First, opening remarks:
Dave: Current laws are completely elitist and restrict investments to folks who are accredited individuals, therefore using net worth in place of IQ—that’s un-American. But then we have other investing opportunities—like the housing market, like the stock market—which obviously have no repercussions on average investors. Why the hell are we restricting access to businesses in the U.S. who are creating jobs?
Michael: I have two problems to raise; one is a warning aimed at entrepreneurs and another is aimed at investors. Entrepreneurs: it’s the PeeWee Herman Challenge, if you love crowdfunding, you might have to marry it. It creates a structure that VCs don’t like—once you start to go down the crowdfunding road, you can’t go back. If you plan on opening a taco truck and you plan on raising money up front that you’ll never need to raise again, then crowdfunding is for you. The other problem is “Grandma’s gonna eat dogfood” problem. It creates a mismatch between the highest risk investments and the investors able to withstand the blow. [Stocker added: "It’s not an IQ test." in response to McClure's suggestion that the accredited/unaccredited investor distinction implied unaccredited investors were stupid."
Roger: Dave, don’t we need more investor protections? Or are they enough?
Dave: I don’t know, ask 10 million Americans who are underwater in their house. Is crowdfunding their biggest enemy, or is their banker and Moody’s their biggest enemy?
Michael: If you’re a public company, lying is pretty hard. Accounting fraud is pretty hard. You don’t even need to commit much fraud to trick people when there’s a minimal amount of information available to make decisions. You probably don’t understand the risks that you’re about to get into.
Dave: So you’re equating income with intelligence.
Michael: No, I’m equating income with vulnerability.
Dave: So should they be more afraid of investing in their house than in crowdfunding?
Roger: (reigning things in) Doesn’t crowdfunding democratize the process? Why shouldn’t the little guys be able to get in early like the VCs?
Michael: The kinds of companies that are going to have to resort to crowdfunding—being limited to $1 million a year—are going to be the companies that are too risky to get money from angels and other investors. Once people buy equity through crowdfunding portals, it’s going to be a long time before they’ll be able to unload it. Grandma is going to be stuck with those securities until she can find someone else’s grandma to unload it on.
Dave: We’re trying to provide training wheels for things that are miniscule when there are vast parts of our economy that have no limitations whatsoever—like Wall Street. Tear down this wall, Mr. Stocker. Make it a free country.
Roger: A million dollars doesn’t go very far with a tech company. If they need money, they probably go to a VC and if that doesn’t work, they go to crowdfunding. So if you see a tech company on a platform like that, they probably look like damaged goods. How are you going to look at them, Dave?
Dave: $20-$50k is enough money for most companies to get working capital. I don’t care how you get the money as long as you have an interesting product. I don’t think most tech companies are going to be the source for crowdfunding. Most companies on there will probably be mom-and-pop companies that make up 50% of our GDP but don’t have access to venture capital.
Michael: There’s this vaguely Libertarian Ron Paul idea of lets get the government out of companies—
Dave: Keep your laws off my startup!
Roger: In 2011, $1.5 billion has gone into crowdfunded offerings. It’s mostly products and donations. The wisdom of the crowd seems to have moved a lot of capital to the companies that need it the most. Why is this a bad idea for the company, Michael?
Michael: Because it means you’re not going to get any money from anyone else ever. It’s true—the crowd sure liked tulips a few hundred years ago. It comes down to the difference between equity crowdfunding and the other kind of crowdfunding—donations, philanthropy. It’s not eBay where you can see you have a defective product and you can send it back. You’re going to sit on that for a long time.
Dave: I think Mr. Stocker’s points are fair, but is it a good law that should be allowed to exist? We’re founded upon a tradition of taking risk. The people who were sent West to homestead, they had a lot of things they had to stick with, they had to take that land and work it—so I don’t think length of return on investments is a bad thing.
Roger: What would you have the SEC do—the devil’s in the details. There’s a lot that needs to be filled in to make this law work.
Michael: What kind of liability would a director in an issuing company face? if you’re trying to put together a board, don’t you think your potential directors are going to want to know how much they’re going to be on the hook for. Also, in terms of how much an individual can put into a crowdfunding deal—it’s supposed to be the portals that will make this happen. They have to get it right—the portal itself could be liable if the SEC makes them liable. I support strong liability standards on both fronts.
Dave: I think we should be concerned about the lobbying ability of plaintiff lawyers. I don’t think it’s good for the United States to put undue legal cost structures on companies. Right now accredited investors have to self-declare themselves to companies they invest in. I think this just opens up the market to other players.
Michael: When regulations are bad, it’s like Christmas. There will be plenty to keep plaintiffs lawyers busy.
Roger: What’s the world going to look like a year from now?
Dave: I hope the SEC gets around to filing some process for implementation so we can have a chance to screw it up and figure it out 5-10 years from now. I don’t think they should be able to delay ruling on this—hopefully before a future administration tries to change the JOBS Act. It’s a free country—people have opportunities to lose their money on lots of different things—houses, penny stocks.
Michael: Dodd Frank which PS passed two years ago—those regulations haven’t been issued yet, so if the SEC were to act on this crowdfunding stuff sooner would be alarming to me. Buzzkill answer: mostly nothing will happen in crowdfunding. It will be seen as too high risk for any small venture to get into. It will be used mainly as a portal for angel investors. But other parts of the JOBS Act will be used more than the crowdfunding part.
And for closing remarks:
Michael: Look, I’m a securities lawyer, that’s like being a divorce lawyer or a mortician. Someone calls you when something bad has already happened. Once things start being made available to the retail public, usually all the juice has been sapped out of that area. When you start looking at high velocity areas, retail investors don’t have a lawyer. Plaintiff lawyers don’t represent retail investors, they represent institutions. It’s easy for legislation like this to get pushed through. But to the entrepreneurs, I want to ask is this a business risk you want to take?
Dave: The larger issue here is the fact that small business is a significant part of the world’s GDP—largely unsecured tax cash flow. The long term benefits to our society of opening up our financial markets is absolutely a good thing, period. It’s a huge boon to unlock trillions of dollars in financial capital access. Even if we fuck it up in the beginning, it’s still worth doing. Small business owners aren’t going to have access to large capital. Mom and pop businesses in Cleveland and Mississippi don’t have access to capital—they’re going to be borrowing from their customers and from family. That’s why this is a great thing—we’re formalizing things that are already happening and are already legal outside the U.S.
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