On April 5, President Obama signed the JOBS Act into law, legalizing crowdfund investing in the United States. Although numerous people influenced the legislative process surrounding crowdfunding and JOBS Act, Sherwood Neiss and his fellow Startup Exemption co-founders were central figures in that process. The bill would not have passed — in fact, would not even exist — if not for the tireless efforts of these three individuals over the last 15 months. Neiss and his partners crafted the original crowdfund investing framework (which remains largely unchanged in the final JOBS Act), testified at two Congressional hearings surrounding access to capital for entrepreneurs, and lobbied vigorously on Capitol Hill for the ideal implementation and passage of a crowdfund investing bill.
I recently spoke with Sherwood Neiss about the JOBS Act: its conceptualization, the subsequent legislative process, its ultimate passage, its potential benefits and drawbacks, its media and public reception, and much more. The first part of that discussion is available here; the second part is available after the jump.
Eric Blattberg, Crowdsourcing.org: There are a number of elements of the JOBS Act only marginally related to crowdfunding that ease regulations for businesses. Let’s talk about some of those for a minute, like this new classification of the $1 billion dollar “emerging growth company” as well as the 2,000-shareholder limit (as opposed to the previous limit of 500). Ostensibly, the JOBS Act is supposed to help “business startups” — it’s part of the catchy JOBS acronym — but it seems to me that a company with $950 million dollars of capital isn’t exactly a small business. Do you really think it’s necessary to have the limit that high? Do you think companies with 3,000 employees and $950 million in capital should be allowed to avoid that SEC paperwork?
Sherwood Neiss, Startup Exemption: My personal opinion is no, they shouldn’t. I think those limits are really high. I’m not necessarily agreeing with those, but you know, it was a packaged bill.
Blattberg: Since you were so close to the process, could you speak to how it got to that point?
Neiss: I don’t know how those other components got to that point because we strictly stayed to the crowdfunding part. All I know is that these were six bills that passed with almost unanimous bipartisan support in the House, and what they were trying to do was essentially show up the Senate. The House wanted to show America, how can we have one side of our Congress with such American support — meaning, complete bipartisan support — but not have the other chamber see things that way from an American’s perspective as well. It was a challenge — they were throwing the gauntlet down. They were saying, here’s the deal: you either take this up, or come election time, everyone in the House as well as the President of the United States is going to point their finger at you, the Senate, and be like, “You’re the bottleneck, not us.” And that was risky business, and it really forced [Senator] Reed to act. And the thing about this is, the Senate does not act. They’re slow and they’re proud of it. They don’t need to move fast — they’ve got six years in office, so they take their time to do things. The JOBS Act was a direct challenge to Senate inaction. It put them in a compromising position where they needed to show that they can step up to the plate and play ball, too.
So what’s going to happen to all this competing legislation floating around? I know Senators Brown and Merkley have their own crowdfunding bills, in addition to the original McHenry bill. Is all that irrelevant now that the JOBS Act passed?
Brown’s bill will go nowhere. What we’ve got [with the JOBS Act] is what will go live. That’s why Brown signed on to the compromise. I don’t think there will be anymore crowdfunding bills that come through because that’s all done.
So to recap, we addressed two of the main arguments against the JOBS Act: the fraud fears, which you responded to extensively, and these other components easing a number of regulations on businesses, both small and potentially quite large (again, up to $1 billion in capital). As an avid supporter of the JOBS Act, you couldn’t comment as extensively on that — but I suppose that’s how Congress works: you can’t get everything you want without any of the other stuff…
You know, someone told me about three weeks ago, “Woodie, don’t worry. This is going to go through, and in the end, believe it or not, it’s going to look an awful lot like your original framework.” I responded, “So why did we have to go through all of this?” And they said, “Because that’s how Washington works.” At the end, shaking hands with [Senior Policy and Technology Advisor] Doug Rand at the White House, he’s like, “15 months to a law — that’s impressive.” Generally, they say it takes five to ten years to implement a law.
I don’t know if you can share this information, but if you can, about how much did that 15-month process cost? I saw you were soliciting donations on your website, and you mentioned earlier that you invested a lot of your own time, sweat and money in this effort.
Tens of thousands. It was painful to not give up, because either way it was going to cost us. And yet, we’re sitting here congratulating ourselves, looking at each other and going, “Now what?” (laughs) In a way, the jokes is on us, you know? We’re not building one of these crowdfunding platforms. We are three entrepreneurs that were stuck with trying to find capital for ideas that we wanted to make into businesses. By the way, time was not quantified in that tens of thousands figure — you know, if we were to add our time into that, I’m sure it would easily rise to over a million dollars, probably a million and a half. From what we understand, that’s what lobbyists would have been paid over the same period of time. And now we’re like, where do we go from here? People are looking to us for the next phase. We have built this beautiful cruise ship, and we’re not going to let someone else jump on board, crash it, and let it sink. So, again, the joke’s on us. People are looking to us and saying, “Don’t let us down! We’re not through the rulemaking process.” My personality is black and white; I’m either in or I’m out. So I’m like, “Alright, I’m in!” I’m not giving up, don’t worry. But if we could figure out how to get paid for doing this, that would be great. (laughs)
What level of involvement will you have in the SEC rulemaking process?
We want to help foster this organization, help it get started on its own, and help put together whatever board and advisors that it needs. If those people choose to have us in leadership positions, then so be it, we’ll take it on, but this is going to be a democratic process. Crowdfunding is based on complete transparency and community involvement. Clearly, our leadership and drive was what was needed to get the legislation through, but a different kind of leadership and drive is needed in this SEC review process. That being said, we also believe we’re very positioned to speak on behalf of what the crowdfunding industry needs to make this a transparent marketplace. But we don’t kid ourselves and think we have SEC credentials — we’re not lawyers. We’re completely open to the fact that, if the group so decides, some former banking committee chair or someone worked with FINRA might be much more adept at leading this. If they will do it in good faith, go for it. They’re probably going to do a much better job than we would.
What we want to focus on right now is this gap between passing legislation and the formation of this organization, providing the leadership to rally the industry participants together and making sure that we’re speaking with a unified voice. The worst thing that we could do right now is fall apart and go in our own different ways. We need to rally together to make this a transparent, functioning marketplace. So, short term, we’re still doing what we’re doing: sending emails out in response to thousands of various inquiries. If they want us, we’re willing to step up to the plate for the next year. But outside of that, I’m confident that a very robust board of thoughtful leaders with a lot of experience will shape this organization going forward. Maybe we’ll have a board seat, but honestly, I don’t know. That’s what democracy is all about: you leave it up to a group of people to decide. You can pitch yourself as a good candidate, but they’ll let you know if they think it’s true. Same goes for crowdfunding: you can pitch your idea as good, but the community will let you know if you’re worthy.
I’m really curious to know who lobbied hardest against the JOBS Act and the previous crowdfunding bills. Who were your main opponents?
I don’t recall too much about FINRA’s criticism…
They’re all together in this. FINRA oversees the state securities relationship, so it has a vested interest in making sure state oversight was protected. People in FINRA were speaking out against the legislation. You have to remember, Washington is run by 20 year-olds. Those are the ones you interact with and they’re the ones that form teams around their respective representatives and senators. When you’re younger, like we are, you have a natural kinship with these people. You talk about Facebook, you talk about Twitter, and they get it. Then the well-paid lobbyists with their nice suits and gray hair — not that we don’t have some gray hair (laughs) — bust onto the scene with a lot of money. FINRA hired its own lobby group — I don’t remember who it was on K Street — and they spent a lot of time working against [the JOBS Act], promising a lot of campaign dollars for politicians who jumped ship.
In perhaps the most ironic part of the whole legislative process, Senator Carl Levin [D-MI] said, “Deep-pocketed special interests pushed this crowdfunding bill through the House.” We hadn’t seen it before the White House called us, and jokingly was just like, “Wow, apparently you guys are a deep-pocketed special interest.” Between the three of us, I asked, “Who wants to be deep-pocket, who wants to be special, and who wants to be interest?” You know how they say, he who screams loudest is probably doing exactly that? It made me think, Carl Levin must be in the pockets of special interests. Clearly, if he paid attention to what was going on, he would have seen these three entrepreneurs funding this whole thing by themselves. That’s the amazing part of all of this.
I mean, don’t get me wrong, the reality is that this was a very broad team effort, period. Three very passionate individuals saw a valuable idea that someone else came up with — we didn’t come up with crowdfunding, everyone knows that — and acted. We went to the power brokers that we knew in Washington, people like Karen Kerrigan of the Small Business and Entrepreneurship Council. That wonderful woman got us our first connection to [Congressman] Darrell Issa [R-CA]. We wouldn’t be where we are today [without her]. If it weren’t for Kevin Lawton and Amy Cortese, what they wrote in The Crowdfunding Revolution and Locavesting, we wouldn’t have the detailed statistics or the information we needed to corroborate what we were saying. Then there’s Paul Spinrad and Jenny Kassan, who wrote the first petition to the SEC. When we first sat down with some people from the SEC, they asked, “Are you part of that petition that we got?” When we read it, we were like, “Oh my god, this is very similar to what we’re talking about. It’s good to see someone else is already thinking along these lines.” Again, it was just more validation for what we were doing. Then there are people that worked for Congressman Issa, who said, “You’ve really hit on something here. Let’s put this in a letter and send it to the SEC.” If it weren’t for them taking hours back in January and February of 2011 trying to really understand what we were talking about in the very nascent stages of this, we wouldn’t be where we are today.
If it weren’t for the crowdfunding platforms that wanted to launch this and showed up in Washington — you’ve got Freeman White from Launcht, the WeFunder people — if it weren’t for them showing up on their own dime and insisting, “You need to make crowdfunding investing legal,” this wouldn’t have happened. So even though I feel like, at the core, we were the guys that just brought it here and kept on driving it, we were not solely responsible for making this happen. That’s blatantly obvious. And if it weren’t for Doug Rand, please, this thing would be dead. You need a champion in the White House to help you get legislation across the finish line. You know, when the White House reached out to us in June of last year, we were like, “Wow, how did they hear about us. Then, freakin’ Representative McHenry went, “Ha! I’m going to draft this legislation based on their framework.” Do you know how important that was? None of this would have happened if we didn’t have that initial piece of legislation. If it weren’t for Andy Green in Senator Merkley’s staff, who while crafting the first Merkley sat with us for hours and hours, hashing out if-then-what-if, how do we think about it this way, think about it from the opposition’s viewpoint, let’s put ourselves in their shoes and try to make something that works for you and for them. I mean, without all of these aforementioned people, none of this would have happened.
So yesterday at the signing ceremony, there was this congratulatory feeling going around and the euphoria of it finally being done. When someone came up to us and said, “Congratulations guys, we couldn’t have done this without you.” We responded, “No you don’t get it, we couldn’t have done this without you.” That’s really what this was all about: we might have shown up, and we might have had the framework and that stake in the ground and had a vision, but if we didn’t have that community of supporters — even people like our parents, as well as representatives in Washington backing us — none of this would have happened.
Now that the JOBS Act is finally passed and signed into law, what is your reaction to the related coverage from the mainstream media?
I have to say, I was completely dismayed with the The Wall Street Journal and The New York Times coverage. I felt like they were in the pockets of the advocates for status quo. It didn’t speak to American entrepreneurialism or our can-do attitude. Quite frankly, I didn’t get it. The vehement opposition and the hatred for what we were doing in the mainstream media was shocking to us leading up to this. But today, I bet when I Google crowdfunding and see what happens, it’s going to be pretty positive. And you know what, the first thing I did when I woke up was I Googled crowdfunding. And as opposed to 90% of the articles being negative and 10% being positive — oftentimes, based on something we might have said — 90% of the coverage focused on opportunity and how the JOBS Act represents something good, and 10% focused on the negative. And I was like, “Ha! I knew it would happen eventually.” When we emerge from this SEC review period and really put this legislation into action, we’ll see discussion of the successes that are coming out of this.
I think angels and venture capitalists are going to be playing an active role in this. They’re going to be paying attention to the ideas that the crowds are getting behind. The crowd is going to be doing that initial seed financing — I know you can do up to $1 million, but most will probably opt for under $250,000 — and for those really good ideas, the angels are going to want to come in and finance the second round. The crowd serves as customer validation; we’ve just provided an on-ramp.
Have you heard any reaction from the more traditional investment firms on Wall Street? Crowdfunding has to be on their radar by now. Are they pro-crowdfunding, do they think it represents a threat, or is it just so beneath them in dollar value that they feel it’s irrelevant to their business?
I haven’t heard anything yet. But here’s one thing: everyone is going to hire someone to patrol this industry. Before, all the ideas were funded in Silicon Valley, in and around New York City, and in Cambridge. Now you’re going to see good ideas arrive from Nebraska, from Louisiana, from everywhere, and they’re going to need a point-person in each of these organizations to pay attention to what’s happening in the marketplace. It’s going to be pretty wild. This is not only going to transform what happens for entrepreneurs and Main Street in the United States, but this is Web 3.0. Web 1.0 was the Internet. Web 2.0 was social media. Web 3.0 is social media meets community financing.
We are not only going to be funding Main Street entrepreneurs in the United States of America, by the way; this framework that we put together is going to be implemented around the world. There are countries itching to be #2 to what we just did. We are going to transform the way entrepreneurs are funded worldwide. And you know what? Every dollar that goes into those local entrepreneurs has a three to ten times multiplier, according to [Amy Cortese’s] Locavesting. If you fund a local business, that’s going to have a three to ten times local implication there. So if you have a down-and-out community, and we help fund people there, that’ll have a much greater impact than taking your dollars and investing them in an Apple, which actually has a .15% drainage, because it’s taking cash out of that community. So this is going to have a regional and local impact that we have yet to see.
Wow, we just hit an hour. Let’s wrap up here. Do you have any final thoughts or feelings you want to share?
I’m going to Disney! (laughs)
Time for a break, then?
Yeah. But seriously, I’m excited to see where this is going to go. I’m excited to sit down in five years and look back on the success of this and see all the good that this legislation accomplished. I’m really excited for the future.
As you should be. Once more, thank you so much for talking to me today.