September 24, 2013
Ms. Elizabeth M. Murphy
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090
File No. S7-06-13
Dear Ms. Murphy,
I am writing in my capacity as the Founder CEO of Space with a Soul. Space with a Soul is a coworking space that provides office space, meeting space, and services to more than 40 small start-up companies, social enterprises, tech innovators, and nonprofits. Our space focuses on innovation, and other similar spaces focus on business acceleration or incubation.
In our every day work at Space with a Soul, my team and I see a number of entities looking to raise capital for businesses that grow the American economy. The process is often a serious struggle, since raising even small amounts of capital is an extremely difficult task.
Most of the companies seeking to raise capital are searching for small amounts of funding in these critical early stages, before they're attractive to larger individual investors, investment funds, or venture capital companies. Finding funding at this early stage is so difficult that the folks who provide this money are called by a name usually reserved for a being from heaven - "angels". These "angel" investors are so named because securing funding from them is often akin to finding an angel who will become not only an investor, but also an advocate for the company.
In other comments before the Commission, you've heard from several investors and investor groups, all heavily concerned about the regulatory burden of timing, disclosure, and punishment provisions under this proposed regulation.
I believe that the proposed changes should be considered a "major rule" under the Small Business Regulatory Enforcement Act of 1996 (SBREFA). Under the SBREFA, a rule is considered "major" where, if adopted, it results or is likely to result in:
- An annual effect on the economy of $100 million or more (either in the form of an increase or a decrease)
- A major increase in costs or prices for consumers or individual industries or
- Significant adverse affects on competition, investment, or innovation.
Specifically, the requirements for advanced notice will make it difficult for innovation, acceleration, incubation, and coworking spaces to run idea competitions or contests to encourage the creation of new ideas and new companies, without running afoul of the Commission's rules on disclosure. These contests provide massive exposure and publicity to new ideas and new innovations, and in innovation-heavy areas like Boston, provide the infrastructure on which innovation is built. Often times, the first meetings between potential investors and those whose ideas they seek to fund, occur at these events.
Creating unnecessary disclosures at this point will have a substantial negative effect on innovation all around the United States. At these early stages, entrepreneurs are often simply "baking" their idea while they're looking for funding to investigate its feasibility. Although the SEC has a duty to protect investors, at these early stages, it is the entrepreneurs who often need protection from investors, because of the vast differences in sophistication between the two.
Creating disclosure requirements before such contests will rob them of their best ideas, will discourage investment and innovation, and will make the United States a less desireable destination to start a business or invest in new ideas. This outcome will lower the competitiveness of the United States around the world, and should be avoided at all costs.
The best way to avoid these negative consequences would be to remove any pre-clearance or pre-disclosure requirements from the proposed rule, allowing entities to seek funding in the market first, and disclose their process once the funding process is underway. At that point, they will have the money and the expertise to pay for experienced counsel to guide them through the process. At any earlier point, they are likely too idea rich and cash poor to be able to comply with the myriad complex requirements and provisions proposed for pre-disclosure.
In addition, I urge the Commission to adopt two exceptions to the proposed regulation.
1) The proposed regulation should exempt businesses looking to raise a small amount of funding, under $750,000.00, from any additional requirements. At these low dollar amounts, the legal fees to comply with the proposed regulations would eat a significant chunk of the money raised, making it impossible to efficiently raise small amounts of capital.
2) Institutions and companies that sponsor informational forums, pitch contests, accelerator competitions, networking events, industry nights, and other such events should be exempt from any disclosure requirements or liability for the lack of disclosure by participants in these contests. These events often function as the investment equivalent of "open mike" nights at a comedy club, allowing anyone with an idea a venue to have it heard or critiqued. Any restrictions on their ability to do so will have a negative impact on the efficiency of capital markets in seeking ideal locations for funding innovation.
In summary, I appreciate the attention the Commission is giving to these rules and regulations, and hope that the final rule will properly incentivize and enable innovation as intended by the JOBS act, while providing adequate protections to investors in the marketplace.
Founder and CEO
Space with a Soul
281 Summer Street
Boston, MA 02210