Subject: File No. S7-09-13
From: Margaret A Wilson
Affiliation: Professor of Technology Commercialization

February 3, 2014

Your proposed rules are very late, but I am pleased at how carefully thought out they are. For the most part, I agree with the rules you are proposing. Here are some thoughts and my comments based on many of your questions.

Investors will serve as vettors, pre-investment. Good so long as conflict-of-interest is clear. Entrepreneur/issuer also needs some protection from hostile parties misusing the system to tank a competitor Could an intermediary shut down a submariner?

One-size fits all with $1million limit. Some agencies, such as NSF, have profiled their SBIR companies to see what their capital needs are. They vary dramatically by sector: software/IT capital requirements are the lowest. Materials science, electronics, manufacturing requires the highest with biotech close behind (with a longer term risk-profile). The $1M limit is the only workable system – the issuers who choose to use the crowdfunding system will just have to work within its contraints.

Request for comment:
1. Yes, make the $1 million net of fees. Entrepreneur needs predictability which this would provide. While the system is new, everyone needs to see how the overhead costs develop.
2. Should we require that certain exempt offerings be included in the calculation of the $1 million limit? No. Section 4(a)(6) exemptions should not be bundled with other exemptions. Capital is hard to raise and ventures that are more capital intensive need other options for raising required funding. This issue mitigates the $1M –fits-all challenge.
3. NC
4. Common definitions useful. Do not develop a new definition. Good enough for entrepreneurs.
5. NC
(Investment Limits
#10146 Q: provide for a greater of limitation based on annual income and net worth? Yes – good approach. Clear and workable.
#10146 Q: use rules for determining accredited investor status. Yes. Clear. Definition well vetted.)
6. Potential investors: My husband and I are working very hard to build a healthy retirement. I can envision a time when our fixed income is modest (just under $100,000) but our net worth is quite impressive (north of $2M). We would both like the option of investing in new technologies since we have both spent a lifetime working with and among many different technologies, knowing and helping many entrepreneurs. We would prefer to have maximum flexibility to use our investment income so that we could take advantage of a larger upside on any crowdsourcing venture we participate in.
7. Allow for calculation of both annual income and net worth on a joint basis for couples. Totally appropriate and logical.
8. By requiring intermediaries, you are, by default, forcing the process to be removed from the issuer until the investment is closed. The intermediaries need to find ways to ensure that investments dont exceed the $1M limit. Seems to me that is their job, in addition to providing a communications channel and crowdsourcing repository for deal evaluation.
9. Institutional investors should face the same limitations as all others, if investing under 4(a)(6). They have lots of other options for investing – they shouldnt be allowed to crowd-out individuals who want to invest through this method.
10. NO. Dont go for lower amounts. Doesnt seem to fit legislation or legislative intent. It will already be a challenge for the issuer to manage its investors. Dramatically increasing the number of investors that would comprise a $1M total investment pool is nuts. Issuers should be screaming NO, NO. $250-$500 levels are where the non-equity crowdfunding options seem more appropriate.
11. You set out a reasonable way of assessing investor qualifications – dont look to go below those levels. It would just buy trouble for the issuer and the intermediaries to make the process more expensive than the system can afford.
12. Good. One intermediary is good. Each intermediarys capabilities need to be very transparent to issuers. Their policies and implementation processes should be in clear, plain English. No legalese should be allowed
13. Yes. Stick to online. Otherwise, it is not a level playing field. Plus it would drive cost up. For this to work, it will have to be cost effective for the intermediaries and the issuers.
14. No. Keep it all online/electronic.
15. Intermediaries should not be allowed to restrict access to their sites. Their limitation method would revolve around their business model and their service offerings.
16. Back office activities offline – OK. Especially backups Intermediaries should be able to physically visit with the issuers. It should be fine for the intermediary to physically host a rollout party, introduction of investors to the issuer (once $1M reached) or similar crowd face-to-face meeting if the issuer wants to meet his/her investors. But that is it. Everything else should be electronic.
17. NC
18. NC
19. The ability of an issuer to offer a clear and compelling description of his/her venture will make it possible to get investors. We are talking about a risky, buyer beware system. That is the benefit of crowdsourcing – the risk is spread and the information aggregation is shared: the crowdsourcing process should help shake out bad ideas. The funding gap is highest at the earlier stages where prototyping funds are needed, where proof of concept takes funding. That is risky. That is what this is all about Otherwise, you have to figure out how to define an idea only venture – let the crowd do that work Leave it to them...
20. Dont exclude. Recent research (e.g. Mahdjoubi PhD thesis – UT Austin) shows that business plans are often more fiction than fact and not worth the paper they are written on. That is not a good metric. Having an issuer describe the ventures Business Model would be much more valuable than their business plan in a low-information situation. You dont have other good metrics. Let the Crowd do it. Or let intermediaries refuse business that they thinks is hopeless/worthless. But that opens a different can of worms
21. NC
22. Stick with English. If intermediaries want to foot the bill for translations to other languages, that is fine. But everyone should expect every deal to be presented first in English.
23-28. NC. All fine. As a potential investor, and as a professor of technology commercialization it is all about the stakeholders and the team. I would want to know who is working for the issuer as much as I want to know about ownership. I want to know that the entrepreneur has a good team of people who have the technical and business skills to make the venture work. That is a different information requirement from officers and directors, but just as important – or more important to the venture.
29. See 19-20. Should we explicitly require issuers to describe any material contracts of the issuer, any material litigation or any outstanding court order or judgment affecting the issuer or its property? YES These are important elements to the success of a venture. Potential liabilities should be required.
30. Making it easy for issuers is key to getting good information to investors. Having a checklist or prescribed list of questions on key issues could be very effective. I review SBIR grants, and where specific information is required, we usually get straight answers. And it makes the answers more comparable among various issuers.
31. Yes. Appropriate.
32. Whenever it deviates from described uses.
33. Your examples dont include any of the kinds of information I expected. What about costs of patent filings, experimentation, contracting for prototyping services, buying a 3D printer, buying research services (e.g. from Southwest Research Laboratory), hiring a marketing expert who can translate technical ideas into marketable terms, etc.?
34. Good
35. Good
36. Good as is.
37. Good
38. Yes
39. If intermediaries are going to specialize, that information should be offered (e.g. intermediaries who want to work with tech startups, others who want to support mom pop retail, some who what to support sustainability ventures, etc). Is such specialization something you can determine up front?
40. Yes
41. Yes, yes. Types of issues: failure of patent to issue. Difficulty hiring key technical talent. Major international competitors. Biotech – risky path through clinical trials.
42. List is good. Could matter if a key employee is blocked from certain activity because of a non-compete commitment from a prior employer...
43. NC
44. NC
45. NC
46. NC
47. NC
48. No. They need to report. Issuers need to let investors know that they dont have prior experience or investment.
49. NC
50. US GAAP is good.
51. No. Just understand that they may not have a lot of information to offer initially
52. Dont exempt. Just make the disclosure appropriate to their history.
53. Good
54. Startups typically operate on a cash-basis for the first 1-2 years. You talk about investment level. You should be talking more about the stage of the business – is the issuer doing a startup, a business expansion, or something else? How much money they need is less the issue than how they will use the money and how they will account for it. Pushing a startup to go beyond cash accounting may be a good thing, but it may also be too early for them to do anything else
55. NC
56. NC
57. NC
58. NC
59. Issuers should only provide personal income tax information on a voluntary basis. You should require that all ventures be structured businesses and financial disclosure should be based on the business, only.
60. NC
61. NC
62. NC
63. NC
64. NC
65. NC
93. Electronic only
94. Allow any and all forms of information that the intermediary can technically offer Prescribing it is a bad idea. Let the market define what is effective. The crowd will ask if something is missing
96. Yes. Let them put in weblinks and otherwise point potential investors to intermediaries.
111. Oy Overselling airline seats? Yes, you should allow for some coverage so the issuer gets the full $1M. You should prescribe, by rule. Dont leave it to the issuer.
112. No. Your analysis is spot on.
113. No, dont limit.
114. Non-equity crowdfunding efforts in tandem with JOBS Act efforts should be left up to the issuer and the system they use (Kickstarter or other). Shouldnt be SEC business.
115. No no. Issuer should provide a transparent description of method used.