November 13, 2013
Comment on File Number S7-09-13
Dear Chairwoman White:
I write to comment narrowly on the question of whether the Commission’s proposed rule to exclude crowdfunding securities issuers without a “specific idea or business plan” from eligibility to rely on Section 4(a)(6) is appropriate. (The Commission’s request for comment on this issue is articulated on p. 40, ¶ 20 of the Commission’s Supplementary Information.) For the reasons below, I believe that in this instance, the Commission has struck an appropriate balance between facilitating the funding needs of small issuers and safeguarding the interests of crowdfunding investors.
1. The Business Plan Requirement Is Consistent With Other Portions of the Act
A rule stating that only issuers with a business plan may rely on Section 4(a)(6) is consistent with the other requirements of the Act. Section 4A(b)(1)(C) already requires that an issuer file and make available “a description of the business of the issuer and the anticipated business plan of the issuer[.]” It was clearly the intent of Congress that “idea-only” businesses and ventures would be unable to avail themselves of Section 4(a)(6), because they would be unable to meet this statutory disclosure requirements. Congress’s focus on supporting entrepreneurs with existing business plans is also apparent from the Congressional record from the implementation update after the bill was passed. See, e.g., Hearing Before the Subcommittee on Investigations, Oversight, and Regulations of the Committee on Small Business, 113th Cong. 2 (2013) (opening statement of Rep. Yvette Clarke) (“For entrepreneurs who have a solid business plan yet lack immediately marketable products, equity has been a crucial aspect of getting their business off the ground.”); see also id. at 28.
2. The Proposed Provision Protects Investors Without Stifling Entrepreneurs
Requiring potential issuers to have business plan (other than being promptly acquired) maximizes potential investors’ ability to weigh the merits of investing. The Commission notes that the crowdfunding system is premised on subjecting entrepreneurs’ ideas to “the wisdom of the crowd.” This presupposes that the crowd has enough quality information on which to base its decision to invest. Requiring a business plan serves a dual purpose: it provides more information to investors so that they can make strategic risks, and it weeds out issuers who have no real plan (or perhaps intention) of effectively utilizing the crowdfunded equity to bring their product to market. The most successful crowdfunded projects—which currently trade “token[s] of value related to the project” for investment rather than equity (Supplementary Information at 6)—already present clear business plans to investors, explaining concretely how the entrepreneurs plan to use the capital they raise. See, e.g., Discover Projects (Most Funded), KICKSTARTER, http://www.kickstarter.com/discover/most-funded?ref=sidebar. If this population represents what a successful crowdfunding requires, then a clear business plan is a necessary element anyway; the proposed rule will have a minimal impact on those entrepreneurs who are already likely to find success with investors, while requiring the others to formulate at least a basic business plan and thereby increase their attractiveness to investors.