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Making It Legal to Tweet For Investors
Making It Legal to Tweet For Investors
November 04, 2011
Originally published in The Wall Street Journal
'Tweet for Jobs." So says a section of Barack Obama's campaign website encouraging the public to use social networks to lobby Congress for passage of the American Jobs Act. For years already, savvy politicians have demonstrated how social networking can bring people together and raise money. "Crowdfunding" has also enabled many causes to mobilize funds and supporters. But try following their cue in the business world and you might just be breaking the law.
It's common to have hundreds or even thousands of "friends" on Facebook, "connections" on LinkedIn and "followers" on Twitter. Although such networks provide great opportunities for entrepreneurs, securities laws make it virtually illegal to ask members of a social network to invest small amounts in a microenterprise.
The good news: A package of common-sense bills that passed the House overwhelmingly Thursday night would give securities laws an update for the Facebook age. These bills are obvious boons to the economy, which is why they've attracted much more bipartisan backing than Washington tends to offer these days.
Under the Securities Exchange Act of 1934, any firm with 500 or more shareholders becomes subject to costly reporting rules. These include the Sarbanes-Oxley Act of 2002, which costs companies an average of $2.3 million in compliance costs every year, according to the Securities and Exchange Commission (SEC). President Obama's Council on Jobs and Competitiveness has faulted Sarbanes-Oxley for placing "significant burdens on the large number of smaller companies."
In an outline of its jobs proposal released to coincide with the president's address to Congress in September, the Obama administration called for lowering barriers to crowdfunding for the smallest firms. Specifically, it recommended "establishing a 'crowdfunding' exemption from SEC registration requirements for firms raising less than $1 million (with individual investments limited to $10,000 or 10% of investors' annual income)."
Rep. Patrick McHenry (R., N.C.) sponsored a crowd-funding relief bill that slightly expands upon the administration's recommendation, and on Wednesday the president issued a statement affirming that he "supports House passage" of this bill.
Also in the House's package is the repeal of a longstanding rule that bans advertising investment vehicles for "accredited investors," or those individuals wealthy enough to qualify for securities exempt from SEC registration. This ban on so-called general solicitation makes it harder for small enterprises and large venture capital firms alike to raise capital, as it means that firms have to go through the difficult process of searching for and communicating with accredited investors one-on-one.
The general-solicitation ban, and similar state securities rules, also raise free speech concerns. Ironically, they exacerbate the lack of transparency of investment vehicles, such as hedge funds, so often decried by politicians.
The state of Massachusetts, for example, sanctioned the hedge fund Bulldog Investors starting in 2007 merely for putting information about the fund's performance and investing philosophy on its website. Bulldog is challenging the state rule on First Amendment grounds with representation by Laurence Tribe, the Harvard Law professor and former senior counselor in the Obama Justice Department.
In the meantime, a bill from House Majority Whip Kevin McCarthy (R., Calif.) would scrap general-solicitation bans for accredited investors at the federal and state levels. It passed the House on Thursday night with more than 400 votes.
Of course, both federal and state penalties for fraud would still apply to crowdfunding and advertising. But entrepreneurial ventures would be less subject to "prior restraint" rules simply because of their number of investors. It's about time: In an age where one can buy real estate on eBay and entire companies elsewhere on the Internet, how does it make sense to prevent investors from purchasing small stakes of businesses online?
Now that House members have passed these bills, President Obama should instruct his supporters to tweet senators to follow suit. After that, they and other entrepreneurs can tweet for investors in their own innovative business ventures.