SEC Crowdfunding Barriers At South By Southwest
In mid-July, South by Southwest (SXSW) – the Austin-based yearly festival that brings together the creators of film, music and technology every March – trekked west for a summer vacation of sorts in Las Vegas. In its second year, the SXSW V2V conference, asdescribed on its web site, “is an extension and re-imagining of the legendary SXSW experience with an emphasis on the creative spark that drives entrepreneurial innovation.”
As the conference convened at the Cosmopolitan hotel in the heart of the South Strip, one did not have to be a Vegas oddsmaker to bet that crowdfunding would be a key topic of discussion among the diverse entrepreneurs gathered there. After all, when it comes to crowdfunding, South by Southwest may not have written the book, but can be said to have kickstarted the Kickstarter.
The main 2014 SXSW event in March saw the premiere of the Veronica Mars movie, one year after its producers began a Kickstarter campaign that raised $5.7 million from fans to revive the cult TV favorite for the big screen. And that’s only the latest project that debuted at SXSW after raising money from thousands of contributors through crowdfunding websites like Kickstarter and Indiegogo.
The V2V conference also had a distinct focus on how the phenomenon known as “disruptive innovation” could itself be disputed by government red tape. Many panels discussed what happens when technologies in the age of apps come into conflicts with laws and regulation written before most folks had telephones.
One panel, “How to Make the Crowd Go Wild,” focused on “equity crowdfunding,” the next stage of online financing from multiple parties. The discussion confirmed for me that the next logical step in crowdfunding is to allow fans to share in a crowdfunding project’s profits—in addition to receiving T-shirts as thank-you gifts.
The panelists noted that Jumpstart Our Business Startups (JOBS) Act, a modest securities deregulation bill signed by President Obama in 2012, made some positive changes, particularly with regard to wealthy accredited investors. “The JOBS Act is a big deal,” said David Monshorry, CEO and founder of Asset Avenue, an online marketplace connecting investors to commercial real estate.
Monshorry touted the JOBS Act’s ending of the decades-old ban on “general solicitation” of investors by private companies, which the SEC finally repealed in September. Entrepreneurs have long been able to sell portions of their companies to wealthy “accredited investors” (currently defined by the SEC as those who make at least $200,000 a year or have a net worth of $1 million or more, excluding the value of their principal residences) without the mounds of red tape that go with taking a company public.
But they couldn’t do any sort of public communication, let alone advertising, in search of these wealthy investors. Even public forums like V2V, in which startups seeking investors pitch themselves in sessions such as “V2Venture,” would have been considered legal grey areas.
In 2012, my organization, the Competitive Enterprise Institute, filed an amicus brief to the U.S. Supreme Court supporting a First Amendment challenge to this advertising and solicitation ban. Though this free-speech challenge was ultimately unsuccessful, it influenced Congress to include repeal of the ban in the JOBS Act. Now, as the V2V event guide points out, “[S]tartups across the country are excited by new opportunities to receive funding for their ventures.”
All across America, entrepreneurs are taking advantage of the JOBS Act liberalization to come up with new ways to reach wealthy backers. The Washington City Paper’s Jessica Sidman notes that D.C. restaurants can now “send out an email blast seeking investors to, say, their 2,000-person mailing list or put an ad looking for cash in the newspaper or on their websites.” But citing prominent securities attorney and former SEC official Scott Museles, she added that, “the catch is that all investors solicited from a mass public appeal must be accredited investors.”
Still, there are a lot of wealthy investors in the capital-raising sea. And startups such as those featured at V2V seem to be the biggest beneficiaries. Anyone who doubts that American ingenuity is still alive and well should review the innovations of the entrepreneurs who presented at the V2Venture sessions.
In keeping with SXSW’s roots, many of the firms displayed technologies to enhance the enjoyment of music and entertainment. There was Covington, Kentucky-based Tixers, which described its product as a “timeshare for tickets” where “ticket holders can exchange they are unable to use for tickets they can use in the future.” Los Angeles-based Dealflicks calls itself “a Priceline for movie tickets” that can help theaters sell unclaimed last-minute movie tickets for up to 60 percent off.
These and other entrepreneurs may fail or succeed, but they deserve to do so on their own, and shouldn’t face undue barriers.
But there was also a resolve to turn startup energies to campaign for more rational rules governing these technologies. “We need to get in touch with the SEC,” said Andrea Downs, moderator of the crowdfunding panel and founder of Coastal Shows, a series of trade shows for startups.
The panel “Startup Politics,” moderated by Julie Germany of the libertarian activist group Generation Opportunity, focused on both crowdfunding and technologies under siege such as ride-sharing services. A summary in the V2V event guide asked, “How can we bridge the knowledge gap to help build more effective movements and craft better policy?”
Attendees at SXSW events are a diverse lot, politically and otherwise. Many who attend the arts and entertainment sessions no doubt lean Left. But freedom for crowdfunding and other populist-oriented technologies seem to unite these attendees—as well as the millions of other Americans who have contributed to Kickstarter and Indiegogo campaigns or shared rides through Uber and Lyft.
At the end of the conference, the attendees left Las Vegas to go back to pursuing their innovations. Policy makers and politicians who bet against these passionate and creative entrepreneurs would be playing a very bad hand.
John Berlau, senior fellow for finance and access to capital at the Competitive Enterprise Institute, attended the South by Southwest V2V conference in Las Vegas. CEI Research Associate John Breeden contributed to this article.