With Single Class of Shares, Twitter’s IPO Breaks Industry Trend

For its Initial Public Offering, Twitter, Inc. hopes to differentiate itself from its competitors.1 It has tried to do this from day one. In its recent S-1 filing, the media and technology company broke a long running industry trend by offering a single class of shares to the public.2 In the past decade, beginning with …

Risky Investment for the Fantasy Football Guru

On October 17, 2013, Fantex Holdings launched an “all-new marketplace that allows investors to buy and sell Fantex, Inc. stock linked to the value and performance of the brand of a professional athlete.”1 The Initial Public Offering will be called a “Fantex Series Arian Foster Convertible Tracking Stock.”2 The offering has been subject some confusion. …

Is Venture Capital a Tool in Community Development?

In 2003, the Over-the-Rhine district in Cincinnati, OH experienced 90% vacancy, high crime and blight. Enter: the Cincinnati Center City Development Corporation (“3CDC”). As a non-profit organization, the 3CDC has managed two major mostly-private investment funds (the Cincinnati New Markets Fund and the Cincinnati Equity Fund) to land bank properties and redevelop the spaces into …

Microsoft Ventures: A Three Pronged Benefit Program

Through venture capital, many small startup tech businesses have been able to obtain the necessary funds to start their business. The success of these startups provides investors with not only an opportunity to profit on the new organization’s success, but also allows many large corporations to invest in startups as a means to spread their …

A New York State of Mind: In-State Private Equity Program Invests in New York Start-Ups

Originally founded by the State of New York Comptroller’s office in 1999, New York’s In-State Private Equity Program has certainly made an impact on the state’s best and brightest new businesses.1 Since its creation, the program has intended to support native New York businesses while also generating hopefully solid returns for the state.2 Historically, and …

Should You Form an LLC or C-Corporation?

If you are considering this question, you already have a business concept, a business plan (hopefully), and have done enough market research to ensure that your idea will have some traction and solve some pain point. But, you are unsure of which business entity to choose. Both entity types have their pros and cons, which …

Shareholder Adviser Responds To Silicon Valley Governance

Oracle Corporation, like many Silicon Valley tech companies, makes no secret about wanting to do things differently.1 But their different approach to corporate governance is now getting an angry response. On Tuesday, October 8th, CtW Investment Group, which advises union sponsored pension funds and is a substantial shareholder of Oracle Corporation, issued a letter to …

Convertible Notes & Why They Might Be Good For Your Startup

So you need to secure funding for your startup, but you are not sure you want to give up equity right away, especially because you do not want to put a value on your company too early. You also are not sure what your company is even worth and would like more time in order …

SEC – Roadblock to Equity Crowdfunding?

With such a promising name, what’s not for entrepreneurs, small businesses and venture capitalists to love about the Jumpstarting Our Business Startups Act (JOBS Act)?[1] Indeed, the Act was passed with bipartisan support in both houses and signed into legislation by President Obama on April 5, 2012. At its passage, the JOBS Act was widely proclaimed as a promise for growth for small businesses and start-ups because of the Act’s capacity to increase access to capital.[2] Despite this initial phase of promise, the JOBS Act has gotten off to a rather slow start in the realm of equity-crowdfunding.

One of the ways in which the Act is designed to help startups is by making it easier to obtain additional capital through equity crowdfunding. Although it has been a buzzword for the last few years, crowdfunding is not a new phenomenon. Traditional crowdfunding is defined as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”[3] In the United States, the Securities Act of 1933[4] and the Securities Exchange Act[5] restrict the potential means of generating funds via crowdfunding. These Acts prohibit entities from offering or selling securities to the public unless the offering is registered with the SEC, or unless there is an exemption from registration. Thus, the SEC registration requirements have limited crowdfunding to a means of generating capital from contributors without the prospect of financial return on investment (i.e., no equity offerings for funders). Accordingly, crowdfunding enterprises solicit funds by means such as offering prizes for donations or by offering funders the option to purchase a product prior to the product’s release on the market.[6] But even with the availability of numerous crowdfunding platforms[7] to incentivize offerings, many enterprises currently find it difficult to access substantial capital using traditional means of crowdfunding.

Equity crowdfunding in the United States, however, would enable enterprises to issue equity in return for crowdfunders’ contributions. The prospect of return on investment would entice many would-be-funders to take the financial leap-of-faith and support startups. Equity crowdfunding can also be particularly useful to small-business owners who have been unable to secure adequate funding through more traditional means like small business loans. To date, many foreign countries, particularly member states of the European Union and Hong Kong, have already capitalized on the potential of crowdfunding by permitting startups to issue equity to investors.[8]

The JOBS Act recognizes the potential for equity crowdfunding and amends the provisions of the Securities Act of 1933 and the Securities Exchange Act that foreclose the opportunity to crowdfund due to SEC registration requirements.[9] The “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,”[10] in particular, addresses the conflict by creating an exemption for unregistered securities offered by private companies via the “crowdfunding exemption”[11].

But still, further government action is necessary before the crowdfunding exemption can go into effect. In an effort to protect investors from the potential of fraud that equity crowdfunding entails, the Act requires the SEC to issue rules governing the crowdfunding provisions.[12] The Act provides a period of 270 days from the date of enactment[13] in which the SEC is to issue these rules. On December 31, 2012, this 270-day period expired without any such rules having been announced.

Although it has been nearly a year since the legislation was enacted and three months since the expiration of the deadline, there is no indication the rules will be issued any time soon. Factors that may be contributing to this delay include a rulemaking-backlog (created largely from the 2010 Dodd-Act mandates) and a still-pending change in chairmanship at the SEC.

So when can we expect equity-crowdfunding to go into effect? It depends on whom you ask, but the prognosis generally is not good. Many fear it will not be any time soon,[14] while others claim at earliest next year.[15] Even worse, some believe that even if the SEC does issue rules, the rules may be so complicated as to preclude the opportunity to equity crowdfund in practice.[16]

In the meantime, small businesses and would-be entrepreneurs are feeling the hit. But they are hardly waiting idly by. Crowdfunding organizations are seeking the media’s attention through venues such as the National Press Club in Washington DC, as well as speaking with the SEC directly to inform the Commission of the industry’s current investor protection mechanisms.[17] Members of the Crowdfunding Professional Association, for example, have already met with the SEC more than thirty times.[18] Despite the industry’s efforts to push-start the crowdfunding exemption into action, the wait continues. If and when the SEC finally issues the rules, the crowdfunding exemption has enormous potential to help small businesses.

[1] Jumpstart Our Business Startups Act (JOBS Act), Pub. L. No. 112-106 (2012).

[2] See, e.g., JOBS Act Promises to Improve Access to Capital, Husch Blackwell (Apr. 5, 2012), http://www.huschblackwell.com/jobs-act-promises-to-improve-access-to-capital/.

[3] Tanya Prive, What Is Crowdfunding and How Does it Benefit the Economy? Forbes (Nov. 27, 2012, 10:50AM) http://www.forbes.com/sites/tanyaprive/2012/10/12/top-10-benefits-of-crowdfunding-2/.

[4] Securities Act of 1933 §5, 15 U.S.C. §77e (2006).

[5] Securities Exchange Act 15 U.S.C. §78d.

[6] See generally Thaya Brook Knight et. al., A Very Quiet Revolution: A Primer on Securities Crowdfunding and Title III of the JOBS Act, 2 Mich. J. Private Equity & Venture Captial L. 135, 135-36 (describing four current methods of crowdfunding in the United States).

[7] See generally Devin Thorpe, Eight Crowdfunding Sites for Social Entrepreneurs, Forbes, http://www.forbes.com/sites/devinthorpe/2012/09/10/eight-crowdfunding-sites-for-social-entrepreneurs/ (providing an overview of top crowdfunding platforms).

[8] Ralf Hooijschuur, Crowdfunding in Different Countries – Legal or Not? Squidoo http://www.squidoo.com/crowdfunding-in-different-countries2 (last visited Mar. 18, 2013).

[9] Securities Exchange Act 15 U.S.C. §78d.

[10] JOBS Act, Pub. L. No. 112-106 §301 “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012.”

[11] Id. at §302

[12] Id.

[13] Id.

[14] See, e.g., Destiny Bennett, SEC Stalls in Setting Rules for Crowdfunding, AGBeat (Feb. 21, 2013), http://agbeat.com/finance/sec-continues-stalling-in-setting-rules-for-crowdfunding/.

[15] Kathleen Pender, Crowdfunding Awaits Key Rules from SEC, SFGate (Feb. 8, 2013, 6:58PM), http://www.sfgate.com/business/networth/article/Crowdfunding-awaits-key-rules-from-SEC-4264631.php

[16] Marco Santana, Entrepreneurs Await Rules for Crowd-Funding Clause, USA Today (Jan. 20, 2013, 10:03PM), http://www.usatoday.com/story/money/business/2013/01/20/crowd-funding-clause-startups/1566496/ (worrying that the rules the SEC ultimately provides will render the crowdfunding clause impracticable.).

[17] Catherine Clifford, Crowdfunders Step Up Lobbying for SEC Rules, Entrepreneur (Feb. 19, 2013), http://www.entrepreneur.com/article/225863.

[18] Id.

London Bank Scandals Open Doors for Financial Start-Ups

Throughout the United Kingdom, consumers’ trust in banks has deteriorated due to a series of recent scandals.[1] The tidal wave started in June, 2012, when Barclays Bank agreed to pay $450 million to settle claims that it manipulated interest rates to lift profits and mask concerns about its declining health.[2] Next, the United States Senate issued a report that HSBC bank failed to stop laundering Mexican drug money; HSBC faces up to $1 billion in fines.[3] Furthermore, JPMorgan & Chase Co. recently disclosed a $5.8 billion trading loss caused by its London office in a portfolio designed to circumvent risks that the bank takes with its own money.[4] As a result to these financial disasters, London bankers now worry that regulators will increase their efforts to clean up the image of the financial sector and quell public outrage.[5]

As a result of these scandals, newcomer financial firms seek to capitalize on United Kingdom banks’ misfortunes. Financial startups are using new technology and are innovating in ways that banks cannot in order to improve customer service, and venture capital firms are jumping at the chance to get a piece of the action.[6] For instance, Wonga, an online lending firm that offers high interest lending services to small businesses and consumers, has secured about $150 million in venture investment[7] from Balderton Capital, TAG, and Kreos Capital.[8] To cut own on costs, Wonga gathers publically available online data to determine a potential lendee’s creditworthiness.[9] Consumers are attracted to the fact that they can obtain loans within 15 minutes that they would not be able to receive from banks due to their risky credit.[10] Last year, Wonga reported revenues amounting to $73 million,[11] and is contemplating a $1.5 billion IPO on Nasdaq.[12]

Other venture capital success stories include GoCardless, a new financial firm based in London, which provides services to small businesses and consumers, allowing them to set up monthly payments directly to suppliers, at a cost dwarfing that of what banks charge.[13] The company is able to provide such favorable rates by cutting out the cost and complexity of credit card networks.[14] GoCardless has secured approximately $1.5 million from the venture capital firm Y Combinator.[15]

Finally, as banks have pulled back on lending, deeming small businesses to be too much of a financial risk, MarketInvoice helps small businesses obtain capital fast.[16] MarketInvoice is an online marketplace where small businesses are able to auction their long-term supply contracts to money managers for the highest price.[17] The company has received $1.4 million from venture capital investors.[18]

Growing disdain among small businesses and consumers for banks in light of recent scandals in conjunction with new innovative and technological services provided by financial start-ups has sparked a new industry in the United Kingdom. Venture capital firms will without a doubt continue to seize on the opportunity to invest in these financial start-ups.


[1] Mark Scott, In London, Nimble Start-Ups Offer Alternatives to Stodgy Banks, N.Y. Times DealBook (Oct. 22, 2012, 4:45 PM), http://dealbook.nytimes.com/2012/10/22/in-london-nimble-start-ups-offer-alternatives-to-stodgy-banks/.

[2] Ben Protess & Mark Scott, Barclays Settles Regulators’ Claims Over Manipulation of Key Rates, N.Y. Times DealBook (June 27, 2012, 8:11 AM), http://dealbook.nytimes.com/2012/06/27/barclays-said-to-settle-regulatory-claims-over-benchmark-manipulation/.

[3] Robert Barr, Bank Scandals Tarnish London’s Reputation, The Miami Herald (Aug. 17, 2012), available at http://www.miamiherald.com/2012/08/07/v-fullstory/2938519/bank-scandals-tarnish-londons.html.

[4] Id.

[5] Id.

[6] See Scott, supra note 1.

[7] Bobbie Johnson, Wonga Readies $1.5bn IPO, but Stigma Won’t Go Away, Gigaom (June 6, 2012, 1:26 AM, http://gigaom.com/europe/wonga-ipo/.

[8] http://www.startups.co.uk/wonga.html.

[9] Scott, supra note 1.

[10] See id.

[11] Id.

[12] See Johnson, supra note 7.

[13] Scott, supra note 1.

[14] John Peabody, GoCardless Tries to Disrupt the Credit Card Industry, Reuters (May 15, 2012), http://blogs.reuters.com/small-business/2012/05/15/gocardless-tries-to-disrupt-the-credit-card-industry/.

[15] Scott, supra note 1.

[16] Id.

[17] Id.

[18] Id.