To probe the legal intricacies revolving around the JOBS Act and how these new laws impact the crowdfunding scene in the next months leading to and right after its much-anticipated full implementation, David Drake spoke with Vince Molinari, CEO of Gate Technologies, who moderated the Crowdfunding panel last Nov 14, 2012 SEC public hearing on Government-Small Business forum on Small Business Capital Formation Program. Mr. Molinari is one of the Top Ten Most Influential People in Crowdfunding and the driving force behind GATE Impact.
Drake: Vince, you are a founder of leading organizations and have taken a leadership position on crowdfunding for equity in the US. The law is changing through your work at SEC exclusively for this law. The US is the first country in the world taking a leadership position and changing the law for crowdfunding. This is a momentous change in how capital flows. You are the co-chair of CFIRA (Crowd Fund Intermediary Regulatory Advocates) with Candace Klein of SoMoLend and you were one of it’s three founding firms and the trade association CfPA (Crowd Funding Professional Association) along side with The Soho Loft and StartUp Exemption Sunday March 18, 2012 – right before Senate was to take up H.R. 3606 (JOBS Act) for vote. How do you feel about the progress the crowdfunding for equity portion of the bill has taken to date?
Molinari: I believe the crowdfunding for equity portion of the JOBS Act or Title III has received great exposure and is positioned to have a significant impact on the access to capital for small business and entrepreneurs. The SEC and Finra have been extremely open to meetings with CF Industry leaders, to explore and learn about core issues of CF during the rule-making phase. This has resulted in ongoing communication that I am confident will result in aiding and fostering the best rules possible for the sector .
Drake: What would you like to see change in the progress to implement the law and what can the readers do to help?
Vince: Of course, like all of us, I would like to see the rules implemented sooner than later, but understanding of the complexities associated with perhaps the most meaningful changes of our securities laws in many decades requires diligence and patience. I think it is paramount for all of us, your readers, the industry and investors to continue to keep pressure on our legislators and regulatory bodies in order to keep CF front and center.
Drake: Vince, what will be the impact on the US when crowdfunding for equity becomes legal?
Vince: I believe CF will have a huge impact on the US when it becomes legal as it is the first iteration of a paradigm shift in capital formation that will be able to utilize the power of Web 3.0, Social Media and Crowd Intelligence. This is the realization of the democratization of capital formation in the US.
Drake: How will US crowdfunding for equity affect foreign countries?
V: I can envision CF affecting foreign countries in a manner that, as the US has become the global thought leader in implementing CF, it could create a net inflow of companies seeking capital coming to the US to establish Stateside operations in order to secure funding. This could result in new strategies for Job Creation in the US.
Drake: When will crowdfunding for equity become legal in the US?
V: It is very difficult to estimate when crowd funding will become legal in the US as it is a direct function of the Rule making phase with the SEC and Finra. And within that, there exist many variables that range from the composition of the SEC Commissioners, comment periods once initial rules are proposed and Finra rules that will govern portals and the actual member approval process for portals to obtain Finra Membership. SO my best guesstimate would be Q3 2013
Drake: What’s your response to reports Mary Schapiro of the SEC will step down after the election?
V: It’s seems quite certain that Mary Shapiro will retire at year end. This could have a significant impact on the implementation of not only Title III but the JOBS Act itself. If as it appears Commissioner Elisse Walter is the interim Director, she will play a significant role as she is viewed as the swing vote, that is if it put to vote during the interim phase. If the vote occurs post appointment of the new SEC Director, we could experience meaningful additional delays.
Drake: What’s going to be the total cost for issuers to do crowdfunding for equity when it is legal?
V: It is difficult to determine what the costs to issuers to utilize CF will be until the Rule- making phase is complete as there is uncertainty in many key areas such as the direct and indirect costs associated with escrow, investor updates, audit, and whether portals will be able to charge transaction fees as a percentage of the raise. As an example of the fluidity, at the recent SEC Annual Small Business forum breakout session on Crowdfunding which I co moderated with Sara Hanks of CrowdCheck, one of the recommendations put forth to the SEC was that they consider an upward revision of the requirement for an audit for companies seeking to raise $500K or more.
Drake: How will Fortune 10,000 companies get involved in Crowdfunding for Reward?
V: There are many Fortune 10,00 companies that are exploring CF for rewards as a method to test new products/strategies, build customer loyalty and as a new channel to advertise.
Drake: What are the three things you would advise an issuer on crowdfunding for equity to be cognizant of?
V: The three main things that I would advise an issuer on CF is:
First and foremost, although signed into law by President Obama on April 5 it is not yet legal to conduct until the SEC and FINRA issue the final Rules, for CF for equity can’t be utilized.
Second, is investor awareness and disclosures. Issuers should make investor awareness and education a cornerstone of their offering. It is essential that investors are aware and accept the inherent risks associated with investing in early stage companies. The issuer disclosures should be certain and clear on this matter. And third, issuers should explore and conduct due diligence on the portals that they are considering to utilize for their CF round. There are many portals that are planning on focusing on certain sectors, affinity groups, geographies, etc. the right fit will go a long way in helping to result in a successful campaign.
Drake: What are the two biggest challenges for the industry?
V: The 2 biggest challenges for the industry at this point are number 1, short term to intermediate term sustainability of the portals, while they are awaiting the final rules. It seems that many portals have raised capital, and built technology based upon the 270 day rule making phase mandated by the legislators in the Jobs Act and today have no ability to generate revenues and are burning meaningful cash during what appears to be many more months of delays until implementation. I have concerns that many portals won’t survive to see the effective date of title 3. Secondly, the industry has to continue to advocate and educate that CF is a serious new investment practice, that if implemented properly and permitted to grow, will have substantial impact on early stage, smaller financings that will aggregate in real job creation and economic recovery/expansion.
Drake: What are two things obstructing the ability of crowdfunding for equity to run efficiently?
V: The Cf industry needs the rules to be complete in order to be able to demonstrate that it can run efficiently and offer real investor protections and education. I believe most of the rest will taken care of by the utilization and continued development of technology for the space.
Drake: Vince, what are the biggest opportunities for your firm positioning yourself as a leader and where do you see most of your business emanating?
V: I believe the biggest opportunity for our company, GATE Impact, will be for the CF sector to adopt our technology suite of products in order to help create standardization and best practices for the industry. The more that common protocols can be established for this emerging space, the easier it will be for investors to understand the opportunities and ultimately transact in CF. I believe we can specifically help create investor education/awareness tools, standardized documents, centralized escrow, unique identifiers, dematerialized holders of record, and offer the platform to allow for the listing of companies to have potential liquidity events in secondary trades.
Drake: How big do you see this industry be in dollar amounts in 2014?
V: It is difficult to pin down at the moment as this is a quite dynamic and iterative emerging industry, but it certainly has the potential to be very significant and impactful. The most relevant data seems to indicate that the market size can reach $4Billion
Drake: How will broker dealers and angels be affected by this law and how can they best leverage it?
V: I think broker dealers can be significantly impacted on the upside by CF being enacted into law. I believe CF for equity can be a new product line for BDs to remain relevant to its customers. I believe technology for CF will now allow BDs to offer much smaller sized offerings, that were previously uneconomical for them to conduct. I also see investors looking to access Cf through their brokers as they seek new ways to diversify and capture alpha.
Drake: Gate Technologies have years of international expansion in its infrastructure and stand to be the largest platform for 506 c and crowd funding distribution. Thanks for the interview, Vince, and we look out for upcoming news releases on your progress. I have traveled the world discussing this and you are leading us with your work in financial innovation.