By Richard J. Bishirjian, Ph.D. CrowdfundBeat Guest post,
The Jobs Act of 2012
Title III of the Jobs Act, introduced by Cong. Patrick McHenry (R-NC), contained Crowdfunding language that was intended to dissolve the barrier between “accredited” and “non-accredited” investors established by the Securities and Exchange Act in 1935. It’s purpose was to free up access to capital markets by small businesses, startups and entrepreneurs.
Beginning with the banking crisis of September, 2008, Risk Capital dried up.
Title III of the Jobs Act was intended to rectify this lack of risk capital, bur the SEC delayed promulgation of Crowdfunding regulations for three and a half years after that legislation was enacted. The spirit of Title III was throttled by SEC regulators due to the SEC’s attitude that the marketing of securities is prone to fraudulent behavior.
For the past 80 years, only “accredited” investors may invest in non-registered securities. Ordinary “non-accredited” Americans are relegated to investments in registered securities, real estate, and collectibles. With few exceptions, entrepreneurs may not legally solicit investments from customers unless they are accredited investors. That explains, I believe, the popularity of the Crispy Cream IPO. For the very first time, ordinary Americans could purchase stock in a company that they regularly frequented.
U.S. Securities and Exchange Commission
I attended the SEC meeting at the U.S. Securities and Exchange Commission that met at 10:00 am on Friday October 30 in Washington, DC. This meeting was called to approve promulgation of Crowdfunding regulations and was held in the Auditorium in the basement of the SEC building. About 80 persons were in the audience and at least twenty SEC staff were present in addition to three SEC commissioners and the SEC’s chairman.
Commissioner Luis Aguilar gave a summary of proposed regulations. His summary indicated that he favored the proposed regulations. He was followed by Commissioner Kara Stein who expressed concerns of a typical bureaucrat that new regulations opened the door to potential fraud.
Ms. Stein listened intently as Dr. Michael Piwowar raised serious concerns that the proposed regulations were overly complex, would limit participation of small offers and contained “hidden traps” which he said required that Crowdfunders place “compliance at the top of their priorities.”
Dr. Piwowar was appointed by President Obama and was formerly the Republican chief economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs under Senators Mike Crapo (R-ID) and Richard Shelby (R-AL).
Capital Needs of Small Businesses and Startups
Most entrepreneurs do not need a great deal of money–at least at the start. They require “seed” money in increments of $100,000 or at a later stage they require several hundred thousands of dollars to expand. They do not need a million dollars at the start.
Our company successfully journeyed through a very hostile regulatory environment for eight years and attained academic accreditation with investments that totaled $2.4 million. We would not have known how to use $2.4 million, even if we had it, and would have burned it at a fast clip.
Capital that we raised in increments of three hundred thousand dollars a year permitted us to recruit instructors, create online courses, master the principles of effective online learning, learn how to properly conduct business as a for profit education company and adjust to a rapidly changing regulatory environment.
Each stage of our journey had different capital requirements because regulations changed several times, and each time regulations changed, we had to justify a new request for additional financing. When we first learned about Title III of the Jobs Act, we hoped that Crowdfunding regulations would permit us to go directly to the “Crowd” and solicit investments.
That is not what the SEC has approved.
Crowdfunding regulations approved on Friday require that securities be marketed to the “Crowd” through “Funding Portals” or registered Broker Dealers who meet registration requirements of the SEC.
Yorktown University’s Experience Marketing a SB1 Public Offer
In 2000/2001 we conducted a SB1 registered “direct public offer” of common stock in “Yorktownuniversity.com” without a Broker Dealer.
That effort failed due to a number of factors:
- Though many sympathized with our motives, they did not believe we could crack the barriers to accreditation.
- In 2001 the “dotcom bubble” burst and capital for Internet IPOs dried up.
- We did not “prequalify” the 4,000 contacts of wealthy Americans in the database we used to solicit investments.
- Our polling assistants who conducted telephone calls to donors, part time workers, were not trained for the task of making “cold” calls.
- We did not adequately advertise our IPO.
But, we learned an important lesson.
A broker dealer syndicate would have made the difference between success and failure, if we could find and afford one. We could not afford one, nor would any established Broker Dealer want to syndicate a conservative IPO.
New Crowdfunding regulations permit offers through “Funding Portals” or Broker Dealers up to $100,000 without audited financials. Because of costs, that is the optimal level of any Crowdfunding effort if we pursued one.
In 2000, one of our instructors was a Broker Dealer and he became the authorized Broker Dealer for our SB1 offer in exchange for shares of common stock priced at $10 each.
Today we might find another person like him, but we would also have to invest in marketing our Crowdfunding effort. In order to pursue a Crowdfunding effort that seeks $100,000 we will need to compensate a new Broker Dealer with a cash inducement and a percentage of any amount raised, and investment in advertising. Advertising is critical and requires an advertising budget of not less than $20,000.
Crowdfunding with a Funding Portal
A number of funding portals have been formed since 2012 and are “ready to go.” I do not believe, however, that we will find a Funding Portal willing to syndicate a small offer for $100,000 and I worry that new entrants into this business lack the client base of a normal Broker Dealer or do not have the marketing experience such an effort requires.
Moreover, our current corporate structure may not be suitable for Crowdfunding of $1 million.
If we seek $1 million, we may be required to do one of two things:
1) reorganize our corporate structure by collapsing Yorktown University Holding into Yorktown University or vice versa, and offering shares in the restructured company or
2) spin off the company’s assets into two new corporate entities.
I estimate that the legal cost of restructuring will be not less than $15,000 to $20,000 to prepare for a Crowdfunding solicitation of $1 million. Such a reorganization would require approval of every shareholder.
The second alternative is less costly.
Spin off the assets of EDUcourses into two new companies: EDUcourses organized to market conservative MOOCs and the commercial MOOC learning management system (MOOC3) that we plan to market to individuals, corporations and colleges for entry into the MOOC marketplace.
Crowdfunding up to $1 million also require audited financial statements.
We have not paid for an audit of our financial statements since we prepared to make application to participate in Title IV programs in 2010. The cost was about $5,000 five years ago and for a different purpose than Crowdfunding. An audit for a securities offer may cost $15,000 to $20,000.
And we will require a suitable “Funding Portal.”
I attended a Crowdfunding conference in Orlando two years ago where many aspiring “Funding Portals” were present. Most were securities brokers who conduct small business (SB1) public offers. None, so far as I could determine, was positioned to assure the success of their IPOs. As such, most may be expected to charge significant up-front sums for participating companies because there is no guarantee that a Crowdfuning effort will succeed. They appear to be organized to process Crowdfunding for compliance with SEC regulations, not the successful conduct of an IPO.
Until we know who the “players” are who actively solicit clients for Crowdfunding, and their track records are visible, I don’t think we should jump into the Crowdfunding marketplace at that level.
Richard J. Bishirjian, Ph.D. is a businessman and educator. He earned a B.A. from the University of Pittsburgh (1964), and a Ph.D. in Government and International Studies from the University of Notre Dame (1972) under the direction of Gerhart Niemyer. He did advanced study with Michael Oakeshott at the London School of Economics (1968/69) and studied Sanskrit at the Southern Asia Institute, Columbia University (1978). Dr. Bishirjian taught at universities and colleges in Indiana, Texas and New York from 1968 to 1981. He is the editor of A Public Philosophy Reader that was cited by the Intercollegiate Studies Institute as one of the best studies of conservatism. Dr. Bishirjian is the author of more than forty professional essays and reviews. Appointed to the Office of the President-Elect in 1980, he served as a Team Leader with responsibility for the National Endowment for the Humanities, and was appointed by President Reagan as Acting Associate Director of the United States International Communication Agency, now USIA. He served on the staff of the United States Senate. He was president and founder of World News Institute, and Associate Director of Boston University, College of Communication. Beginning with the fall of the Berlin wall, he worked in Eastern and Central Europe as a privatization consultant and/or partner with major corporations. In 1996 he served as privatization consultant to the County of Allegheny, Pittsburgh, Pennsylvania. His previous experience in distance learning includes management of Boston University College of Communication’s continuing education seminars to government and business executives in the Washington, DC area. Dr. Bishirjian has been a member of the Philadelphia Society since 1975 and serves as an Editorial Advisor to the quarterly journal founded by Russell Kirk, Modern Age.