[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
FINANCING AMERICA'S SMALL BUSINESSES: INNOVATIVE IDEAS FOR RAISING
CAPITAL
=======================================================================
HEARING
before the
SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JUNE 6, 2013
__________
[GRAPHIC] [TIFF OMITTED]
Small Business Committee Document Number 113-021
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. David Schewikert............................................ 1
Hon. Yvette Clarke............................................... 2
WITNESSES
Ms. Michelle Sullivan, Senior Director of Corporate
Communications and External Affairs, Boston Beer Company,
Boston, MA..................................................... 3
Mr. Alejandro Cremades, Founder and CEO, RockThePost, New York,
NY............................................................. 5
Mr. Benjamin Miller, Co-Founder, Fundrise, Washington, DC........ 7
Ms. Danae Ringelmann, Co-Founder, Indiegogo, San Francisco, CA... 9
APPENDIX
Prepared Statements:
Ms. Michelle Sullivan, Senior Director of Corporate
Communications and External Affairs, Boston Beer Company,
Boston, MA................................................. 26
Mr. Alejandro Cremades, Founder and CEO, RockThePost, New
York, NY................................................... 29
Mr. Benjamin Miller, Co-Founder, Fundrise, Washington, DC.... 31
Ms. Danae Ringelmann, Co-Founder, Indiegogo, San Francisco,
CA......................................................... 34
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
FINANCING AMERICA'S SMALL BUSINESSES: INNOVATIVE IDEAS FOR RAISING
CAPITAL
----------
THURSDAY, JUNE 6, 2013
House of Representatives,
Committee on Small Business,
Subcommittee on Investigations, Oversight and
Regulations,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. David Schweikert
[chairman of the subcommittee] presiding.
Present: Representatives Schweikert, Chabot, Clarke, and
Chu.
Chairman SCHWEIKERT. All right. Let us convene this
oversight hearing of small business.
The Committee members will all have opening statements, and
I ask them to submit them for the record.
I would like to take a moment and explain the timing
lights, just so as we are going along, green, you are fine.
Yellow means talk faster. Red, please stop. We will actually be
handing out five minutes of testimony time and then we will
actually just engage in discussions.
As typical, I have my written opening statement but want to
say just for expediency, there is probably no hearing I have
looked forward more to than this one. Having met three of you,
having read all of your successes and your bios, you are an
interesting group. I believe you are doing really special
things for our economic future and the economy. Where does
technology take us and give us opportunities to actually, give
everyone that fighting chance to be able to participate in
taking a risk but also receiving the rewards for that risk.
Each of you have carved out sort of special, unique spots out
there.
As you are doing your testimony, and as we are also
engaging in the questions, it is not only telling your story
but share with us where government has done things that work,
but also where our regulatory environment, and those of us in
Congress either did not understand or we have created blocks--
statutorily, regulatorily--on where you think you could take
sort of this egalitarian access to capital. Because that is
what this is really about. It is really about helping that
small business, those sort of small entrepreneurs that want to
move and grow, and provide jobs and help all of us in this
society and economy.
Ranking Member Clarke.
Ms. CLARKE. Thank you, Mr. Chairman. And I thank all of our
witnesses for being here today. I think you have really set the
tone for today's hearing.
For the past two years, our nation's economy has
experienced positive and steady private sector job growth,
adding about 4.8 million jobs during that time. However, these
gains have not been enough to overcome our nation's above
average unemployment, which currently stands at 7.5 percent
minority unemployment for African Americans and Latinos, while
retreating remains at 13.2 percent and 9.2 percent,
respectively. So while we are moving in a positive direction,
we still face challenges in fully putting America back to work.
Creating nearly two-thirds of all new jobs, our small
businesses must remain front and center to our recovery. For
our national economy to experience a more robust recovery, our
entrepreneurs and small businesses must play their traditional
job-creating role, and for that they must have access to
capital.
Four years after the financial crisis effectively froze the
credit markets, entrepreneurs and small businesses are still
facing challenges acquiring funding through traditional
avenues. Increasingly, entrepreneurs are turning to
crowdfunding and other innovative funding methods to finance
their ventures. These include using the Internet to reach
accredited investors, creating peer-to-peer lending platforms,
and applying old lending models and new ways to address the
issue. Congress passed the Jumpstart our Business Startups, or
JOBS Act, in 2012, to overhaul SEC restrictions on crowdfunding
and small, public stock offerings. Once the SEC publishes its
final rules, this law has the potential to unlock an untapped
network of millions of investors to small businesses and
entrepreneurs seeking capital.
The SEC has faced challenges in the past, balancing
capital-raising needs of small businesses with the need to
protect investors with limited wealth and financial market
knowledge. They are now in a difficult position of creating the
framework for a new finance regime that has the potential to be
easily exploited without proper oversight and regulation. It is
important that the SEC work quickly, though not hastily, to
finalize crowdfunding rules. Rushing to publish rules could
overexpose investors or lead to an unworkable system that shuns
market participants.
In today's hearing, we will discuss the new and innovative
ways small businesses are raising capital and how
implementation of the JOBS Act will affect lending to and
investment in our job creators. While the outcome remains
uncertain, we must remember that it is virtually important that
the SEC strike the appropriate balance between investor
protection and producing a functional system that provides the
capital for small businesses.
So I look forward to all of your testimony here today, and
I thank you for your insights. And I yield back, Mr. Chairman.
Chairman SCHWEIKERT. Thank you, Ranking Member Clarke.
I was going to ask Mr. Chabot to introduce Ms. Sullivan.
Mr. CHABOT. Thank you very much, Mr. Chairman. I appreciate
that.
Today, I am honored to introduce Michelle Sullivan, who is
the senior director of Communications and External Affairs at
the Boston Beer Company. Now, I do not represent Boston; I
represent Cincinnati, but the Boston Beer Company is actually
in Cincinnati. I know it is a little confusing. Ms. Sullivan is
here to discuss the brewery's signature philanthropic effort,
and that is Samuel Adams Brewing the American Dream. She worked
hand-in-hand with Sam Adams's founder, Jim Koch to engineer
this innovative approach to small business lending and
development. As her testimony this morning demonstrates, their
program really does work.
The city of Cincinnati has a rich history of craft
breweries dating back to the pre-prohibition era. In the mid-
`90s, the Boston Beer Company moved to Cincinnati and breathed
life into one of those breweries which still operates today;
very successfully I might add. A craft beer renaissance is
taking place in hometowns like mine back in Cincinnati, but
really all over America. And we have entrepreneurs, such as Jim
Koch, to thank for that. And with his innovative approach to
microlending, Jim continues to give back to all of our
communities.
Ms. Sullivan, I thank you for participating in this
hearing, and as we have discussed, and as you have seen, we
actually have a Sam Adams barrel top hanging in our office, and
on there it indicates the distance between our Washington
office and the brewery back in Cincinnati.
I have actually got another hearing, a Judiciary hearing,
which has just started also and I have to go over there, so if
I could, Mr. Chairman, I am going to go ahead and ask my
question now which you can take later on to answer. But it is
not every day that we hear about the unique effort that your
company has made, so I would just like if you could at some
point, discuss what was the inspiration behind the Sam Adams
Brewing for American program.
And again, I thank you very much for your testimony here
this morning. And Adam Scheidler from my office is here. We
will get your transcript and read that, as well as your answer
to the question.
Thank you to the other members of the panel for being here
as well. Thank you, Mr. Chairman.
Chairman SCHWEIKERT. Thank you, Mr. Chabot.
Ms. Sullivan, five minutes.
STATEMENTS OF MICHELLE SULLIVAN, SENIOR DIRECTOR OF CORPORATE
COMMUNICATIONS, BOSTON BEER COMPANY; ALEJANDRO CREMADES, CO-
FOUNDER AND CEO, ROCK THE POST; BEN MILLER, CO-FOUNDER,
FUNDRISE; DANAE RINGELMANN, CO-FOUNDER, INDIEGOGO.
STATEMENT OF MICHELLE SULLIVAN
Ms. SULLIVAN. Thank you very much for your kind words,
Congressman Chabot.
Chairman Schweikert, Ranking Member Clarke, and other
members of the Committee, thank you so much for inviting me
here this morning to discuss Samuel Adams Brewing the American
Dream on behalf of our founder, Jim Koch.
My name is Michelle Sullivan. As the congressman said, and
as senior director of Corporate Communications and External
Affairs, I am charged, with Jim, for the implementation of this
innovative program. I am pleased to be here to discuss that
innovative way in which we assist small businesses by affording
them access to capital and knowledge to start or grow their
businesses.
In 1984, when Jim Koch started the Boston Beer Company, the
odds were stacked against him. Flavorful, high-quality craft
beer, like Jim's, were virtually unheard of by anyone--beer
drinkers, beer distributors, beer retainers, and certainly not
bank lenders. After brewing the first batch of beer in his
kitchen, he named it after one of his favorite revolutionary
war patriots, Samuel Adams. And after trying to obtain a bank
loan from numerous banks, he quickly realized the reality of
starting a small business went far beyond having a great
product--namely a lack of access to capital and the right
network of business contacts could prevent a small business
from succeeding despite the quality of its product.
Jim began selling his beer bar-to-bar himself in Boston,
having had to start his own distribution company in addition to
his brewery because all of the wholesalers in Boston turned him
down for the opportunity to carry Samuel Adams. He scraped
together the funding for his brewery by risking everything
personally, taking out a second mortgage, and by raising money
from family and friends.
The beer industry has undergone profound changes since
those days in the `80s. America's big three breweries--
Anheuser-Busch, Miller, and Coors--have been acquired or merged
into foreign conglomerates, and indeed, Miller and Coors have
merged their operations in the U.S. So this leaves the brewery
that Jim started in his kitchen, Samuel Adams, as one of the
nation's largest American-owned breweries today. But after
nearly 30 years of significant growth, we still only account
for just under one percent of the entire beer industry, and the
two largest players account for over 80 percent. So in the beer
industry, it is still very much a David and Goliath world; that
said, we are proud to continue to lead America's brewing
community, comprised of more than 2,400 other small brewers in
all 50 states, not only in brewing outstanding products and
creating jobs but also in our unconventional path to corporate
citizenship.
In 2008, working with a team of employees led by Jim
himself, we created Samuel Adams Brewing the American Dream.
The program has two major components. We host a variety of
mentoring and coaching events for low- and moderate-income
entrepreneurs, and through our nonprofit partner, Accion, we
fund microloans ranging from as little as $500 up to $25,000.
Our program serves business owners in the food and beverage
industries, including craft brewers, the very industry where we
compete and sell in, and the one where we are most able to give
the small business owners meaningful nuts-and-bolts advice,
guidance, and introductions.
Microloans are a critical component of the program. As you
know, there is a serious lack of funding available today to
small businesses. It is equally as important to educate
inexperienced business owners in the areas of sales, graphic
design, purchasing, marketing, hiring, distribution, and other
aspects of business that can make the difference between
success and failure. And we know it works because we have a 97
percent payment rate on our microloans. As of today, we have
disbursed 234 loans totaling over $2 million; have hosted 45
events nationwide that have attracted more than 3,000
attendees. More than 300 of our Samuel Adams employees have
participated in these events as coaches and mentors, and we
have saved or created more than 1,400 jobs. So in an odd twist,
we have actually created more jobs outside of the Boston Beer
Company than inside, and we are proud of that.
When Jim started Boston Beer, he was armed with a great
product, the financial backing of family and friends, and a
passion to succeed. What he did not have, and the reason he
feels so strongly about Brewing the American Dream, were
mentors. Jim did not have a network of established business
owners whose expertise he could call on. Through this program
he makes what he needed that was not available to him available
to others; namely funding, nuts-and-bolts advice, and access to
mentors. Working with these small business owners is an honor.
We are convinced that well-supported small businesses are
poised to grow and thrive. They are the engine for future
economic growth. They are a source of innovation. They will
create jobs. They will be the household names of the next
generation. And like Jim Koch, they will realize their American
dream.
I want to thank the Subcommittee for allowing me this
chance to discuss Samuel Adams Brewing the American Dream, and
please let me know if you believe our program can be beneficial
in your district.
Thank you again, and I am pleased to answer any questions
that the Committee may have.
Chairman SCHWEIKERT. Thank you, Ms. Sullivan.
Ms. Clarke.
Ms. CLARKE. Thank you, Mr. Chairman.
I have the distinct honor and privilege of introducing Mr.
Alejandro Cremades. He is co-founder and CEO of Rock the Post,
one of the leading investment crowdfunding platforms for
startups in the United States.
After one year of development, his team was able to launch
the platform to the public on November 23, 2011. In less than a
year, the platform was already mentioned by Time Magazine as
one of the best crowdfunding platforms in the world, as one of
the top 10 digital tools for entrepreneurs by Forbes, and as
one of the hottest startups to watch by Business Insider. Prior
to Rock the Post, Mr. Cremades worked as a lawyer at King and
Spaulding, where he was involved in one of the biggest
investment arbitration cases in history. Mr. Cremades guest
lectures on crowdfunding and entrepreneurship at NYU Stern
Business School and at the Wharton Business School. And I want
to thank you for being here today and we look forward to your
testimony.
Chairman SCHWEIKERT. Thank you, Ranking Member Clarke.
Five minutes. And help us. Let us get our pronunciation of
your last name proper. How should we be saying it?
Mr. CREMADES. It is Cremades. Either way is fine. I am used
to it. It is okay.
STATEMENT OF ALEJANDRO CREMADES
Mr. CREMADES. Thank you so much for the kind introduction,
Mr. Chairman, and other members here present today. I am
particularly interested in sharing my thoughts and experience
with regard to the difference that crowdfunding is already
having at its early stage on small businesses in the United
States and the positive impact that services, like Rock the
Post, provide.
According to a Kauffman report, new firms add an average of
three million jobs in their first year, while other companies
lose one million jobs annually. Unfortunately, 65 percent of
the new firms go out of business within the first four years,
due mainly to lack of access to capital. Traditional methods of
financing are very limited. Out of six million businesses that
launch every year in the U.S., only 400 of them get venture
capital money. The rest rely on angel investors, which
represent less than one percent of the U.S. population, or
friends and family. With equity crowdfunding offered via
services like Rock the Post, startups are able to gain exposure
in front of thousands of investors; obviously, right now,
accredited investors. In the offering world, startups take on
average eight months to close a seed round. Via Rock the Post,
startups and small businesses fundraise their round between 60
or 90 days with minimum road show instructions. Success
stories, like Villy Custom Bicycles, a Shark Tank-backed
company with high-profile investors, like Mark Cuban and
Barbara Corcoran, raised their funding goal in just two weeks
alone on our platform; Musicx.fm, a little over a month.
Rock the Post's crowdfunding platform not only helps
entrepreneurs to gain access to funding, but also reduces the
fundraising time significantly, which allows them to focus on
growing their business, which is the most critical factor for
the bottom-line. However, we are operating under a lot of
restrictions, which makes it challenging to truly innovate and
pioneer this new industry. The general public solicitation rule
is the most difficult challenge to overcome.
Secondly, the fact that only accredited investors are
allowed to make investments is also a big obstacle. Even though
the law allows up to 34 unaccredited investors per offering, we
feel that the amount of disclosures required to comply with
this exemption kills the attractiveness for platforms like Rock
the Post to be able to get involved. Not to mention, the burden
entrepreneurs are faced with in providing additional disclosure
materials. Allowing nonaccredited investors to partake in
private offerings will open the door to over 300 million
Americans in comparison to the seven million accredited people
that have access to use Rock the Post today as investors.
With that being said, I believe that we are far behind, and
every day that passes by without the JOBS Act being implemented
is another day that startups need to fight for survival.
Pandora, the online radio, for example, of which I am sure many
of you have heard, was rejected over 300 times from financial
institutions, and thank God they did not give up on their
business.
I invite you all present in this room here today to create
a unified voice in order to reduce the delay of the JOBS Act
implementation. There are many cases like Pandora out there,
and unfortunately, many of them end up giving up in the
process.
Thank you all for listening, and I will be more than happy
to answer any questions that the members might have.
Chairman SCHWEIKERT. I truly appreciate that opening
statement.
Ben Miller is cofounder of Fundrise, a real estate-based
development company based right here in the Washington, D.C.
area. Ben co-founded Fundrise, with his brother Daniel, as a
way to involve members of the community in real estate
development. In addition to being cofounder of Fundrise, Ben
also serves as managing partner of Westmill Capital and
president of Western Development Corporation. And you went to
University of Pennsylvania.
Ben, five minutes.
STATEMENT OF BEN MILLER
Mr. MILLER. So I deeply appreciate the opportunity given to
me.
My name is Ben Miller, and I cofounded a company called
Fundrise. And what Fundrise does is crowdfunds real equity into
real estate. And so we are actually, technically, equity
crowdfunding today 10 blocks from here on Eighth Street NE. So
any resident in Washington, D.C.--you can be accredited or
unaccredited--can invest at $100 a share online through
Fundrise right now.
And so I think the reason I was invited is that we are
actually crowdfunding. We are doing it now. We have a good
sense of what it means and what it took to do it in the current
regulatory environment. And obviously, there were some
challenges, so I will quickly tell sort of how we did it and
what we learned.
So briefly, my background is real estate development. I
built a lot of large scale, multi-hundred million dollar
properties in the D.C. Metro area, such as Gallery Place at 7th
and H. But the problem is institutional capital does not
understand emerging neighborhoods. I have Mass Mutual,
Cornerstone, Angelo Gordon, AFL-CIO as our equity partners, but
if you look at Brooklyn, Bushwick, L.A. Arts District, 8th
Street NE, all across the country these emerging neighborhoods
really do not get the attention of institutional capital, even
though that is really where the growth is, especially from the
millennial generation.
And so we decided to raise money from people instead of
institutional capital, and sort of reconnect this disconnect in
real estate. To do that, that was very challenging. We actually
ended up hiring former deputy director of the SEC to help us
navigate through the SEC and local regulators to figure out how
do you equity crowdfund with the existing regulations? We did
that using something called Regulation A. I think we were one
of only two or three people last year who cleared the SEC using
Regulation A, and we raised $350,000 from 175 people. And it
took us about three months to do that online. We have an
offering live today. I think we had $250,000 in a few days on
the next public offering, so you can see how quickly once you
start doing it people want to do it, and I watched family and
friends and wives start to do follow-on investments from the
first offering.
So the offering took us nine months to get through the SEC.
It cost us far and above $100,000, and the final offering was
hundreds of pages and actually weighed 12 pounds. And we have
done multiple Regulation A offerings now, and so I have a good
sense of what it is. And I would sort of say that I was lucky
to have good local regulators in Washington, D.C. and Virginia,
because the process was very ad hoc. They were really looking
at me. This was a novel idea, selling shares of a real estate
property had never really been done online before, and so I was
lucky that I worked with them, but if I had not had the depth
of resources and the staying power, I do not think that would
have been possible for most small businesses, most community
development organizations.
And so I would say that sort of the basic takeaway is that
you can invest in a Japanese manufacturing company today, but
you cannot really invest in your own community. Short of this
is no feasible way other than what I am doing for communities
to invest in themselves. And I have seen we are now operating--
we are in L.A. We are in New York, actually, working with Third
Ward in Brooklyn. Quasi Foundation just gave us a grant to
launch in Detroit. So we are seeing a lot of communities
wanting to reinvest in building their own communities, not
looking for some outside sort of Wall Street capital to solve
their problems.
But I would say it seems like two big takeaways from doing
this are, one, that I understand that there need to be
safeguards for investor protections, but I found personally
putting offerings out there publicly, generally soliciting
because we filed with the SEC and letting anybody invest, the
public was a very tough critic. I had hundreds of questions
from the SEC, and I got thousands of questions from the public.
And I have real estate analysts from the largest companies in
the country invested in our deals, underwriting them, asking us
questions. And so I found personally the public was
sophisticated. There was not willy-nilly, you know, funding of
investments online. They were really asking tough questions and
wanted to understand what they were investing in.
And the second really big takeaway I found was the SEC and
the local regulators really were not designed to do what I did.
This idea of small capital formation is not their primary
mandate. They did not have the staffing I think in the funding
to really do that, and I think we should, if possible, maybe
the private sector and public sector come together and look at
funding and institutional supports that could make maybe that
possible or better fund institutional, let us say,
institutional staffing that small business administration maybe
would normally do for our sector.
Thank you.
Chairman SCHWEIKERT. Thanks, Mr. Miller.
Our last witness is Ms. Ringelmann. She is the co-founder
of a crowdfunding portal, Indiegogo. Through Indiegogo,
businesses, individuals, and small organizations are able to
fund or raise funds through donation-based crowdfunding. Prior
to co-founding Indiegogo in 2007, Ms. Ringelmann worked in
finance as a securities analyst with Cowen and Company. Danae--
--
Ms. RINGELMANN. Danae.
Chairman SCHWEIKERT. I always get this wrong.
Ms. RINGELMANN. Danae.
Chairman SCHWEIKERT. Danae.
Ms. RINGELMANN. No problem. It rhymes with Renee.
Chairman SCHWEIKERT. Rhymes with?
Ms. RINGELMANN. Renee.
Chairman SCHWEIKERT. Okay. Danae holds an MBA from the Haas
School of Business and a B.A. from the University of North
Carolina. I will disclose she also runs one of my favorite
sites.
STATEMENT OF DANAE RINGELMANN
Ms. RINGELMANN. Thanks. Well, I am happy to be here,
everybody. Thanks for having me.
Yes, my name is Danae Ringelmann. I am one of the founders
of Indiegogo. We are the largest and global perks-based
crowdfunding platform. We do not limit our platform to any
geography or industry, so we are in every country of the world
and every industry. So everybody from the arts, like filmmakers
and musicians, to charities and nonprofits can use Indiegogo,
to entrepreneurs and small businesses, which is why I am here
today. We are also distributing millions of dollars every
single week now to campaign owners across the world, so it is
working.
I am talking here today though about Indiegogo's
meritocratic approach to crowdfunding and perks-based
crowdfunding, as well as what we think the benefits, the larger
benefits beyond money are to both small businesses here in
America, as well as the greater economy.
But first, as a way of background, I wanted to introduce
myself and talk about how I came to this. I actually met my co-
founders back in 2006. We came together before the word
``crowdfunding'' even existed in our vernacular out of a mutual
frustration for how unfair and inefficient fundraising was. I,
myself, am the daughter of two small business owners, who
struggled for 30 years to keep their business going and get a
loan, and not once could they actually get a loan despite
growth. Why? They did not know the right people. They did not
have the right connections. So when I graduated from college, I
went into finance to understand how this world actually worked,
and I actually met failure myself. I started working with some
theater producers and filmmakers on the side, trying to help
them raise money the old fashioned way, and I had this
culminating moment where I failed in security investment for a
theater production despite audience engagement and response and
enthusiasm for this production to get off the ground. And it
was in that moment that I realized that the people who wanted
this play to come to life the most, which were the actors and
the audience, did not actually have the power to make it
happen. They were relying on a third-party gatekeeper who had
different interests.
So at that moment I said, all right, here is my new life. I
am going to quit finance and I am going to go back to business
school and start a company that was going to democratize
financing. And that is where I met my co-founders, Eric and
Salva, who themselves had faced frustrating challenges with
fundraising--Salva for raising money for cancer research and
Eric for the arts--and together we started and created
Indiegogo, which is now empowering millions of people across
the world to fund what matters to them.
So specifically, with perks-based crowdfunding it is a
little different. The way it works is you create a campaign
page on our site. You set a funding target. You set a funding
goal, a funding deadline, you put up a video, and then you
share it with everybody that you know. The reason why
crowdfunding is different than online fundraising though is
that Indiegogo offers extra amplification through social media
integration, as well as through our go-go factor promotion, to
allow you to reach more audiences beyond your inner circle--to
your second and third order friends, as well as strangers. I
can talk a little bit more about go-go factor a little bit
later.
So you might wonder, well, why are people funding if they
cannot get equity, if they cannot invest, if they are just
getting a perk? And our research has actually found that there
are four reasons that people fund. We call them the four Ps.
People. People want to support the people or team behind a
project.
Their passion. They want to support the passion or project
itself.
The third reason is participation. They want to be part of
something bigger than themselves.
And the fourth reason is the perk. And we find that
typically, people fund for a dynamic number of reasons, so a
cross section of the four at any given time.
For example, I recently funded a campaign for an app called
``Not Buying It.'' It is an app where you can take a picture of
a piece of sexist media out in the world and upload it to
Twitter. And if everyone is uploading it, it creates pressure
for the advertisers to change their media. The reason I funded
it is for all four reasons. I supported the project owner,
Jennifer Sebold Newsome. I supported the project. I supported
the movement to stop the objectification of women, their sexism
in the media, as well as I wanted the perk itself.
So a lot of people think crowdfunding is about just money--
it is a new and alternative form of financing--but there is
actually a lot more to it than that, and there are people who
actually use crowdfunding not just for the money but for the
other benefits. Specifically, for small businesses, there are
four benefits. There is market validation. There is risk
mitigation. There is customer feedback. And there is confidence
building that happens. With market validation, what is
happening is that people are voting with their dollar, and so
it is a far better indicator of interest than any focus group
or Facebook like button could do. With risk mitigation, a lot
of product designers and entrepreneurs are using crowd-funding
as a way to mitigate the risk of overproduction or
underproduction of their first run of product, because what
they are doing is they are offering their perk in exchange for
funding, and therefore, they fund and make the exact amount of
product that they need to do to get off the ground.
The third reason is customer feedback. We had a campaign
owner by the name of Sonny Vu, who had created an activity
tracker and he had actually raised money from venture but he
still used crowdfunding as a way to get off the ground because
he wanted to become smarter faster. He used the crowdfunding as
a way to test his pricing and his messaging and his actual
features and learned that people wanted a certain color of his
device more than another color and they were willing to pay
actually more for it all through the crowdfunding campaign.
The third reason is--or the fourth reason is confidence.
One of my favorite reasons I think that people use
crowdfunding, and a great example of this is Karen, who started
a bakery business called Free Bread. It was her first business.
She lacked the confidence to get going, and so she created a
campaign to raise $10,000 to launch her bakery business. And
she knew that if she failed she would be back in the same place
that she was before because it was always a dream of hers to
start this business. And within a few weeks she had the money,
and she sent us a note saying, you know, when this started to
happen, I started to raise the money, my life actually started
to change. So there are lots of reasons.
On the economy side, and the greater kind of financial
industry side, there are also benefits. The first is
meritocracy. Like the other panelist said, when every day ideas
go unborn, every day ideas die because they are
undercapitalized, because of the lack of efficient access to
capital. And so crowdfunding is making it efficient and thereby
creating this incubation platform for traditional investors to
actually discover product and businesses based on their own
true merit. And so that is what I think are the greater
benefits. And I am happy to go further into that.
The third benefit there is jobs, of course, and I will end
there so that we have time for questions.
Chairman SCHWEIKERT. Thanks, Danae. You had said you would
probably go long.
Ms. RINGELMANN. Yes, I did.
Chairman SCHWEIKERT. As chairman, I am going to give myself
five minutes, but--this is one of those moments where I could
probably grab all of you for hours because this is an area I
have great interest in.
I am going to start with Mr. Miller. You and I have had the
conversation, technically, you are not doing crowdfunding as we
saw it in the JOBS Act. You are right now having to use the Reg
A mechanics and do SEC filings, and you can also only take
nonaccredited investors within the jurisdiction, so within the
state or D.C. area, that have been given approval. Tell me how
much paperwork goes with these filings. Tell me what
limitations you are having to operate under right now.
Mr. MILLER. So there is a lot of paperwork. I mean, the
good news is that we have now done it a number of times and we
are focused on real estate, so we have--I mean, real estate as
a product has a lot of similarity to building my building--a
lot of the same risk factors. I mean, I know that a normal
public company, like Facebook, it took them three months to go
public, and I know it took us nine, and we raised, I think,
$350,000 in this time. Now, we are raising another $325,000 for
another property, and I think most public companies raise
billions. So I feel like there is an asymmetry there that the
JOBS Act can help address.
The paperwork is actually less of a challenge in terms of I
think that there is just--I do not think that there is anybody
inside the SEC who really has the mandate for regulation A. I
mean, it was really underused and I am going to bet you that
that same sort of problem will happen when you start seeing
potentially thousands of other small issuers raising money. And
so that is going to require staffing up an organizational
focus, and a lot of times I will have a comment in from the
SEC. The comment will be, you know, something pretty small,
something about maybe what does this footnote mean on the
account? And it will take weeks; weeks, really, to hear back
about a footnote in an audit statement.
Chairman SCHWEIKERT. How many pages of paperwork were in
your first filing?
Mr. MILLER. Something like 350 pages. A lot. But you go
back and forth. I mean, ultimately, a file, it is really an
integrative process so it was a lot of disclosure.
Chairman SCHWEIKERT. Okay. Mr. Cremades, you, in your
testimony, or in your opening statement, were actually having
the discussion of a couple things. One, right now you can only
have accredited investors participate. So it is only a small
fraction of our nation's population. How different do you think
your world would look if we actually had the JOBS Act, the SEC
rule sets done, where unaccredited could start to participate?
What difference do you think that makes in how you would run
your shop?
Mr. CREMADES. That would make a huge difference because
right now we are restricted just to a certain amount of people
in the U.S. and our platform is kind of like closed doors, you
cannot really have access to any offering or any terms on any
offering unless you are an accredited investor. Once the JOBS
Act is implemented, then we have the possibility of being able,
you know, especially when the general solicitation rule is
revised, we have the possibility of converting Facebook likes
or Tweet shares into investors really, you know. And instead of
having really that limitation towards seven million people
really, we can access over 300 million Americans. And there are
going to be different levels of investors. Obviously, you have
the high-net-worth individuals, which are considered angel
investors today, people that are making over $200,000 on salary
or have one million in assets or that are making with their
spouse 300,000 combined, but then you are going to have the
other two different types of investors which is one, the one
that is making over $100,000. The JOBS Act establishes a
limitation there of 10 percent, where they can invest only 10
percent of their income, so it is not like, you know, like in
the casinos, for example, here in the U.S., people are spending
45 billion without any type of limitation. So also, the other
different type of investor that we are going to have is the one
that is making under $100,000, and that the profile of investor
is going to have a limitation of five percent of their income.
So it is a huge impact what is going to happen when the JOBS
Act is implemented.
Chairman SCHWEIKERT. Okay, Danae, just off the side of this
we have had a conversation. I have tried to share this actually
very publicly that I believe what we have done in the way we
have written our rules is we have sort of split our society. We
often hear the discussion of the haves and the have nots, but
in many ways we have done that with our financial rules. We
heard the comments earlier, that, 118 million Americans--or 318
million Americans and only seven million can actually invest
with you right now. We treat the other 300 million of our
brothers and sisters as sort of a second class citizen in their
ability to participate. I know there is often fear of if we
move to an equity-based crowdfunding. But at Indiegogo you have
built fraud detection technology into your platform. Can you
share some of that with us?
Ms. RINGELMANN. Yeah. So when we started Indiegogo, it was
very important to us to stay true to our mission, which is to
empower people to fund what matters to them. And in order to do
that we needed to be open and not curate, so we do not just
pick and choose people to be on our site. We do not pick and
choose who we promote. That is all done meritocratically. So
everyone has an equal chance of success. So with that though,
when you are an open site, you are open to people potentially
taking advantage of the site in a way that it was not intended.
And so we have been aware of that since day one, and over the
last five years we have pioneered and innovated around that
risk specifically. I actually remember the day when I was
trying to look for any regulation that existed to follow, and
there actually was not anything out there. I did not fit into
any specific box, and so I said, well, let me just pull from
best practices of adjacent industries and let us go at it.
And so what we ended up doing was really trying to
understand where fraud could come from, and over the last five
years we have built a system to fight that. So we really fight
fraud in three ways. The first is easy. It is the natural
dynamics of crowdfunding are a natural deterrent to fraud in
and of itself because when you are raising money from a lot of
people, you need to convince a lot of people to give you money.
And we know successful campaigns start with the people that
they know first. The early funders in are always the people
that know you the best, and then through crowdfunding you can
amplify it beyond that to strangers. So just the natural way
that crowdfunding happens is a great way to prevent people from
going onto the site and trying to raise a bunch of money for
something that does not really exist.
The second way is our fraud systems that we have built. We
have built proprietary fraud detection and trust and safety
systems that is constantly learning and evolving because we are
applying machine learning and all kinds of the latest in data
science to get smarter, faster. I would probably say that one
day our system will probably be better than any, and it is
better right now than any manual process.
And then the third is we just follow other platforms, like
eBay and PayPal and we use a community policing site--excuse
me, a community and policing approach where people can flag
campaigns if they look suspicious. But that is three layers on
top of each other that have kept our fraud rates far below one
percent, and it has enabled us to keep this an open platform
and really provide a meritocratic place so that we are not
judging and picking and choosing who has the right to raise
money, but the world does.
Chairman SCHWEIKERT. And I want to touch on that one bit
and then I have one quick question for Ms. Sullivan, and then I
will pass to Ms. Clarke.
Less than one percent?
Ms. RINGELMANN. Far less.
Chairman SCHWEIKERT. That somewhat surprised me when I came
across it because you allow almost anyone. I mean, I think you
have something up right now to save a horse and to fund a
bakery, I have to buy an ad. I mean, you have everything from
business ideas to social ideas to, you know, save a large
animal.
Ms. RINGELMANN. Yeah, we just had--and because of
everything going on in Turkey just three days ago, three
Turkish Americans were so bothered by what is going on they put
up an Indiegogo campaign because they could get started right
away, and they have raised almost $100,000 in just the last
three days to buy an ad in the New York Times to help change
the conversation about what is happening in Turkey.
Chairman SCHWEIKERT. Which surprised me because, from the
mechanics of it.
Ms. RINGELMANN. It is democracy.
Chairman SCHWEIKERT. Well, you are so egalitarian. And I
can put up literally everything, but yet you seem to have very,
very little bad actors.
Ms. RINGELMANN. Because we pull it down ASAP. Like, right
away. It is all automated and systematized. So we catch stuff
faster than a human being can do because we are a data driven,
Silicon Valley type of startup where we rely on data and
analysis and machine learning to catch all that stuff. And we
are going to continue to evolve there. We are going to continue
to innovate there.
And I guess the point that is probably worth mentioning is
that we did that not because we had any law to follow or any
regulation that we had to abide by. I was, in fact, looking for
those when we were just starting six years ago, but because,
again, we were creating a new industry, we did not fall into
any boxes. But the reason we did it though is because we wanted
to stay in business. You know, we wanted to have a safe and
clean site for our customers because we knew that the 99.9
percent of people who were coming to our site to use it in the
way that it was intended would not want to come to our site if
they saw or had fraudulent activity. Plus, we did not want to
lose money because if there is fraud on our site, we pay for
it, not our customers.
Chairman SCHWEIKERT. Thank you, Danae.
Ms. Sullivan, now, you are sort of the unique one here in
what you are doing because in many ways you are actually a
small entrepreneur microlender. Help us understand a little bit
on that same sort of discussion of, how do you maintain your
repayment rates? Because in many ways when they repay, you have
the opportunity to invest in the next little business and
growing concern. I mean, how have you built that model to keep
it going?
Ms. SULLIVAN. Yes, that is a great question, Mr. Chairman.
I think there are two components to that. One is certainly
in the screening process, and Accion as our partner, over
decades of microlending, they have developed a successful
system of screening potential applicants. For those who have
the credit score, the drive, the passion, to really succeed in
their business, one of the facets that is unique to what we do
is that unlike a bank, if a person with a great idea and a real
drive and passion to succeed in starting or growing a small
business is not qualified for a loan at that point, we will
work with them through Accion to help the entrepreneur actually
become loan ready. So unlike a bank, you are not told yes or
no; you are told not yet. And we are able to actually help
those folks who are really dedicated and willing to stay with
the process, stick with it until they are able to get their
loan. So there is a very robust screening process in the
beginning that Accion has piloted. Some of that does involve
intangibles, you know, like the person's character and how much
drive and motivation they have, which we find is actually quite
helpful in looking at a business. A small business is not just
what can be found on the paper. It really is the person, the
entrepreneur who is behind it that in many ways is going to
cause it to succeed or fail. So we do have a robust upfront
process, but I would say even more importantly and unique to
that is the coaching and mentoring that we offer. As many
entrepreneurs would tell you, the day that they receive their
funding, they look at themselves in the mirror and they think
now what. So for us to be able to work with those folk who have
a wonderful idea, a great product, but are not expert in the
other aspects of running a business, such as sales, for
example, you could have a wonderful product, but if you are
unable to convince a retailer to sell that product to
customers, then you are not going to succeed. So we work with
them hand-in-hand and in any aspects of coaching or mentoring
that the business owner needs to succeed by pairing them up
with Samuel Adams employees who have that expertise.
So if you are in Brooklyn, and we have several
beneficiaries in Brooklyn, and you would like to work with one
of our sales folks in New York City to coach and mentor you as
to how to sell your product to retailers in New York City, we
make that available to them, and we have found that it has
worked. I mean, we have been able to partner with many of the
entrepreneurs in selling their products into the smallest of
the small neighborhood grocery stores, all the way up to
wonderful chains, like Kroger and Whole Foods, for example. So
they may have a wonderful product, a great idea, the drive and
the passion, but what we give them are some of the skills, such
as selling, or hiring, or procuring ingredients, things that
are very difficult sometimes to attain on your own.
Chairman SCHWEIKERT. Thank you.
Ms. Clarke.
Ms. CLARKE. Thank you, Mr. Chairman. This panel has really
provided some fascinating information in today's hearing. I
just wanted to sort of go down because each has such a unique
way of going about providing these opportunities and start with
Mr. Cremades.
It has been estimated that only three percent of accredited
investors are investing in startups and small businesses. In
your opinion, is the lack of participation the result of
current SEC regulations, the inherent risk of startups, or
something else entirely?
Mr. CREMADES. With all due respect, I would like to argue
that the point from 2011 to 2012, the angel investors in number
increased 59 percent from 200,000 to 318,000. And also, I would
like to say that the amount that has been invested has also
increased 43 percent. As a matter of fact, it went from being a
$15 billion market, really angel investors investing in
startups, it went all the way up to 22.1 billion in one year
alone. And in addition to that, I would like to say that
people, especially investors, are disappointed with the returns
that they are seeing on the public markets really investing in
startups. Obviously, it is risky, but especially these
individuals that are high-net-worth individuals, for them just
really putting eight percent of their portfolio into these
types of investments, it really is not that much. I think that
not only you are investing in a company, but also you are being
part of something. And that is the most important part of this.
So back to your point, I would like to say that the times
are changing. I think that people are slowly getting educated
at the same time, and the industry is definitely growing from
every perspective.
Ms. CLARKE. And just as a quick follow-up to that, do you
believe that it is important that new regulation and policy be
driven by the practical application of what your investors are
doing? Because this is sort of unchartered territory, which is
why you are, I think, running into the obstacles that you see.
We are trying to fit your model into existing frameworks that
really are not applicable. What would you say from your vantage
point would be a good approach to I guess unleashing and
creating the space for the development of the model that you
have established?
Mr. CREMADES. So for us we do not rely on what is going to
happen with the JOBS Act or on what the SEC is going to come
out with, if they are going to have special vetting mechanisms
that are going to apply for the crowdfunding industry and the
platforms, the funding portals that are going to be operating.
We do strongly believe that platforms, especially now at this
point, they should all take reasonable measures and also
responsibility and accountability for developing the
appropriate systems so that they can provide the best services
for the angel investors and also for the startups that in the
end really somehow contribute to that investor protection.
So as a matter of fact, on Rock the Post, and it was funny
that we touched on this point earlier, we also do have identity
verification systems and social proof mechanisms that help to
conduct the due diligence better between the entrepreneur and
the investor, and we do backgrounds on every single individual.
So I do believe, back to your point, that it is important for
the platforms to take accountability and not to rely on the
public institutions.
Ms. CLARKE. Thank you very much for your response.
Mr. Miller, investing in a small business can be very
risky. Even the most sophisticated investors occasionally make
bad decisions, losing their investments in the process. Easing
SEC regulation and reporting requirements for crowdfunding
securities as required under the JOBS Act will therefore expose
tens of thousands of investors to increased risk. In your
opinion, how can the SEC adequately inform ordinary investors
of the risks while not burdening small businesses and
restricting access?
Mr. MILLER. So what surprised me and what we have been
doing is what a lot of large companies, in real estate, at
least, have started doing what we are doing. We are using
Fundrise. We are working with Four City, which is a $11.6
billion company. Based in D.C., you see most of the major real
estate companies now starting to do this, and the reason they
are interested is that they want the public as a partner. There
is enormous value, social value having the public get
activated, be part of building their neighborhood, and helping
you make better decisions, you get better data. When you go to
community meetings, when you go through the entitlement
process, when you go get maybe a liquor license, you have a
more representative support for that project, and so I think
that the idea that crowdfunding is only going to be small
businesses that are risky is actually a misnomer. I have
actually seen a huge diversity of players interested in using
this kind of new tool, this sort of new innovation that makes
it possible to create sort of an equity in who is building your
city, who is investing in it, sort of who owns your
environment. And so what I have seen also, and I think
everybody here is talking about this, you know, it is our
lifeblood to make sure that there is quality offerings on the
platform. I mean, it is a disaster for there to be fraud or
even failure just from normal entrepreneurial processes. So,
you know, everybody is focused, anybody who is building a
platform and investing millions of dollars is going to be
focused on that, and I think has a deeper expertise, for
example, in real estate or underwriting breweries, for example,
then maybe the regulators do.
Ms. CLARKE. Just a follow-up to you, can you elaborate on
the challenges that you have faced with traditional capital
with regards to these emerging neighborhoods that you are
applying your technologies to?
Mr. MILLER. Yeah. I mean, I take a perfect example. There
is a developer in L.A. He bought a 450,000 square foot project
in downtown L.A., and the institutional capital partners said
downtown L.A., we do not want to invest there. It is tired. It
is really not the future. And he could not raise capital from
normal places and basically ended up raising it from a hedge
fund. His cost of capital was double, triple really what it
should have been. And so this problem--and I am giving an
example of this is a problem not that institutional capital is
making with small businesses and making with large businesses.
They just do not always understand the dynamics of growth in
neighborhoods. Usually, they are not local, and so to them
Bushwick looks the same as Williamsburg. They are like, oh,
that is like the same. Right, but if you live there it is a
joke. Right? So I just see that crowdfunding is really a way--
over time you will see that there is a partnership between the
institutional capital and the crowd. I am already seeing it
with big companies coming together, and that is how you will
see sort of a new sense of why is this like there is decent
underwriting and security. Well, because there are
institutional players involved. It is not an either or. It is
really going to be about both.
Ms. CLARKE. And then Ms. Sullivan, I wanted to ask about
this program. Your program is quite unique. I am familiar with
Accion, of course, being from New York, but a larger business,
a company like yours in collaboration is a model that we have
not seen heretofore. A larger business providing smaller ones
in the same industry with professional coaching as well as
opening doors to lending opportunities is quite unique. How has
the program been received by the food and beverage industry?
And has there been interest in replicating the model elsewhere?
Ms. SULLIVAN. That is an interesting question.
I do not think the answer is yes yet. I wish that were
true. We would say that the notion of funding those in your
industry, you know, other food and beverage companies, is
really where we can add the most value. I think sometimes folks
will look at them as potential competitors, but from our
perspective, our sector, the craft brewing industry is only six
percent of all beer sales in the U.S., so we believe that there
is room for many other small brewers to come in and join us as
a small brewer. There is still so much potential growth. We
welcome others to the table.
I do not believe that really this notion of bricks-and-
mortar businesses like ours funding others in their space has
caught on to a great extent. I am aware that Tory Burch, who is
a fashion designer, who designs clothes, has been funding other
sort of upstart clothing designers. She actually partners with
Accion as well. To my knowledge, we are really the only two
manufacturers who are funding other manufacturers in their same
space. I would make the case that that is a missed opportunity
because we are much better able to provide what I believe to be
one of the more critical components of the program--the
coaching and mentoring--to people who face the same challenges
that we face currently or have faced in the past. You know,
from my ability to coach somebody in the real estate industry,
for example, is much decreased versus what I can talk to
another beverage manufacturer about. So I would say that there
is a competitive notion that keeps others perhaps from funding
or mentoring upstarts. But I also believe there is a huge
opportunity there.
Ms. CLARKE. Thank you. Mr. Chairman, I yield back.
Chairman SCHWEIKERT. Thank you, Ms. Clarke.
Ms. Chu.
Ms. CHU. Mr. Cremades, can you describe the process both
small businesses and potential investors must go through in
order to access crowdfunded capital through Rock the Post or
similar portals? What are the terms or obligations that must be
met either as a small business or as an investor?
Mr. CREMADES. That is a very good question. Right now we
are operating via Regulation D, Rule 506, and we do this in
compliance with a broker-dealer. And the name of the broker-
dealer is called Bendigo Securities. And this firm was founded
by the former CEO and CFO of E*TRADE Financial. So essentially,
what we do is we aggregate the issuers and also the investors,
and then they get to do what they do best, which is the backend
compliance of the transaction itself. So essentially for the
compliance, there is a lot of paperwork that needs to be done
before putting an offering on the site. On average, we
received--last month I believe we received over 1,300 startups,
and unfortunately, since the due diligence is quite heavy on
every single one of them, it takes normally on average between
two to three weeks to make sure that we can drill down on the
terms and also the structure of the company. We cannot take all
of them, so it is hard for us really in that sense.
Basically, the process is that we receive the application
from the company. Once we receive the application, then we
focus on the team and the market. And if we are able to see a
compelling story or potentially something attractive, then we
would pass along the application to our investment committee.
Our investment committee is comprised by four individuals. They
have over 30 years of experience in the financial service base.
They are all professional angel investors, and they also have
over $2.5 billion in acquisitions under their belt, so they are
the ones who really take care of the other backend type of the
transaction. It is conducted essentially by Bendigo. So once
everything is met and all the criteria is in place, then we
will go ahead and host the offering on our site and
automatically, it becomes available to the accredited investors
that are registered on Rock the Post. So that is essentially
the process.
Ms. CHU. And once the SEC issues its regulations, is this
going to change the investing process?
Mr. CREMADES. Well, obviously, there is going to be a lot
of disclosures that are going to have to be done with the JOBS
Act. I believe many of you have taken a look at what Title II
and Title III really introduce, and there are some heavy
obstacles. Like, for example, if you are raising over $500,000,
you need to do an audit report of your financials. I think that
for being a startup that is quite unacceptable because it is
over $50,000 potentially that you are going to have to pay on
that. So I think there are many things in the JOBS Act that
need to be sharpened up a little bit further because I think
that even though the regulators did a fantastic job in putting
that out there, I think that they need to really be a little
bit grounded and establish friendlier terms to companies that
have been in business for a very short period of time.
Ms. CHU. And what type of small businesses seek investments
through your service, and what kind of investors are providing
funding? And are there certain communities that are benefitting
more from crowdfunding?
Mr. CREMADES. So we focus on high growth companies. So it
is essentially tech-based, the health care, hardware, and also
consumer. So those are the type of verticals that we cover.
Essentially, we try to focus on businesses that are going to be
able to potentially have a liquidity event in a timeframe of
five years so that the investors can get their money back. That
is kind of like the end that we are going for with Rock the
Post.
Ms. CHU. Okay. And for anybody on the panel, how do your
companies reach out to small businesses that are not as
technologically savvy or equipped? How are you able to get
those, I mean, what are you able to offer the investors in
return for the contribution of funds?
Ms. SULLIVAN. In terms of getting the word out about Samuel
Adams Brewing the American Dream, we find that the old
fashioned way works very well. We actually have teams of
volunteers, both Sam Adams employees and Accion employees who
do what we call block walking. And they will go from business
to business in given communities and spread the word about the
program. We also spend a lot of time letting traditional
investors, such as community banks, know about the program. So
when they are unable to fulfill a funding request for an
applicant, they are able to give them an alternative and let
them know about our program. And we also work with local
governments. So we find that many of our applicants hear about
the program through a mayor's Office of Economic Development,
for example. So we pursue a variety of means, including going
out into the communities and looking directly for entrepreneurs
and going through other gatekeepers, for example, like the
banks, to get the word out.
We do still find that there is difficulty in getting the
word out. One of the challenges we have on the program is
actually letting folks know when they are turned down by a bank
that there are other means of financing out there, so we also
do call on social media and the traditional media to help us
build awareness of the program. We have more money to loan than
qualified applicants. So we are looking for qualified
applicants. We have capital right now that we would like to
have out to these businesses but nobody has applied for it.
Ms. RINGELMANN. We use classic marketing tactics from
online social media to speaking at events to giving workshops
and webinars in education about what crowdfunding is all about,
but one thing I should mention is that at Indiegogo we are very
excited about equity crowdfunding. We do not offer it right
now, but as we look at it and assess it and figure out how we
can actually do it and offer it in a safe way, we would be
looking to maintain our ethos of being an open and democratic
and meritocratic platform. So unlike other platforms, we
probably would not want to have a gatekeeper involved. We would
not want to have a team of people deciding which people have
the right to raise money or which do not because inherent in
that is bias. And that is where you run into things like we had
a campaign that raised over 110,000 pounds in London for a
project called The Cat Cafe. This is a cafe where you go and
you have coffee and you hang out with cats. I met a banker who
said, ``That is the craziest idea I have ever heard. I would
never loan to that business.'' And I said, ``Well, 110,000
pounds worth of funding just went into it from the people
because they clearly want it.'' And so because of that he said,
``Wow, I am clearly wrong. I missed that opportunity.''
And so when you have a system that is reliant on
gatekeepers, individuals picking and choosing projects, you
inherently have bias. So that is why it is also not surprising
that on Indiegogo, or sadly in the venture world, only three to
eight percent of all venture-backed businesses have a woman on
their executive team. If you go to small business, 40 percent
of small businesses are run by women in America, which is a
much better number. If you go on Indiegogo, 47 percent of all
successful campaigns are run by women. That is the power of
meritocracy and democracy.
And so if you require us, for example, if the regulations
were to come out and you require us to have a person sitting
there reading applications, that inherently would be against
what we believe in. And so we did not know that when we got
started, but in being able to innovate and being in a
regulatory environment that allowed us to innovate, we were
actually able to come up with a system that is far more fair
and far more efficient.
Mr. CREMADES. So I would like to--can I add something?
Ms. CHU. Yes.
Mr. CREMADES. I agree. I think that obviously having a
gatekeeper is not the best way to democratize the access to
fundraising, but of course, for us as a platform, we want to
keep the business open. And if we would not have that
gatekeeper, then the SEC would come after us and then we would
be in trouble. Obviously, once the job site is implemented, we
hope that we can explore other ways in which we could have the
platform up and running and basically provide the same
opportunities to everyone because that is the main reason why
we decided to put this platform in place when we founded the
company in 2010, but obviously right now, to be in compliance
we need to have a gatekeeper so that we make sure that
everything is kosher once it hits the platform.
Ms. CHU. Okay, thank you. I yield back.
Chairman SCHWEIKERT. Thank you, Ms. Chu.
And actually, you had a perfect question because there
actually--I am going to yield myself a couple moments here. Let
us consider this the lightning round.
That has actually been one of the discussions, is maybe if
I am the public and I have a couple thousand dollars but I want
to put it into a business, maybe I look for a platform that
puts up an opinion or has a gatekeeper, or the others,
something much more egalitarian where it happens to be my area
of interest or my geographic or neighborhood I know. As we move
towards hopefully having the SEC--sorry, I do not mean to be
sarcastic--I have faith the SEC will get us our rule set and we
at least understand the box we are operating under, and if
those of us as members of Congress need to sort of do a JOBS
Act 2.0 to fix any things where either from our drafting or
their rule sets to make it work. If I come to you tomorrow and
say we have equity crowdfunding as you believe it is coming,
what changes? What are you as Indiegogo about to do different?
If I go onto the site, will it look different? Will my
mechanics be different? What am I going to see that comes
different once you can actually legally do equity crowdfunding?
Ms. RINGELMANN. Well, the moment it becomes legal, that is
when we actually start to get to work and we start
experimenting. So you will not see anything new, different,
because everything that we think customers might want, whether
it is certain information that they would want back in terms of
reporting, our rating systems, all of that, that is all
hypothesis. And so as an entrepreneur, it is my job to put on
the lien startup hat and not make any assumptions; just come up
with hypotheses and then go prove it. So what we would probably
end up doing is try to replicate our approach to crowdfunding,
perks-based crowdfunding with equity in a very manual fashion
with maybe a few customers here and there and really dig into
those experiences and learn what both the campaign owners need
in terms of help, support, education, features, product
enhancement, whatever that may be, as well as what funders
would need. I think it is very easy, and this is the hardest
part about setting regulation, is that this industry does not
yet exist, and the regulators are tasked with coming up with a
regulation on how to control it, but clearly the risk is too
much regulation will completely stifle innovation and not allow
customers to actually--for us to actually explore what this new
equity crowdfunding experience is supposed to be. So nothing
would actually change for us. It would just be far more
experiments and learning so that we could actually come out
with something a little bit later.
Chairman SCHWEIKERT. Thanks, Danae.
Mr. Miller, the same question. You and I had also had the
discussion of would you even move to equity crowdfunding as it
is in the JOBS Act if that regulatorily, mechanically would
benefit you, or are you staying with the model you have
developed now?
Mr. MILLER. I mean, assuming that the regulations are
manageable, we definitely would embrace it because one of the
challenges is we get people from all over the country, and I
was talking to a developer yesterday. He is in, I do not know,
Kansas, and I never heard of him and it turns out he owns 24
million square feet of real estate. And so it is just striking
how, at least in real estate, it is very, very local. In every
local market, if you understand your local market, and you are
really not going to understand the next one, so if we could
actually open it up tomorrow and have really what would be an
open platform--where people in neighborhoods actually are
saying, yes, this guy has got a great reputation. We want to
make this happen. We can push this--we would not have to be
having to figure out this sort of top-down approach that really
is difficult in a scaling environment. We have just so many
people, so much interest, and if we could basically, as I said,
I have lots of real estate experts, real estate analysts.
Actually, a huge part of our user base is real estate people.
And so making them a partner and figuring out who should get
the resources, the limited resources we have to actually get
into the depth of underwriting real estate deals. So I would
actually have an open process in the beginning and at some
point dwindle down when I see enormous support for something
locally.
Chairman SCHWEIKERT. Mr. Cremades, same question. If you
had the JOBS Act at the crowdfunding portion, the rule sets
through the SEC, and I am an unaccredited investor but I know
and like one of the companies, I mean, how do I now interface
with you? How does your platform now change because you are
right now designed actually you have both a gatekeeper model
and a model that only allows, let us face it, accredited,
wealthier investors right now?
Mr. CREMADES. Yes. So I think right now it is really hard
to know what the regulations are going to be looking like. I
think that there are many assumptions that are out there, but I
do strongly believe that too much investor protection--and I am
a big fan of investor protection--would kill the attractiveness
of the industry for platforms like us to switch to the funding
portal perspective rather than being operational via the
Regulation D, Rule 506. What I do feel, and I am particularly
very excited about, is the possibility of adding social media,
blending social media with platforms like ours because it is
definitely going to be able not only to give more exposure to
these ventures, but also to provide much more transparency.
Because I think that is the beauty of social media, is that it
is that process of being able to crowdsource a due diligence
process with a vast amount of people. So I am very excited
about that.
Chairman SCHWEIKERT. Bless you. You hit one of my personal
fixations, and that is sunshine information from lots of
different sources is the ultimate regulator because many of us
here, we turn to the SEC and think they are going to know
everything and that is impossible. And that is how we have some
of the small and huge frauds with highly regulated entities.
How do they get away with it? Well, there is not enough
information in a central place where we as the public, we as
even the regulators can actually see it. Our discussions about
affiliated blogs. I am sorry, does anyone else do this where
you go to the consumer reports of the blog and the first thing
you do is you look for the negative report and you start from
there and go backwards?
Ms. RINGELMANN. Yeah. I mean, I was speaking to the former
head of risk at PayPal and they said the best thing that has
ever come along for risk management in the financial industry
is social media because it is identity management. It is track
record management. When people have a social footprint on the
web, you have a ton of information you can look to to assess
risk. And all of that information goes into all of our fraud
algorithms. So that is why I think bringing social medial
together with investing is incredibly powerful. We did it with
perk-based funding, and I think that is honestly why we have
been so successful in keeping the site clean and safe.
Chairman SCHWEIKERT. All right. Ms. Sullivan, just as one
aside, are you ready to have a relationship with Indiegogo to
actually raise some social entrepreneur money for some of your
small startups? I see a love connection.
Ms. RINGELMANN. We do have dare companies in Indiegogo.
Chairman SCHWEIKERT. Well, I mean, mostly you are
microlending.
Ms. SULLIVAN. Correct.
Chairman SCHWEIKERT. But your loans range from--what is
your smallest to what is the biggest you have seen?
Ms. SULLIVAN. Five hundred dollars up to $25,000.
Chairman SCHWEIKERT. So once I got my 25,000, I started
going. Could you imagine a future where you might actually move
them on to you need the next tier of capital to actually really
start to grow?
Ms. SULLIVAN. Yes. We actually find that with our small
business owners, some of them do come back and apply. We have
had folks who have taken a second loan and a third loan, which
they are certainly eligible for. We actually have found many
times that the capital that we are able to grant them has
allowed them to grow and create a track record that then makes
them qualified for traditional lenders. So many of the
entrepreneurs that we funded five, four, three years ago, have
had enough success using that capital. They have been able to
then qualify to get bank loans, which they previously had not
been qualified for. But I would love to talk more about that. I
think the notion of getting consumers--we have involved
consumers in our program as donors to the loan fund, but you
are way more expert in doing that than we are, so I would love
to entertain those conversations.
Ms. RINGELMANN. Well, with your form of lending and with
crowdfunding, what is really incredible--I did not get too much
into this in the testimony, but the market validation that
comes from people voting with their dollar is incredible. A
great example of this is we had a campaign owner who was
raising money or had developed a light called the gravity
light, which is this really innovative light where you raise it
up for 30 seconds and that creates 30 minutes of light. It is a
great solution for the developing world where kerosene is the
go-to lighting source, which is dangerous and expensive. And so
this entrepreneur was really excited about this design. He
spent weeks calling venture capital, big banks, trying to get
them to take interest and give him some startup capital, and
none of them would return his phone call. So he then went onto
Indiegogo, raised $400,000 by pre-offering lights in exchange
for, you know, $10, $20, $50. Guess who would not stop calling
him? All those venture capitalists that originally would never
return his phone call because clearly the fact that he was able
to raise that much money from the crowd is validation that
there is market interest. And so he gained the confidence, he
gained the customer feedback, he gained the validation that he
is onto something. And actually, it gave him power now in the
situation with the traditional investors. The reason why the
traditional investors are not complaining about it though is
that their investment how has been completely de-risked. You
know, the big job of traditional investors, whether they are
VCs or banks or foundations investing in nonprofits, or even
government and labels and studios trying to find the next
artist, they have two big jobs. One is one of gambler,
essentially. Try to pick the right idea or person or
entrepreneur to back. And then the second job is to amplify
them. So if they are lucky enough to roll the dice and get
lucky with one, then they come in and put more money in and
grow them.
So what crowdfunding is doing is creating this incubation
platform, almost like a farm league for the major leagues if
you want to think about that, where the majors are traditional
investors, where the cream rises to the top, not based on a
lucky connection but truly based on how hard the campaign owner
is working and how much the audience and community cares, which
is we think the only two factors that should matter. And they
rise to the top and then get discovered by the more traditional
financiers who could then not roll the dice on them; they have
proven themselves, but come in and just focus on their
amplification job. And so that is why I think crowdfunding and
these creative alternative forms of financing, it is truly
American. It is really empowering people to go after their
dreams and have control over themselves and their own futures
and not really and hope that some third-party gatekeeper will
say you are good.
Chairman SCHWEIKERT. Ms. Clarke.
Ms. CLARKE. Mr. Chairman, I really do not have any further
questions but just to say to our panelists today that you have
kind of renewed my faith in the capacity of our nation to sort
of remake itself from a capitalist standpoint. So much of what
we experience here in Washington is from the macro perspective
and that has not been a fun ride recently. But what you are
doing is remaking this in a way in which it is much more
democratic. I would be interested in seeing how each of your
endeavors is translated into future generations; how other
young people see this as a new discipline and buy into it
because, of course, the predominant model is the traditional
model and many communities do not have access to that. Having
the platforms that you all have makes it much more available,
and I hope that we can see some new schools of financing
thought come from it. And I wish you all well in your future
endeavors. Thank you. I yield back.
Chairman SCHWEIKERT. Thank you, Ranking Member Clarke.
As we get ready to shut this Subcommittee hearing down,
look, I have grown to become an absolute believer by literally
the end of this decade, for small business and maybe even mid-
size business, the way we find investors, the way we capitalize
our organizations is going to look different. And much of this
is embracing the technology around us and the ability to
capture information as that sunlight. As that refiner of
concept and also eliminator of fraud because so often what
happens here, in my experience in the last previous two years
in financial services and here, is our terror of fraud, the
terror of someone losing money in a deal means we take a huge
portion of our society and our population and say you do not
get to participate in receiving a rate of return, even though
you desperately need that rate of return to have a future,
because we are terrified that someone might lose money. That
ability to take risk is also the ability to grow. It is the
ability to have a future in our society and for all
populations. So what you are doing is incredibly important to
us.
I am going to ask you if you have ideas or you come across
information or you even hear rumor coming out of the SEC, let
us know, because this Subcommittee and I think the Committee in
general are watching very closely, hoping that the SEC puts out
a fair, rational, workable rule set. For a lot of us it has
been a lot of time over the last couple of years trying to put
together those elements of the JOBS Act. So I have faith this
is not the last time I am going to see the four of you, and
this has been very interesting.
And with that I will ask for unanimous consent, which I
guess that means just you and I, that members have five
legislative days to submit statements, supporting materials
from the records. With that also may come some questions being
extended out to each of you, and if you have the ability to,
with the chaos of your lives, to send us back a response, that
is truly appreciated.
And without objection, so ordered. This hearing is now
adjourned. Thanks.
[Whereupon, at 12:41 p.m., the Subcommittee was adjourned.]
A P P E N D I X
Testimony of Michelle Sullivan
Senior Director of Communications and External Affairs, The Boston Beer
Company
Before the
United States House of Representatives
House Committee on Small Business
Subcommittee on Investigations, Oversight and Regulations
June 6, 2013
Chairman Schweikert, Ranking Member Clark and Members of
the Subcommittee:
On behalf of Jim Koch, the founder of The Boston Beer
Company, I want to first thank you for the opportunity to
testify today about our philanthropic program Samuel Adams
Brewing the American Dream. My name is Michelle Sullivan, and
as Senior Director of Corporate Communications and External
Affairs for The Boston Beer Company, I am charged by Jim with
the implementation of this important program, and I am pleased
to be here to discuss the innovative way in which we assist
small businesses by affording them access to capital and
knowledge to start or grow their businesses.
In 1984, when Jim Koch started The Boston Beer Company, the
odds were stacked against him. Flavorful, high quality
``craft'' beers like Jim's were virtually unheard of at the
time by anyone--beer drinkers, beer distributors or beer
retailers and certainly not bank lenders. After brewing the
first batch of beer in his kitchen, he named it Samuel Adams
Boston Lager after one of his favorite revolutionaries and,
after trying to obtain a loan from numerous banks, he quickly
realized the reality of starting a small business went far
beyond having a great product. Namely, that a lack of access to
capital and the right network of business contacts could
actually prevent a small business from moving forward despite
hose good its product is. Jim began selling his beer bar to
bar, restaurant to restaurant and tavern to tavern in the
Boston area himself. He had to start his own distribution
company because the beer wholesalers in Boston all turned down
the opportunity to carry his product. He scraped together the
funding for his brewery by risking everything personally,
taking out a second mortgage and by raising money from family
and friends.
Today, we are in the third decade of America's Craft Beer
Revolution, and Boston Beer is proud to have been a catalyst
for this movement. The beer industry has undergone profound
changes since the 1980s. America's big three brewers, Anheuser-
Busch, Miller and Coors, have been acquired by or merged into
foreign conglomerates and indeed Miller and Coors have merged
their operations in the United States. This leaves Samuel Adams
as one of our country's largest American owned breweries. But,
after nearly 30 years of significant growth, we still only
account for just over one percent of the American beer
business, while the two largest beer companies account for over
80%. In the beer industry, we still live in a David and Goliath
world.
That said, we are proud that we continue to lead America's
brewing industry, comprised of more than 2,400 other small,
quality-driven brewers in all 50 states, not only in creating
an outstanding product, but also in our unconventional path to
corporate citizenship.
From our earliest days, before we could make monetary
donations to charities, we had beer. And we happily supported
hundreds of Boston-area charities by providing Samuel Adams for
their fundraisers and auctions. It was a real benefit to those
institutions to save on the cost of buying beer, and it helped
us get our name out and our Samuel Adams into people's hands.
This program continued, and in 2012, we donated thousands of
cases of beer to 501 c-3 not-for-profit organizations.
As The Boston Beer Company grew, however, we wanted to
create a unique program that went beyond donating beer.
That was Jim's challenge to me in 2007. Working with a team
of employees, led by Jim himself, we created Samuel Adams
Brewing the American Dream. The program has two major
components: we host a variety of mentoring and coaching events
for low and moderate income small business owners and, through
our non-profit partner ACCION, we fund microloans ranging from
as little as five hundred dollars up to twenty-five thousand
dollars. Our program serves small businesses in the food,
beverage and hospitality industry including other craft
brewers, the very industry we compete and sell in, and the one
where we are most able to give them meaningful nuts-and-bolts
business advice, guidance and introductions.
Microloans are a critical component to Brewing the American
Dream as there is a serious lack of funding available today to
small and very small businesses. It is equally as important to
educate inexperienced business owners in the areas of sales,
graphic design, purchasing, marketing, hiring, distribution and
other facets of business that can make the difference between
success and failure. Effectively, we want to ensure businesses
that are part of Brewing the American Dream do not make the
same mistakes that Jim and others starting small businesses
before them have made.
And we know it works, because we have a 97% repayment rate
on the loans. As of today, we have disbursed 234 loans total
over $2 million dollars and have hosted 45 events in 12 states
that have attracted over 3,000 attendees. More than 300 of our
employees have participated in these events as coaches or
mentors. And, we have saved or created more than 1,400 jobs.
So, in an odd twist, through Brewing the American Dream we have
created more jobs outside of Boston Beer than inside. And we
are proud of that.
When Jim Koch started The Boston Beer Company back in 1984,
he was armed with a great recipe, the financial backing of
family and friends, and a passion to succeed. When he didn't
have, and the reason he feels so strongly about Brewing the
American Dream, were mentors. He didn't have a network of
established business owners whose expertise he could call on.
And through this program, he attempts to make funding, provide
nuts and bolts business advice and access to mentors, all of
the resources he didn't have, available to Brewing the American
Dream small businesses owners.
Working with these small business owners has been an honor
and an education. Based on our experience, we are convinced
that well-established and well-supported small businesses are
particularly well-poised to grow and thrive. They are an engine
for future economic growth. They are a source of innovation,
and their passion is contagious. They will create jobs. They
will be the household names of the next generation and like Jim
Koch they will realize their American Dream.
I want to thank the Subcommittee for allowing me this
chance to discuss Samuel Adams Brewing the American Dream, and
please let me know if you believe our program may be helpful in
your district. Thank you again and I am pleased to answer any
questions you might have.
[GRAPHIC] [TIFF OMITTED] 81421.002
Mr. Chairman and other members of the Committee on Small
Business.
Thank you very much for the kind introduction and for
having me here today. I am particularly interested in sharing
my thoughts and experience with regard to the difference
crowdfunding is already having, at this early stage, on small
businesses in the US, and the positive impact that services
like RockThePost provides.
According to a Kauffman report, new firms add an average 3
million jobs in their first year while older companies lose 1
million jobs annually. Unfortunately, 65% of these new firms go
out of business within the first 4 years due mainly to lack of
access to financing.
Traditional methods of financing are very limited. Out of
the 6 million businesses that launch every year in the US, only
400 of them get Venture Capital money at an early stage. The
rest rely on angel investors, which represents less than 1% of
the US population or friends and family.
With equity crowdfunding offered via services like
RockThePost, startups are able to gain exposure in front of
thousands of investors. In the offline world, startups take on
average 8 months to close a Seed round. Via RockThePost,
startups and small businesses fundraise their round between 60
or 90 days with minimal road show distractions. Success stories
like Villy Custom Bicycles, a Shark Tank backed company with
high profile investors like Mark Cuban and Barbara Corcoran,
raised their funding goal in just two weeks on RockThePost or
Musicx,fm in little over a month. RockThePost's crowdfunding
platform not only helps entrepreneurs access funding, but
reduces the fundraising time significantly, which allows them
to focus on growing their business, which is the most critical
for the bottom line.
However, we are operating under a lot of restrictions,
which makes it challenging to truly innovate and pioneer this
new industry. The general public solicitation rule is the most
difficult challenge to overcome. Secondly, the fact that only
accredited investors are allowed to make investments is also a
big obstacle. Even though the law allows up to 34 unaccredited
investors per offering, we feel that the amount of disclosures
required to comply with this exemption kills the attractiveness
for a platform like RockThePost to get involved, not to mention
the burden entrepreneurs are faced with in providing additional
disclosure materials. Allowing non-accredited investors to
partake in private offerings will open the door to over $400
million Americans in comparison to the 7 million accredited
people that are currently in the US.
With that been said, I believe that we are far behind and
every day that passes without the JOBS Act being implemented is
another day that startups need to fight for survival. Pandora
for example was rejected over 300 times from financial
institutions and thank god they did not give up on their
business. I invite you all, present in this room today, to
create a unified voice in order to reduce the delay of the JOBS
Act implementation. There are many cases like Pandora out
there, and unfortunately many of them end up giving up in the
process.
Testimony to the Committee on Small Business Subcommittee
on
Investigations, Oversight, and Regulations
``Innovation and Micro Financing,'' June 6, 2013
Benjamin Miller, Co-Founder of Fundrise
Members of this esteemed House. I deeply appreciate the
opportunity to share my experiences as a small business owner,
a real estate entrepreneur, and a technology company executive.
Let me spend a moment on my background so that you understand
how I came to run Fundrise, one of the only companies in the
country currently raising equity online from anybody and
everybody in Washington DC and Virginia--from both accredited
and unaccredited investors--prior to implementation of the JOBS
Act. We are legally crowdfunding real investment today, through
currently existing regulations, and have been for almost a
year.
Prior to starting Fundrise, I ran a real estate company. In
that capacity, I have lead the acquisition and development of
more than 2 million square feet of real estate property. We
built some of the more iconic projects in Washington DC, such
as Gallery Place on 7th and H Streets NW--a 750,000 square foot
mixed-use development. As a real estate entrepreneur, I have
partnered with some of the largest institutional investment
companies in the country, such as Mass Mutual, Angelo Gordon,
and the AFL-CIO. I understand what it means to raise debt and
equity.
After the 2008 financial crisis, I began to focus on real
estate in emerging neighborhoods. Neighborhoods filled with new
energy and growth driven by the millennial generation, and a
reinvigorated desire from people of all ages to move into
cities. When I went to my traditional capital partners, they
didn't understand the dynamics of these neighborhoods--areas
such as Washington's H Street NE, Cincinnati's Mason District,
Brooklyn NY, or the L.A. Arts District. It was striking to me
how little they understood local neighborhoods, where new
growth is, as compared to traditional core downtown markets.
I would speak to local people in the communities where I
was building and they would get very excited about what we were
doing. They understood why we were investing there. They cared
deeply about the places we were changing. They wanted to
participate in building their city too.
So one day we asked ourselves, ``Why are we raising money
from institutions that have no real relationship with the
places in which we are investing? What if we raised money from
the people who live there, who care, who get it?''
So that's what we're doing. Which is why I am sitting here.
We have been raising real investment, in increments as
affordable as $100 per share, from the local public who live
near our real estate projects. Anyone and everyone locally can
invest--even if they are not accredited investors, as defined
by the SEC. Hundreds of people have been investing hundreds of
thousands of dollars through Fundrise, purchasing shares of
their neighborhoods through our web platform.
Since the JOBS Act did not exist when we started our
endeavor, we had to work within the existing regulatory
framework. Thanks to crackerjack attorneys--Marty Dunn and
Bjorn Hall from O'Melveny Myers--we found a way, using
Regulation A. Ultimately, our filings with the Securities and
the Exchange Commission (SEC) totaled more than 350 pages, and
eventually allowed us to sell equity online at $100 per share
to the local public. Last year, I was one of only two or three
people who have successfully cleared a filing under Regulation
A.
It was a serious undertaking. The first offering took nine
months to get qualified by the SEC and registered with the
District of Columbia and Virginia regulators. It was novel, and
there were new issues we had to work through. Yet, we were
fortunate. The local regulators understood that we were working
to build local places and create a new capital source for local
job growth.
After doing multiple public offerings, raising millions of
dollars online, and spending a lot of money, time, and effort
to crowdfund equity online, here are my two big takeaways:
1) It's difficult to build trust with the local public to
invest in your company online. I have interacted with thousands
of potential investors. People were skeptical at first. There
is a fear among critics of the JOBS Act that the Internet will
make it too easy to raise money, but I found that the public
were even tougher critics of our investments. Anyone who has
read a movie or restaurant review online knows the truth of
that.
There are a lot of experts out there. We have real estate
analysts from the largest real estate companies in the city
invested in our offerings. Even though they are not accredited
investors, these men and women know their subject. And they are
vocal. And put me through my paces. While it is absolutely
prudent to crate safeguards against potential investor fraud,
my firsthand experiences raising real investment online is that
the public put us through just as much scrutiny as the SEC.
2) The regulatory institutions today are not designed to
manage small business raising capital from the public. I was
lucky because I found a real partner with the local regulators.
I have now done multiple local public offerings working with
the SEC, and District of Columbia and Virginia regulators. I
say I was fortunate because I found that in some other states,
the regulators were far more resistant and wary. Therein lies
the problem. On the state level, in many ways, it was an ad hoc
process. While DC and Virginia were terrific, other states gave
the impression that they cared less about creating new
opportunities for small businesses to raise capital and create
job growth.
In terms of the Federal regulations, while I found the SEC
extremely reasonable, it takes six to nine months to clear an
offering for $300,000 under Regulation A. This waiting period
creates high legal fees, an expense most small businesses
cannot afford. The fact of the matter is the SEC is not funded
to handle small offerings like mine. At times, I felt like no
one in the SEC really owned my filing. The SEC is currently not
built to manage and review small-scale issuances. Yet, we are
about to see a sea change in the number of such issuances.
Based on my experience, I would recommend that Congress
fund a group designed to take responsibility for the filings of
small, agile, job-creating companies. A venture fund or private
equity company can review an offering in a matter of weeks, if
not days. Could a well-funded department, housed at the SEC or
Small Business Administration, do the same and help thousands
of small businesses like mine raise capital while substantially
mitigating concerns over investor protection? I believe so.
Already, donation-based crowdfunding is approaching a $3
billion per year industry.\1\ Once the SEC and FINRA implement
the JOBS Act, we will almost certainly see even more tremendous
flow of small-scale fundraising. As of today, however, there is
no institutional body mandated with a special focus to manage
and support this new industry. The Federal government has
agencies to represent and engage with constituencies ranging
from chicken farming to glacier research. The SEC's small
business department is only a handful of people. Small business
growth, innovation, and community development will be one of
the greatest sources of jobs in our country in the next decade.
Shouldn't we set up the type of institutional supports that
crowdfunding deserves to help it succeed?
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\1\ http://www.forbes.com/sites/ryancaldbeck/2012/12/11/
crowdfunding-predictions-for-2013/
[GRAPHIC] [TIFF OMITTED] 81421.001
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Introduction
My name is Danae Ringelmann, and I'm one of the founders of
Indiegogo--the largest global crowdfunding platform in the
world. We launched in January 2008, before the word
``crowdfunding'' existed in our vernacular. Our mission is to
provide an equal opportunity platform that empowers people to
fund what matters to them--whatever that might be. Film, music,
non-profits, small business, inventions, medical treatments,
trips and more--all happen on Indiegogo every day. Today we
distribute millions of dollars every week to campaign owners in
every country of the world.
Why I'm Here Today
I'm here today because Andy Guggenheim asked me to share
Indiegogo's story in pioneering what today is called perks-
based crowdfunding. I will also be sharing the benefits of
crowdfunding specific to Indiegogo's inclusive and meritocratic
approach and with a focus on small businesses in America. I
will also talk about lessons learned and share a bit about how
we've had to innovate and mitigate risk in order to create a
whole new industry.
As background, I was compelled to start a company that
would democratize finance as I saw firsthand the impact of an
inefficient and unfair financial system that needed to be
fixed. I was a child of two small business owners who sweated
it out for 30+ years. Not once, did they get a loan from the
bank to expand, despite steady growth, loyal employees, and
top-notch customer satisfaction. The reason they struggled was
not for lack of performance, but lack of connections to
gatekeepers. They were on their own, like most small business
owners in America. When a bank rejected them that was it. There
was nowhere else to turn except our own savings, own mortgage
or worse, our credit cards.
So after witnessing my parents hustle and overcome intense
challenges (e.g. making payroll without laying off anyone after
September 11), I went into finance to understand how money
worked and flowed. It was while I was on Wall Street, however,
that I began volunteering with filmmakers and theater producers
on the side and experienced first hand the struggles of
fundraising. Even I--someone who worked at a bank--failed at
helping brilliant artists with proven audiences get off the
ground, not for lack of heart and hustle, but rather lack of
connections to financial gatekeepers. When I failed to secure
investment for a theater production after staging a one-time
show in front of an audience that loved it, I realized that the
people who wanted the play to come to life the most--the
audience and the actors--lacked the mechanism to make it happen
themselves. Shortly thereafter, I quit finance and returned to
business school at UC Berkeley to start a company that would
democratize finance. It was there that I met my two co-founders
Slava Rubin and Eric Schell who themselves had been struggling
with fundraising. Together we created Indiegogo--now the oldest
and largest perk-based global crowdfunding platform.
What's Crowdfunding on Indiegogo
Crowdfunding on Indiegogo is people-powered finance. it's
individuals directly funding the ideas, businesses, artists,
non-profits and causes they care about. There's no middle-man
or traditional investor--like a bank or a VC, a media publisher
or a studio, or even a grants-oriented foundation or government
funding body. Crowdfunding is--simply--lots of people
contributing a few dollars each to raise enough money together
to push an idea or project forward.
While this concept might not feel new, the reason the
industry has a new name ``crowdfunding'' is because people-
powered finance has never been so efficient and effective as it
is today.
Through the integration of social media and incorporation
of online payments--two irreversible shifts in online
behavior--Indiegogo campaigns for funding spread to like-minded
folks (both people you know and don't know) far faster than
ever before. If traditional fundraising helped you raise money
from the first degree of people you know, crowdfunding on
Indiegogo helps you turn your first degree connections into
havens, thereby allowing you to raise money from people
interested in your project who are 2nd and 3rd degrees away.
Landscape of Crowdfunding
Within crowdfunding, there are a few models. There's
donation and perks-based crowdfunding, like Indiegogo. In this
case funders contribute money in exchange for perks--tangible
or intangible goods and services of finite value. There is no
investment made, no profit participation or upside.
There is also securities based crowdfunding like peer-to-
peer lending, and equity crowdfunding for accredited investors
only, and mainstream equity crowdfunding that will soon be
permitted under the JOBS act. Today, I will focus on perks-
based funding as that is the model Indiegogo pioneered in 2008.
How Indiegogo's Donation & Perks-Based Funding Works
The way Indiegogo works is as follows:
1. Create a Campaign
A person or organization with a project or idea in need of
funding goes to Indiegogo.com and creates a campaign page. On
Indiegogo, there is no application process nor arbitrary
vetting of ``quality'' as Indiegogo believes that every idea
has the right to try to raise money. Only campaigns that are
illegal or in violation of our Terms of Use are removed
automatically and systematically.
On the campaign page, the campaign owner:
pitches their idea, team and impact (in both
a text and a recommended video).
sets a funding target and deadline
(typically 30-40 days)
outlines their use of funds.
offers perks (optional), which can be
anything from a thank you note or twitter shout out to
a tangible item of finite value. A campaign for a
business that creates innovative coffee mugs, might
offer the coffee mug itself as a perk
picks their funding framework, either:
``Fixed:'' campaign owner receives money
only if they reach goal
``Flexible:'' campaign owner receives money
whether or not they reach goal
(It's worth noting that we encourage campaign owners to set
a funding target that matches an amount they need to move their
project forward. It does NOT need to be 100% of budget, as
campaign owners can do multiple campaigns, or use their
Indiegogo campaign to attract additional funding from other
sources--more on that later.)
2. Go Live.
Once the Indiegogo campaign page is drafted, they can go
live at any time. Once live, campaign owners share their
campaign with their friends, family and followers via
newsletters, social media and other outlets. For artists,
followers are typically their fans. For businesses, it's their
customers. For non-profits and causes, its people passionate
about their cause. On Indiegogo we typically see that campaigns
that reach their funding goals raise the first 30% of funds
from people they know.
Due to the social media integration embedded into the
funding experience on Indiegogo, friends of friends begin to
fund. (For example, when people fund, they are prompted to
tweet or post to Facebook.) Thus 2nd and 3rd order funds begin
to come in... leading eventually to ``stranger dollars.''
Lastly, campaigns earn extra promotion and exposure on
Indiegogo.com and our marketing channels as well. Indiegogo's
proprietary algorithm--the gogofactor--determines the amount of
added exposure. The gogofactor, similar to google's pagerank
algorithm, is a measure of a campaign's activity and its
community's responsiveness--i.e. two factors completely in the
control of the campaign. Indiegogo's promotion, therefore, is
completely meritocratic. Just as we don't decide who has the
right to raise money, we also don't decide who we promote--the
campaigns and their communities do. No other platform offers
this meritocracy.
As you can see, crowdfunding success on Indiegogo is
earned. I call out the ``friends-first-strangers-later''
pattern of success simply to dispel any assumption one might
have that crowdfunding is a field of dreams. People do not just
post ideas, walk away and come back to find money in their
account. If campaign owners build it, the proverbial ``they''
will NOT come. It takes work, akin to the work of grassroots
and guerilla marketing tactics. This is an important
fundraising dynamic to understand as it may inform your opinion
on the risks of crowdfunding in general. More on that in a bit.
Benefits of Indiegogo--It's not just about the money!
Many people first hear about crowdfunding as a new and
alternative form of finance. This is true. But what many people
don't appreciate at first, are all the other benefits
crowdfunding on Indiegogo brings to campaign owners, their
funders, the entire financial ecosystem, and our economy.
Benefits to Campaign Owners:
For campaign owners market validation, risk mitigation,
customer feedback and confidence are non-monetary benefits
often great enough to drive small businesses to crowdfund even
if they didn't need the money.
1. Market validation: Crowdfunding on Indiegogo enables
entrepreneurs raising money to test their market and prove
demand. A vote with one's dollar before a product or service
even exists is a far better indication of true interest than
any focus group or ``facebook like'' button could ever provide.
2. Risk Mitigation: Along with market validation, comes
risk mitigation. In the case of Luminaid--a business started by
Illinois-based Andrea Sreshta and Anna Stork that makes
environmentally friendly, solar-powered lights for the
developing world (as a safer alternative than kerosene)--
crowdfunding protected them from the risks of over-production
and under-production.
They used Indiegogo to raise $51,829 to fund their first-
run production. For a $25 contribution, a funder would be sent
a light a few months later. Because the funding came in up
front, and because the amount raised was tied to an exact
count, it was impossible for the Luminaid entrepreneurs to
``over-manufacture'' or ``under-manufacture'', thus mitigation
production guesswork and risk.
3. Customer Feedback: A crowdfunding campaign on Indiegogo
enables entrepreneurs to gather direct feedback, both
qualitative and quantitative. California-based Sonny Vu is a
product designer who designed a product called the Misfit
Shine--an activity tracking device that elegantly fits on your
clothing. He and his team used Indiegogo to raise $846,675 to
fund this first-run production. He actually had already raised
venture capital funds, but he still used Indiegogo to get
``smarter, faster'' on his product features, messaging, and
pricing.
Throughout his campaign he swapped perks in and out, and
learned that his funders far preferred the black version of the
Shine over the silver version, and were willing to pay $50 more
for the black. He also discovered a new revenue stream--
necklace accessories--after his funders suggested he add
necklaces as a perk. To his surprise, the necklaces were quite
popular. Based on feedback from his funders, he discovered new
revenue streams and gathered quality feedback on features,
messaging and pricing. That's priceless information and data
for a new business that hasn't even launched yet.
4. Confidence: Perhaps my favorite non-monetary benefit of
crowdfunding on Indiegogo for campaign owners, however, is the
confidence a campaign owner builds. Karen Freer of Brooklyn, NW
had always dreamed of opening a gluten-free bread company. But
the idea of saving $10,500 to launch seemed almost impossible.
So rather than wait and save, she launched an Indiegogo
campaign and raised $10,771 from 95 funders. For $1, she gave
folks a hug: For $10, a note. For $50, several rolls of bread.
Within a matter of weeks, she had the funds to launch her
business. She was beside herself. What was a dream, instantly
became a reality. Here's what she shared with Indiegogo in a
note to our Customer Happiness team:
``I'd like to tell you something. Once I began my Indiegogo
campaign, I truly saw my life start changing. Indiegogo has
given me the confidence in my first business venture--and with
that a great feeling of hope for my future. That is a true
gift'' - Karen, Free Bread.
Benefits to Funders: Empowerment
In addition to being a source of funding and a great way to
validate a market, reduce risk, get feedback and gain
confidence for campaigners, crowdfunding is turning funding
from a ``transactional'' experience into a ``social and
relationship-based'' experience.
When people fund what matters to them, they're not just
buying bread or activity trackers in advance, they're creating
their own reality around them... often times for as little as
the price of a cup of coffee. As a result, they're more engaged
and empowered.
A great example of this is the fastest growing political
campaign on Indiegogo right now. Distraught by the way the
government was handling the sit-ins in Turkey, three Turkish
Americans felt compelled to take action. They started a
campaign four days ago to raise $55,000 to purchase a full-page
ad in the New York Times calling for democratic action and a
new dialogue on Turkey. As of Wednesday, June 5th at 10 am,
2,369 people from across the world had joined forces and funded
this ad together, raising $93,290.
Crowdfunding on Indiegogo, therefore, empowers. No longer
do people have an excuse to complain about bad Hollywood
movies, nor the lack of local coffee shops in their
neighborhood. If they want to see good movies and have a local
hang out with friends, they can fund them can get their friends
and other like-minded folks to fund them too.
Why People Fund if there's no Return or Profit Potential
Indiegogo's research reveals that people on Indiegogo fund
for 4 reasons. We call these reasons the 4 P's:
People - they like the person or team
running the campaign.
Passion - they are passionate about the idea
or project.
Participation - they want to be part of
something bigger than themselves.
Perks - they want the perk
However, we have also found that there is a dynamic mix of
motivations at play for any given contribution. For example, I
recently funded an app called ``NotBuyingIt.'' It's an app for
the phone where you can take a picture of a piece of public
media that you deem sexist and/or belittling towards women. The
app posts the image to twitter with a hashtag #notbuyingit.
With enough tweets, the goal is to make the advertiser revisit
and remove their sexist ad. This app campaign is being run by
Jennifer Newsom, an activist whose film ``Miss Representation''
sparked a movement to eliminate sexist media in the public. I
funded this campaign for all 4 reasons--I want to support
Jennifer Newsom and this project. I want to be part of the
movement, without having to quit my day job, and I want the app
(i.e. the perk).
Benefits to the Finance Industry and the Economy
The macro benefits of crowdfunding on Indiegogo to the
larger finance industry and the economy as a whole are also
grand.
1. Meritocracy. When people fund what matters to them,
ideas that might once have gone unborn or remain
undercapitalized due to lack of access to traditional
gatekeepers, now have a chance. In London, a cat cafe recently
raised 110,000 on Indiegogo to open. This cafe will be a place
where people can get coffee and hang out with cats - or what
some might call a very niche business. After sharing their
crowdfunding success with a banker whose job it is to review
loan applications for new businesses, the banker stated in
shock ``I would've never thought a cat cafe would have a
market. Had that application come across my desk, I probably
would've said `no.' Clearly, I would've been wrong.''
Because funding success is based on hard work and community
or audience engagement, not based on winning over an arbitrary
gatekeeper whose goals, beliefs and biases may be different,
crowdfunding on Indiegogo is making finance fair and efficient,
once and for all.
2. Incubation Platform & New Role for Gatekeepers.
Crowdfunding on Indiegogo is also fundamentally disrupting
finance. Unlike disrupting technologies in other industries,
which typically destroy the traditional industry, crowdfunding
on Indiegogo is making the financial ecosystem stronger as it's
providing an incubation platform for the worlds' ideas.
Just as crowdfunding de-risks a business or venture for the
entrepreneur starting it, its also de-risking any follow-on
investment that comes from a traditional investor. For example,
the designers of Gravity Light - another lighting product that
creates energy by lifting it up - couldn't get a Venture fund
to return their phone call when they needed to raise funds to
prototype their product. So they turned to Indiegogo and raised
$399,590 from the people. After the campaign, venture funds
couldn't stop calling the team. They had proven to them his
business was a good investment by proving demand through their
Indiegogo crowdfunding campaign.
3. Jobs. As a result of crowdfunding on Indiegogo, ideas
and businesses that went previously unborn or under-capitalized
due to lack of efficient access to funding will now have a
chance to thrive on their own merit. As they grow, so will the
jobs they create.
Samantha started her gluten-free bakery business Emmy's
Organics on a small business loan. She had one store in the
first year. With the opportunity to distribute her product in a
regional grocery store chain - a huge growth opportunity - just
10 months into her venture, she needed to take on another loan
to pay packaging changes (a requirement for distribution).
Unable to secure a second $15,000 loan - as her bakery was
deemed too young and high-risk - she didn't give up and throw
away the distribution opportunity.
Instead she turned to Indiegogo to raise $15,000 in three
weeks. She offered macaroons as her perks. Her customers funded
her, and brought in their friends as funders too. Within a
month of her campaign, she had redone her packaging and started
selling her product through the grocery store chain. This lead
to further growth, and within the year she was distributing her
product in 40 states across America. To keep up with
production, she had to move into a new kitchen and hire over a
dozen employees. Had Indiegogo not existed, she might still be
selling baked goods out of her one store front, employing just
herself and her partner.
Indiegogo's Innovation around Risk
With a mission to be an equal opportunity funding platform,
it was important to us to take an inclusive and meritocratic
approach to crowdfunding. As I mentioned above, this is why we
do not curate. We want all ideas to have an equal chance of
success - a principle this country was founded on.
However, this inclusive approach also makes Indiegogo open
to people wishing to use the platform in a way it was not
intended - i.e. for fraud. Given that, Indiegogo has innovated
on this front to keep the site clean and safe for the 99%+
users on the site who are using it for its intended purpose -
to fund what matters to them.
We've developed proprietary screening technology and Trust
& Safety algorithms on our backend to automatically screen out
bad behavior. In addition, we employ a community policing
system similar to eBay or Paypal that adds another layer of
surveillance. Finally, the dynamic of crowdfunding (raising a
lot of funds from a lot of people a little at a time) is a
natural deterrent of fraudulent activity as convincing a lot of
people to fund an idea typically takes a track record, social
media activity and hard work to get funding going. This is one
reason why it's a good thing that successful campaigns
typically have to raise the first 30% of funds from people in
their inner circles, as I mentioned above.
Future Innovation
As the SEC reviews the rules for equity crowdfunding, which
we're very excited about as equity crowdfunding is in-line with
our mission to empower people to fund what matters to them, I
like to share that one of the reasons Indiegogo was able to
pioneer perks-based crowdfunding is because the regulatory
environment allowed us to experiment and innovate.
Since our launch in 2008, hundreds of platforms have
followed, each with their own twist on crowdfunding. Clearly, a
new market has been unlocked that might not have had overly
burdensome regulations been in place.
Often regulation is put in place to protect all parties.
While too little regulation could lead to another 2008, too
much regulation could also be damaging as it could stifle
innovation. Regulation setting is a tough challenge; there's no
question about that. What I hope regulators keep in mind,
however, is that business pressures and business uncertainties
are often better drivers of innovation and protection, than
regulations.
For example, Indiegogo developed proprietary screening
systems and Trust & Safety algorithms to ward off fraud not
because a law told us to, but rather because we wanted to stay
in business. A safe site would attract more customers. An
unsafe site would repel customers and lose us a lot of money.
Indiegogo's Vision:
At Indiegogo, we think crowdfunding is just in its infancy.
Just as Twitter and Facebook democratized communication
formenting the Arab Spring, we hope Indiegogo and crowdfunding
will democratize funding. We imagine a world where funding the
ideas and people around you is a daily habit, like commerce and
social networking. Perhaps one day, people will even be able to
control where their tax dollars go. After submitting one's
taxes online, I see a day where the next pop-up screen says:
``to which local, state and national efforts would you like
your tax dollars to fund?'' A dropdown of options would be
provided.
Anyhow, while it seems we've innovated quite a bit to get
perk-crowdfunding off the ground and help make equity
crowdfunding an option, there's still quite a bit of innovation
ahead. It's an incredibly exciting time to be an entrepreneur
in this space as we're helping change finance for good, both
permanently and for the better.
In closing, it's probably worth pointing out that one of my
co-founders Slava Rubin was an immigrant to this country, and
my other co-founder Eric Schell is the son of a librarian. As
the daughter of two hard-working small business owners, the
three of us together struggled to get Indiegogo off the ground
as we ourselves lacked the right connections to make it happen
early on. I often think about how much quicker we might've been
able to grow Indiegogo had we had Indiegogo to fund Indiegogo.
Thank you.