This morning, the Senate Banking Committee held a hearing titled “Spurring Job Growth Through Capital Formation While Protecting Investors, Part II”. It was clear throughout the hearing the goal is a balance between freeing up capital for small businesses and protecting investors. In his prepared statement, Chairman Tim Johnson, who was not present, said the hearing’s “intent is to help them grow and create new jobs, while having suitable protections so investors are assured they will not be taken advantage of if they put their money at risk.” While investment crowdfunding was a component in the hearing, opening up the IPO market received a majority of the time and attention.
Below is a summary of the panelists’ prepared and spoken testimonies.
William Waddill, Senior Vice President and Chief Financial Officer of OncoMed Pharmaceuticals and Co-chairman of the Finance and Tax Committee at the Biotechnology Industry Organization
William made the case that biotech research could slow because “public markets remain essentially closed to growing biotech companies”. Working backwards, the inability for smaller companies to experience an IPO is driving diminishing venture capital dollars towards the industry. Given it takes 8-12 years and $800M to $1.2B to achieve FDA approval, often with no product revenue in the meantime, makes launching a biotech company nearly financially unfeasible.
Jay R. Ritter, Cordell Professor of Finance, Warrington College of Business Administration, University of Florida
Ritter’s talk focused on an academic view about the reduction of IPOs, offering quantitative evidence of the diminished small company IPO market. Ritter does say, “Good investor protection laws, and their timely and effective enforcement, can lower the cost of capital for good companies.” He added, “An increase in fraud if these bills are passed, is not, however, an automatic result.” Ritter used eBay and Craigslist as examples of marketplaces which faced a concern for fraud, but have successfully matched buyers and sellers.
When speaking about investment crowdfunding bills, however, Ritter offers merely “S. 1970 appears to offer some protections to investors that are not present in S. 1791. I am modestly supportive of S. 1790, but not enthusiastic about S. 1791.”
Kathleen Shelton Smith, Co-Founder and Chairman of Renaissance Capital, LLC
Smith takes Waddill’s testimony a step further, saying stock market losses drive investors to abandon the IPO market, driving the marked decrease in venture capital returns. Smith adds that companies that ultimately fail cause job losses, not job creation. She went on to point out the importance of jumpstarting access to capital for stronger companies.
Lynn E. Turner, LitiNomics, Inc.
Turner’s proposes the 1990s may not have been the golden era of IPOs. Rather, it was a misalocation of funds from profitable companies towards ones that ultimately went out of business. His testimony included a chart showing that current venture capital returns hover around their lowest in 30 years. Turner spoke little directly about crowdfunding or the IPO market, except to say, “I do not support the various bills including the IPO on ramp and crowdfunding legislation… it reduces the level of transparency and amount of information investors will receive. It removes critical investor protections.”
Timothy Rowe, Founder and CEO, Cambridge Innovation Center
Rowe was, by far, the most straightforward proponent of investment crowdfunding in the room. He (awkwardly) held up his PC to cite a Kauffman Foundation study which found that over 25 years all net new jobs were from companies five years or younger.
Rowe highlighted that “everyday businesses that are the bread and butter of our communities – businesses like restaurants, small construction companies and the like – are starved for capital.” These businesses are not going to be funded by VCs, or even angels. Which prompted Senator Michael Bennett to, somewhat excitedly, comment that investment crowdfunding “will inject capital throughout the entire geography of the country in a way we have not seen before. This is about Main Street. The potential here is just enormous.”
Rowe commented directly on what makes crowdfunding viable, while taking on the fear of fraud. “One of the things that the Internet has changed is the ease with which an organization can broadcast its needs and attract supporters online. Another thing that has changed is that it is much harder for bad actors to hide from the scrutiny of the masses.” He adds, “UK-based Crowdcube reports zero fraud claims after a year in business… Prosper.com, a crowd-lending business operating under SEC regulation claims to have raised $124M in loans and to have no reports of fraud… AngelList claims zero reports of fraud.”
In his prepared remarks, Rowe proposes a mashup investment crowdfunding bill which shares many features with Funding Launchpad’s ideal bill:
- Require the use of SEC-licensed intermediaries. Like Ritter, Rowe points to eBay as a successful model.
- Enable investments larger than $1,000 for those who can afford it. Rowe submitted a table showing the 80/20 rule more than applies to investment crowdfunding.
- Don’t burden the process with unnecessary restrictions that would render crowdfunding legislation meaningless. Rowe refers to removing the burden of 50 different set of state rules playing a role in investment crowdfunding.
- Don’t burden crowdfunding issuers with excessive liability. In the question period, Rowe points out there will be failures, which is different than fraud. Some bills have provisions that would “create an untenable risk for issuers.”
- Do require a periodic ongoing review of how this is going, as called for in S. 1970.
The best news for proponents of investment crowdfunding might have come from Senator Charles Schumer. In his remarks he stated, “Given the level of bi-partisan support… passage in the Senate appears not to be a matter of if, but of when. I expect a comprehensive Senate proposal to be announced in the coming days.”
Click here to watch the entire hearing. (It will make you thankful for our summary.)
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