FromStartupsAcrossAmerica

DearCongress:

TheGreatRecessionisslowlyfadingfrommemorybutAmericastillneedsjobs.Researchhas
shownthatsmallbusinessesandstartups(fastgrowingsmallbusinesses)arethesourceof
almostallofAmericasnewjobs. Unfortunately,existingfederallawandregulationmakes
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entrepreneurseffortstofound,run,andgrowstartupshardernoteasier.

Startingacompanyishard.Entrepreneursmustidentifyagoodidea,capitalizeonitfasterand
moreefficientlythancompetitors,findmoneytogrowthebusinessrapidly,developand
demonstratecompetenceinawiderangeofdisciplines:finance,leadership,management,
productdevelopment,operations,law,etc....anddomanyotherthingsaswell(evensweep
thefloor).

Asidefromthenormaldifficultiesofstartingabusiness,additionalandneedlesslegaland
regulatoryhurdleshamperentrepreneursabilitytofound,buildandscaletheseimportantjob
engines.

Thisiswhereyoucanhelp!

Throughsomestraightforwardstatutorymodificationsandregulatorychangesinafewimportant
areas:(1)AngelInvestment,(2)Crowdfunding,(3)GeneralSolicitation,and(4)Tax,youcan
significantlyimprovetheentrepreneurshiplandscapeandmakeiteveneasierforstartupsand
entrepreneurstocreatejobs.

RegardingAngelInvestment:

PreserveBroadAccesstoAngelInvestment.ManyofAmericasbestknowncompaniesgot
theirstartorearlysupportthroughanearlystageinvestmentstrategyknownasangel
investment.Angelinvestorsprovidesmalleramountsofbusinessinvestmenttocompaniesin
earlystagestohelpthecompanywithcapitaldemandsandtojumpstartgrowth.Thoughangel
investingcanberiskyitisacrucialpartoftheuniqueanddynamicUSstartupecosystem.But
theSECmightmakedisastrouschangestoregulationsgoverningangelinvesting.

AngelinvestorsmustbeaccreditedbytheSEC.In1982,theSECsetrulesdefiningwho
qualifiedasanaccreditedinvestor.NowtheSECisconsideringupdatingthefinancial
thresholdsinawaythatwoulddisqualifymorethanhalfofthepopulationthatcurrentlyqualifies
asaccredited.

1
See
http://www.kauffman.org/whatwedo/research/firmformationandgrowthseries/theimportanceofstartupsin
jobcreationandjobdestruction
Thiswouldsignificantlyreducetheamountofcapitalavailableforangelinvestmentand,inso
doing,almostcertainlyreducetheamountofangelinvestmentsmade.

Whatyoucando:PleasepassalaworinstructtheSECtonotincreasethefinancialthresholds
tobeanaccreditedinvestor.TheUSstartupecosystemneedsbroadaccesstoangel
investmentkeepingtheaccreditedinvestorthresholdslowwillinsurethis.

ReduceRegulatoryRestrictionsonAngelInvestments.Beyondretainingthecurrent
regulationsforangelinvestmentyoucanalsomakeangelinvestmenteasierbymakingthe
followingchanges.

Whatyoucando:Please:

1. Reduce,dontincrease,thefinancialthresholdstoqualifyasanaccreditedinvestor.
2. RepealSection413oftheDoddFrankAct,whichprecludescountinghomeequity
towardthe$1Mnetworthaccreditedinvestortest.
3. Allowsophisticatedinvestorstoinvestdespitenotmeetingthefinancialthresholds.
4. Allowindividualstoinvestupto5%oftheirnetworthorannualincomeperyearin
startupsdespitenototherwisemeetingtheaccreditedinvestorthresholds.

RegardingCrowdfunding:

AllowIntrastateCrowdfunding.Statesacrossthecountryarepassingintrastatecrowdfunding
lawsthatempowerlocalcommunitiestobuildtheirownlocalstartupecosystemsandsmall
businessesinsteadoflookingtoWallStreetorSiliconValleyforresources.Thesestatelawsare
notsubjecttothefederalcrowdfundinglawbecausethecompaniesraisingthemoneyare
incorporatedinthosestatesandraisingmoneysolelyfrominvestorsinthosestates,in
accordancewiththespecificexemptionfromfederallawforintrastateofferingsthatCongress
enactedintheSecuritiesActof1933.

However,theSEChasrecentlyissuedinterpretiveguidanceontheintrastateexemptionthat
saysthatifthecompanyusestheinternettopromote/discussitsofferingthentheofferingisnot
anintrastateofferingevenifacompanyisincorporatedinaparticularstateandallinvestorsare
inthatstate.
2

Thisisnonsenseanditneedstobecorrected.Besidesthefactthatitsnearlyimpossiblenotto
usetheinternettocommunicateanyfundraisingorcommunityorganizingevent,formanyifnot
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TheSECsguidanceisavailablehere:
http://www.sec.gov/divisions/corpfin/guidance/securitiesactrulesinterps.htm#14103
http://www.sec.gov/divisions/corpfin/guidance/securitiesactrulesinterps.htm#14104
http://www.sec.gov/divisions/corpfin/guidance/securitiesactrulesinterps.htm#14105
mostoftheentrepreneursseekingtoraisemoneyunderstatecrowdfundinglaws,theinternet
representstheidealtooltocommunicateafundraisingeffort.Itisalowcostmeansof
disseminatinginformationtoalargenumberofpeopleonabroadscale.Alloftheforegoingsays
nothingoftheonlineinterstatecrowdfundingplatformssuchasKickStarterorIndieGoGothat
werebuiltanddesignedtofacilitatethesetypesoftransactionsbyprovidingtransparency,
reducingtransactioncosts,andprovidingbroadchoiceincrowdfundinginvestments.These
platformsaretrulytheperfecttoolsforlocalcrowdfundingefforts.

Whatyoucando:PleaseeitherpassasimplepieceoflegislationtofixthisordirecttheSECto
clarifyorfixitsintrastatecrowdfundingFAQs.Otherwise,byprohibitingtheuseoftheinternetin
intrastatecrowdfunding,theSECistampingdownanascentbutimportantopportunityto
cultivatelocalfundingandentrepreneurshipecosystemsbeforetheyevenhaveanopportunityto
develop.

FixFederalCrowdfunding.PleasefixTitleIIIoftheJOBSActthefederalcrowdfunding
provisionsthatrequirefundraiserstouseintermediariestoraisefunds.Startupsraisefundson
theirown.Theydontuseintermediaries.Theyhustle,theyworkhard,theybuildsomethingout
ofnothing.Andtheydoitthemselves.Theydonthavethetime,resources,or,really,inclination
ortemperamenttooutsourcethisactivity.StartupfoundersandCEOspitchinvestorsformoney
directlytheydonthirebrokers.

Beyondphilosophicaldifferences,itisestimatedthatbrokersaregoingtochargefundraisers
810%ofofferingproceeds.Thissignificantlyincreasesthecostsofatransactionthatwere,to
date,nexttozero.

Federalcrowdfundingwilllikelyfailnotonlyforphilosophicalreasonsbutbecauseentrepreneurs
wontwanttopayabrokerforsomethingtheyreinclinedtodothemselves.

Whatyoucando:Pleasepassalawremovingtherequirementtouseanintermediaryina
federalcrowdfundingandauthorizeentrepreneurstoraisefundsdirectlyunderthefederal
crowdfundingact.

RegardingGeneralSolicitation:

ReaffirmGeneralSolicitation.Section201oftheJOBSActwasabighelptoentrepreneursin
thatitallowedstartupstotalkpubliclyabouttheireffortstoraisemoney(thisabilitytotalkfreely
abouttheireffortstofundraiseisknownasGeneralSolicitation).Unfortunately,theSECput
rulesinplacerulesthatdiscouragemostcompaniesfromtakingadvantageofthisnew
opportunity.

YoucanrestoretheintentofSection201.

Whatyoucando:PleaserepealthesecondsentenceofSection201oftheJOBSActanddirect
theSECtoallowcompaniestospeakfreelyabouttheirprivatesecuritiesofferings.
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DontLettheSECClosetheDoorEntirelyonGeneralSolicitation.Beyondtherulesthat
discouragemostcompaniesfromgeneralsolicitation,theSECissuedadditionalproposedrules
thatwillmakegeneralsolicitationsocumbersomethatfew,ifany,entrepreneurswillendeavorto
try.Theserulesinclude(1)obligationstofileaFormDbeforethecompanyinitiatesits
fundraisingprocess,asopposedtoafter(2)aburdensomerequirementtoformallyfileall
writtenmaterialswiththeSEC(entrepreneursfrequentlyupdatetheirslidesandotherwritten
materialsbetweeneachmeeting)and(3)apenaltyforviolationoftherulesthatincludesaone
yearprohibitiononraisingmoney.
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TheseruleswouldeffectivelyrepealtheJOBSAct.
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ThisiswhatFredWilson,awellknownventurecapitalist,hadtosayabouttheSECs
rulemakinginthisregard:

IftheSEC'sintention,withtheseproposedadditionalrules,istoneuterGeneral
Solicitationtothepointthatitislegalbutnobodyavailsthemselvesofit,theywill
succeed.

Whatyoucando:PleaseordertheSECtonotissueitsproposedrulesonRegDandFormD.

Finallythetaxchanges:

AllowStartupstoMoreEasilyShareEquitywithWorkers.Inthestartupecosystem,
particularlyformanyearlystartups,cashisscarce.Insteadmanyentrepreneursoffertheir
employeesequityinthecompanyasaformofcompensation.Thereareanumberofdifferent
taxrelatedlegalhurdlesthatmakeithardforcompaniestoshareequitywithworkers.Some
straightforwardchangescouldmakeequitysharingeasierandallowentrepreneurstogrowtheir
businessesmoreeffectively:

First,RepealorRemovetheImposedTaxWithholdingonStockTransfers.TheInternal
RevenueCoderequirescompaniestowithholdincomeandemploymenttaxeswhenacompany
transfersstocktoanemployee.Thisdespitethefactthatunderthesecuritieslawsthestock
cannotbesold.Thismakesitvery,verydifficultforcompaniestoissuestocktoworkers.The
workerscantaffordtopaythetaxes,andneithercancashstrappedstartupcompanies.

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Formoreinformation,pleaseseethisblogpost:
http://joewallin.com/2013/04/07/bespecificgeneralsolicitation/
4
Youcanfindtheseruleshere:http://www.sec.gov/rules/proposed/2013/339416.pdf
5
SeethisblogpostbyFredWilson:
http://avc.com/2013/08/somethoughtsonthesecsrulemakingongeneralsolicitation/
Whatyoucando:Repealthelawimposedincomeandemploymenttaxesonnoncash
transfersofstocktoworkers.

Second,RepealSectionRevenueCodeSection409ARelatedtoStartups.Internal
RevenueCodeSection409Awasenactedtocurbabuseswhereexecutivesoflarge
corporationsweredeferringtaxesonmillionsofdollarsofcashcompensation.

Thisisgood.However,theIRSappliesthesamerulesitappliestomultimilliondollarcash
compensationpackagestostartupstockoptions.Thisisabsurdanditdoesntreflectthereality
ofstartupeconomics.

Section409Amakesitmoredifficultforcompaniestoshareequitywiththeirworkers.Please
repealSection409Aasitappliestostartups.Sometimeslawsthatarebroadlyapplicable,
acrosslargeandsmall,work.Sometimestheydont.ThisisacaseinwhichSection409A
workswellforlargecompaniesbutnotforsmallones.Theresnoreasonthatstartupsshouldbe
hinderedintransferringstocktoemployees.RepealingSection409Amakesemployeesbetter
offandallowsthemtohireandretainbettertalent.

Whatyoucando:RepealSection409Aasitappliestostartupandearlystagecompanystock
optionsandotherworkerequityincentives.

Renewthe100%QualifiedSmallBusinessStockTaxBenefit.U.S.CodeSection1202
excludesfromgrossincomeaportionofthegainrecognizedonthesaleorexchangeofqualified
smallbusinessstockthatisheldmorethanfiveyears.Thistaxcodesectionisasignificant
inducementforinvestinginstartupcompanies.

PresidentObamaconvincedCongresstomakethe100%exclusion,butthe100%exclusion
expiredattheendof2013.Itwouldreallyhelpstartupsifthis100%exclusionwasmade
permanent.

Whatyoucando:Makethe100%exclusionfromcapitalgainsforinvestmentsinqualifiedsmall
businessstockheldformorethan5yearspermanent.

ShortentheHoldingPeriodUnderSection1202.Theholdingperiodtoqualifyforthe
reducedcapitalgainstaxrateunderSection1202isfiveyears.Thisanverylongholdingperiod
toqualifyforataxincentivethatissupposedtoencourageinvestmentsinstartupcompany.The
regularlongtermcapitalgainsholdingperiodis1year.Amoreappropriateholdingperiodforthe
taxincentivetoinvestinstartupsunderSection1202wouldbe2years.

Whatyoucando:Shortentheholdingperiodtoqualifyforthereductioninthecapitalgainstax
rateforinvestmentsinqualifiedsmallbusinessstockto2years.

ExtendtheRolloverPeriodonQualifiedSmallBusinessStock.YearsagoCongress
passedataxcodesection,Section1045,thatwasdesignedtoencourageinvestmentsin
qualifiedsmallbusinesses.Section1045allowsataxpayertorollovertheirinvestmentina
qualifiedsmallbusinessstockintootherqualifiedsmallbusinessstock.taxfree.Section1045is
tostartupswhatSection1031istorealestateHowever,Section1045hasaveryshortwindow
inwhichtomaketherolloverinvestment:60days.

Thisisgreatforsmallbusinessesbecauseinvestmentsinonebusinesscanbereallocatedto
anotherbusinesstaxfree.However,investorsneedtimetotransitioninvestmentsfromone
placetoanother.Yourtypicalangelinvestmenttakesmonthstofind.Findingarollover
investmentopportunityin60daysisunrealistic.

Whatyoucando:ExtenttherolloverperiodunderSection1045to270days.

FixSection83(b).CurrentlyInternalRevenueCodeSection83(b)allowsfoundersof
companiestomakeafavorabletaxelectionsothattheyarenottaxedwhentheirfoundershares
vestastheycontinuetoworkfortheirstartup.ThetroubleisthatSection83(b)onlyallowsthis
electiontobemadebyfilingaformwithin30daysofreceivingstock.Thisisadifficultand
unnecessaryadministrativetimetrapforfounders.Asimplechangetothelawcouldmakethe
electiondeemedmaderatherthanrequiringittobemadeatall.

Whatyoucando:Pleaseeitherextendtheperiodforfilingthe83(b)electiontoallowmorethan
30days(say,allow270days)orreversethepresumptionsothatnofilingisrequiredifnottaxis
owed.

CONCLUSION

Startupsareakeyandincreasinglyimportantpartoftheeconomicenginethatpowersthe
Americaneconomyand,mostimportantly,createsjobsforUScitizens.Bymakingsome
straightforwardrequests,changes,amendments,andevenpublicstatements,relatedtoafew
keyissuesyoucanhelpmakeiteasierfortheseimportanteconomicdynamostocontinuetodo
whatitisthattheydosowell:growandcreatejobs.

PleasetakeactiontohelpAmericasstartups,smallbusinesses,andentrepreneurs!

ThankYou,

EntrepreneurshipSupporter