re:improvingregulationcrowdfundingtoattracthighqualitystartups2014 submissionviawebsite...

January13 30th 2014

Submission via Web Site

Securities and Exchange Commission100 F Street13 NEWashington13 DC 20549

Re Improving13 Regulation Crowdfunding to Attract High-shy‐Quality Startups

We appreciate the opportunity to comment on the13 proposed crowdfunding13 rules

Wefunder is a crowdfunding platform13 for startups Founded in 201113 we helped SenatorBrown Senator Merkley and Congressman McHenry during13 the drafting13 of the legislation13 and were invited to the White House when13 it13 was signed into13 law13 Since then wersquove helped13 early-shy‐stage13 startups raise over $2 million from13 our 25000+ users via 506 offerings13 Startups seed funded onWefunder have since raised over $20 million in venture13 capital

Our mission is to democratize startup investing so that every American has the opportunityto invest13 in13 high-shy‐quality startups13 As one of the few accredited crowdfunding platforms toraise13 funds for startups13 that13 are highly competitive among professional investors ourcomments are focused on improving the rules so that credible startups conside using13 4(a)(6) Otherwise the worst outcome will occur only companies who are rejected byprofessional13 investors ndash and have no other option13 -shy‐ will13 raise funds from13 the crowd

Our letter is divided into two sections13 First13 we address three of the13 proposed rules thatwere wisely crafted and if modified in the13 final rules13 could13 destroy the potential13 ofcrowdfunding13 We conclude with three suggested13 improvements we hope will13 beimplemented in the final rules to make 4(a)(6)13 more attractive for high-shy‐quality13 startups

I Strengths13 of the Current Rules

bull 1 Reliance on investor13 representations13 to calculate investment limits1 Requiring13 a strict13 standard13 of verification13 ndash such13 as13 that13 required for 506(c) offerings ndash will dramaticallyinhibit capital formation This is not a hypothetical13 Wefunder has processed over $35million in investment applications for13 506(c) offerings in amounts as low as $10013 About80 of these13 potential investors refused to verify13 their income with documentation

Providing sensitive financial documentation ndash or even a letter from13 their CPA13 ndash is aburden13 no investor wants to go through13 particularly when13 investing13 small amounts13 Who13 wants13 to13 upload13 a tax return13 just to invest $200 In an era13 when Target13 leaks 40million credit cards why would investors trust any intermediary with their data2 Theeducational materials disclosures of risks and investment limit calculator providesufficient investor13 protections when balanced with the goal of capital formation

1 Response to Request for Comments 158 amp 159 2 httptechcrunchcom20131219target-shy‐confirms-shy‐point-shy‐of-shy‐sale-shy‐data-shy‐breach

WEFUNDERCOM 1 BROADWAY CAMBRIDGE MA 02142 HELLOWEFUNDERCOM (888) 546-0325

bull 2 No integration13 between13 Rule13 506 and13 4(a)(6)3 The $1 million investment limit on4(a)(6)13 fundraises13 should not be integrated with other exemptions Integration13 thatprevents startups from13 raising follow-shy‐on capital would potentially bankrupt the mostsuccessful rapidly growing startups and harm13 their investors

For example one13 startup13 on Wefunder13 raised13 $50000 seed funding via Rule13 50613 andsix months later raised13 an extra13 $14 million in venture capital to finance their rapidgrowth If they had raised via 4(a)(6)13 and faced integration13 issues that13 delayed their nextventure13 round bankruptcy would have been a likely outcome13 Another company13 which13 has already raised $10 million via Rule13 506 wants13 to13 reward13 their unaccreditedsupporters by letting them13 invest up to $100000 using 4(a)(6)13 Isnrsquot13 it less risky forunaccredited investors to invest13 after professional investors13 vet and fund13 the startup

Startups must also be able to fundraise13 in concurrent 506(c) and13 4(a)(6) offerings13 Founders in Silicon Valley are always meeting with potential investors13 If they13 canrsquotimmediately accept13 an offer because they have an open13 4(a)(6) round13 no founder13 of ahigh-shy‐growth startup will put their venture13 financing13 at risk by crowdfunding

bull 3 Flexible13 Oversubscription4 The oversubscription13 policy13 in the13 proposed rules13 shouldremain the same Founders13 often have multiple plans for how to13 accelerate13 growth13 ifthey receive additional unexpected funding13 They take the advice of Paul Graham aninvestor13 in over 500 startups13 collectively13 worth13 $144 billion5 who wrote13 ldquoIts a mistaketo have fixed plans in13 an undertaking13 as unpredictable as fundraising13 The right strategy in fundraising is to have multiple plans depending on howmuch you can raiserdquo6

Further13 issuers must be able to decide which investors are13 accepted13 Startups on13 ourplatform13 have seen investment applications from13 employees of competitors13 as well asclearly13 deranged13 individuals13 Startups will13 not13 use 4(a)(6) if they are forced to acceptinvestment from13 every online stranger in a pro-shy‐rata or first-shy‐come first-shy‐served13 basis13 Prohibiting startups from13 using their judgment serves no investor protection interest

II Suggestions13 for Improvements

The proposed rules13 reasonably balance investor13 protection with expanding capital forsmall business However13 the rules13 could be improved to better attract high-shy‐growth13 startups13 with alternate sources of capital13 These are the companies investors are mostinterested13 in and the ones who13 will create13 many of the jobs the statute was named after7

Our mission at Wefunder is to destroy the ldquoinsiderrsquos clubrdquo so that all Americans not justthe wealthy and well-shy‐connected13 can participate13 in high-shy‐quality private investments Butfor credible13 startups13 to13 consider using13 4(a)(6)13 three improvements must be made

3 Response to Request for Comment 2 amp 34 Response to Request for Comment 109 110 amp 1115 httptechcrunchcom20140113yc-shy‐pg-shy‐2014-shy‐update6 httppaulgrahamcomfrhtml7 httpwwwkauffmanorgnewsroom201308young-shy‐hightech-shy‐firms-shy‐outpace-shy‐private-shy‐sector-shy‐job-shy‐creation


bull 1 Allow Funding Portals to be compensated with a financial13 interest8 The proposerules assume a business model that is unworkable no credible startup with any otheroption13 will13 pay 5-shy‐1513 of their13 fundraising13 in cash13 to an intermediary Only the worststartups rejected13 by13 professionals13 will13 do so Good startups13 will pay a maximum13 of $0

The three crowdfunding platforms regularly13 performing 506 offerings13 ndash AngelListFundersClub13 and13 Wefunder13 -shy‐ have a business model13 based on13 ldquocarried13 interestrdquo9typically13 a 10 share13 of profits13 upon acquisition13 or IPO13 This is no coincidence Itrsquosthe only model13 that13 can work13 with credible startups Itrsquos also the one investors prefer

For Wefunderrsquos 506(c) offerings we charge the startup13 $013 Investors are charged a $25fee that covers costs13 along13 with 10 carried13 interest If we pursued a similar model onour 4(a)(6)13 offerings transaction13 costs13 would13 be up to $10000 less than the amountcontemplated in the proposed13 rules10 Our goal is to deliver more capital to startups13 We have no interest13 in13 being13 a financial parasite13 leeching the lifeblood out of the13 system

More13 importantly our incentives are13 perfectly13 aligned with the investors on our platformwe13 only13 earn a profit if they13 do and we13 proudly13 disclose13 this fact13 Intermediaries shouldnot have better terms ndash they should earn a share of the profits Intermediaries shouldnot pick winners ndash every company on the platform13 should13 pay and be treated the same

If a financial interest is not allowed13 platforms will13 have perverse incentives13 How willthey earn13 a profit13 Not13 by enforcing13 a high quality standard mdash for13 instance13 only13 listingcompanies with $100000 or more investment from13 professionals who have done in-shy‐depth due13 diligence and grilled the founders face to face13 Instead13 to earn13 revenue13 platforms would be incentivized to dramatically increase the volume of companies thatare fundraising13 regardless of their chances of business13 success13 These13 poorly13 run13 platforms will then13 leach their profit from13 the startup decreasing the cash that13 couldhelp them13 reach profitability Thatrsquos a recipe for a lot of investors losing money

Further in addition to decreasing investor protection disallowing the13 intermediary13 to take13 a financial interest is directly13 opposed to the13 intent of Congress The prohibition13 against13 financial stakes in the legislation was purposely not extended to the intermediary itself13 When13 the legislation13 was drafted13 we advised Senators Brown13 and Merkley of theimportance of aligning interests and reducing transaction costs13 and our opinioninfluenced the final language of the JOBS Act13 Further recorded13 in the13 CongressionalRecord by a sponsor13 of the13 legislation13 is the following statement

ldquoIn addition intermediaries13 should be allowed to take an equity stake in offerings This13 however does not mean13 that intermediaries should be able to choose which13 offerings to participate in13 but rather it should13 be a standard13 process for any offering that the intermediary facilitates This will incentivize an intermediary to focus on issuer quality over quantity providing13 more vetting13 for investors and greater alignment of interests Of course any equity stakes by the intermediary must be fully and meaningfully disclosedhelliprdquo11

8 Response to Request for Comment 122 123 amp 1249 httpenwikipediaorgwikiCarried_interest10 Assuming a $1 million fundraise with a portal who charges 10 to13 1511 Congressional Record13 of the 112th Congress httpthomaslocgovcgi-shy‐binqueryzr112S29MR2-shy‐0027


bull 2 Allow Funding Portals that are also Investment Advisors to hold investorsrsquo13 assetsthrough a special13 purpose vehicle High-shy‐growth13 startups13 canrsquot accept hundreds13 of directshareholders13 as13 the13 cost of maintaining records can be enormous and venture13 capitalists13 are wary13 of investing13 in startups with ldquomessy cap tablesrdquo13 No startup13 can takethe risk of endangering their follow-shy‐on13 financing13 The current standard for 506 offeringsndash which Wefunder AngelList13 and FundersClub13 all employ -shy‐ is to13 group up to 99accredited investors into one Single-shy‐Purpose13 Fund which13 then13 invests mdash as13 one entitymdash into13 the13 startup Unfortunately The JOBS Act prohibits private13 funds from using13 4(a)(6)

Congressional intent13 was to block13 hedge funds13 not13 single-shy‐purpose13 vehicles13 which13 they13 had not contemplated (the practice became common only after the Commissionrsquos no-shy‐action letters to FundersClub and AngelList)13 We propose13 that the Commission create13 aspecial class13 of single-shy‐purpose13 vehicle -shy‐ only13 available13 for 4(a)(6)13 offering ndash that13 groupsan unlimited number of investors into one fund sponsored by the intermediary and that13 may invest as a single shareholder13 into13 the13 issuer13

Allowing for such a vehicle13 will attract high-shy‐quality13 startups13 reduce transaction13 costs13 and accommodate intermediary compensation in the form13 of carried interest13 which13 perfectly13 aligns the incentives between intermediaries and investors Intermediariesmay also advocate for smaller unsophisticated13 investors during13 follow-shy‐on13 financing13 whoindividually13 wonrsquot13 have the power to protect13 their rights13 from venture13 capitalists13

We believe that the Commission should consider whether Funding Portals that sponsorsuch13 funds should13 also13 be13 registered Investment Advisors or exempt reporting advisorssimilar to the arrangements contemplated by the no-shy‐action13 letters issued by theCommission to FundersClub12 and AngelList13

If the Commission will13 not create13 a special purpose13 vehicle13 we propose13 that Funding13 Portals13 be permitted to act as holder13 of record13 as noted in the13 Congressional Record

ldquoIntermediaries should also be permitted to act13 as the holder of13 record for offerings that13 they facilitate to reduce compliance complexity13 for issuers and to increase13 the13 likelihood of subsequent13 funding from institutional investors Providing holder of record services13 willreduce compliance complexity for13 issuers and place the burden of managing crowd funded investors on the intermediary Without this mechanism issuer capitalization tables maybecome unwieldy discouraging subsequent funding from institutional investorsrdquo14

Currently only13 clearing13 brokers13 and banks may act as a holder of record13 The costs13 associated with registering13 and operating13 these entities for the purpose13 of crowdfundingis not economically feasible However the13 risks13 associated13 with acting13 as a holder ofrecord are significantly diminished given the few activities that would be performed bycrowdfunding platforms especially for investments where there is no secondary marketWe believe funding portals could perform13 these activities under a less intrusive13 regulatory regime consistent with the Commissionrsquos investor protection mandate

12 httpwwwsecgovdivisionsmarketregmr-shy‐noaction2013funders-shy‐club-shy‐032613-shy‐15a1pdf13 httpwwwsecgovdivisionsmarketregmr-shy‐noaction2013angellist-shy‐15a1pdf14 httpthomaslocgovcgi-shy‐binqueryRr112FLD001S52230


bull 313 Include13 lsquocrowd ratingsrsquo13 in the Safe Harbor for sorting offerings on Funding Portals15

Founders13 consider13 the13 ldquosignalrdquo that fundraising13 activities send to venture13 capitalists13 The best startups13 will only13 list on an intermediary if there13 are13 other credible13 startups13 alongside them As such Wefunder has a high-shy‐quality13 bar13 we will13 only13 allow startups13 to fundraise13 via 4(a)(6)13 after they raise $100000 or more from13 accredited investors

The problem13 is how to sort them Due to the nature of the web some investments willbe more visible for first-shy‐time visitors such as appearing first on the home page Onereasonable13 way13 to13 protect investors13 and13 also13 to13 direct capital to13 quality13 startups13 is via anobjective13 algorithm13 that by default provides greater prominence to startups that haveattracted capital from13 multiple sources or sources that exhibit certain characteristics

If the methodology is clearly disclosed to investors it should be permissible for aFunding13 Portal13 to sort13 offerings13 with an algorithmic score that13 takes into account13 anyobjective numeric data that is reasonably likely to provide meaningful and non-shy‐misleading information to potential investors13 such as numeric ratings13 by13 accredited13 andunaccredited users on the13 platform13 number of commitments from13 investors (weighted13 by valuation13 of their portfolios)13 and page views

Thank you for the opportunity to comment on the proposed crowdfunding rules We hopethat13 our experiences crowdfunding high-shy‐growth13 startups13 via 506(c) offerings are useful13 tothe Commission as the final rules are drafted

We are excited for the day when all Americans can participate in the type of privatefinancings that previously were the exclusive domain of the wealthy and well13 connected13

Please13 contact me at nickwefundercom or 508-shy‐308-shy‐7226 if I can be of any further help

Sincerely

Nicholas TommarelloCEO Wefunder

Response to Request for Comment 216 219 amp 220


15

January13 30th 2014



Re Other Comments13 on Regulation Crowdfunding


Wefunder is a crowdfunding platform13 for startups Founded in 2011 we helped SenatorBrown Senator Merkley and Congressman McHenry during13 the13 drafting13 of the legislation13 and were invited to the White House when13 it13 was signed into law Since then wersquove helpeearly-shy‐stage startups raise over $2 million from13 our 25000+ users via 506(c) offerings13 Startups13 seed funded onWefunder have since raised over $20 million13 in13 venture capital

In our previous comment letter titled ldquoImproving Regulation Crowdfunding to Attract High-shy‐Quality13 Startupsrdquowe talk about13 the critical issues that will ldquomake or breakrdquo crowdfundingamong high-shy‐quality13 startups13 Those are the most important points that concern us uponwhich we believe the success or failure of crowdfunding13 hinges

In contrast13 this letter is focused on providing13 feedback13 on more minor points13 As the onlycrowdfunding platform13 with over a dozen 506(c) offerings that13 allows accredited investorsto invest in amounts as low as $100 we hope our ldquoreal world experiencesrdquo will providevaluable insight to the Commission

8 We are proposing to13 permit an issuer to13 rely13 on the efforts that an intermediary13 takes in order to13 determine that the aggregate amount of securities purchased by13 an investor will not cause the investor to13 exceed the investor limits provided that theissuer does not have knowledge that the investor had exceeded or would exceed theinvestor limits as a result of purchasing securities in the issuerrsquos offering Is thisapproach appropriate Why13 or why13 not Should an issuer be required to13 obtain awritten representation from the investor that the investor has not and will not exceedthe limit by13 purchasing from the issuer Why13 or why13 not

The intermediary should take on the responsibility of ensuring an13 investor13 has13 notexceeded their limits13 If a startup13 has to worry13 about whether hundreds of strangers are13 complying with their investment limits they13 will not raise via 4(a)(6) Startups13 will notsubject themselves to this liability if they have other fundraising alternatives meaning thecrowd13 will only13 have access to13 deals13 that professional investors13 pass on The intermediaryis in a better13 position to track compliance across multiple investments

WEFUNDERCOM 1 BROADWAY CAMBRIDGE MA 02142 TEAMWEFUNDERCOM (888) 546-0325

9 Should institutional and accredited investors13 be subject to the investment limitsas13 proposed Why or why not

For accredited investors we propose to cap an investment into any individual startupraising via 4(a)(6) at $100000 but not impose investment limits on aggregate investments

On Wefunder some startups will be fundraise13 via a 4(a)(6)13 while others13 will choose 506(c)These will be13 displayed13 side by13 side on the13 platform for accredited13 investors This is allows13 the crowd to see the full range of startups that are raising capital and gives them13 a betterunderstanding13 of the opportunities they have access to

It does not make sense to allow accredited investors to invest any13 amount they13 desire insome deals but have to calculate annual investment limits on all their startup investmentsbased on13 their current13 yearrsquos income or net worth for others The investment caps outlinedin the statute were intended to protect unaccredited investors Accredited investors areaccustomed to current regulations Imposing these restrictions on them13 will be confusingmake them13 less likely to invest in 4(a)(6) deals13 and13 contribute13 to the possibility thatunaccredited investors will only be able to access second tier deals

For additional context while most startups13 will13 fundraise concurrently13 with13 both a 506(cand a 4(a)(6) offering they13 should13 be13 able13 to13 forgo the13 cost of organizing13 a single13 purpose13 vehicle to hold small dollar accredited investors by making it easy to include thoseinvestors13 i the13 4(a)(6)13 offering Making13 this13 difficult by13 subjecting13 accredited13 investors13 to13 aggregate investing limits will cause many startups13 to13 choose between13 paying13 to13 organize13 asingle purpose vehicle or conducting a 4(a)(6) offering and many of them13 will choose theformer removing the opportunity for unaccredited investors to invest

10 Should we adopt rules providing for another crowdfunding exemption withdifferent investment limits (eg an exemption with a $250 investment limit and fewerissuer requirements) as one commenter suggested52 or apply13 different requirementswith respect to13 individual investments under a certain amount such as $500 asanother commenter suggested53Why13 or why13 not If so should the requirements forissuers and intermediaries also13 change What investment limits and requirementswould be appropriate Would adopting such an exemption be consistent13 with thepurposes of Section 4(a)(6)

We recommend creating a special crowdfunding exemption with reduced disclosurerequirements when individual investments are lt=$500 Creating an exemption with fewerdisclosures13 ndash including13 no annual reporting13 requirement -shy‐ would encourage startups withmany other funding sources to consider crowdfunding The primary motivation for rapidlygrowing13 startups13 raising13 via 4(a)(6) will not be the capital -shy‐ which they can easily get from13 institutional investors 13 -shy‐ but rather to reward their most passionate customers and widentheir base of support prior to an IPO Otherwise the system13 will remain the same onlyaccredited ldquoinsidersrdquo13 will13 be able to invest13 in13 the best13 IPO-shy‐track companies


24 Are these proposed disclosure requirements relating to13 the issuer and its officersand directors appropriate hellip

The existing disclosure requirements are appropriate and properly take into accountinvestor13 protections13 Disclosures13 on non-shy‐officer employees13 and13 non-shy‐securities13 related13 civillitigation13 would be a needless burden13 that13 is invasive of privacy and adds insignificantvalue13 to13 potential investors

25 The proposed rules would require disclosure of the business experience of directorsand officers of the issuer during the past three years Is the three-shy‐year period anappropriate amount of time hellip

Disclosing the13 business13 experience13 of directors13 and13 officers13 for the13 past 3 years13 is an13 appropriate requirement Those who have relevant experience will have an incentive toshare it on order to make their offering more attractive so a requirement by thecommission does not seem13 necessary The commission should note that many high growthstartup founders13 are13 so young13 that they13 do not have three13 years13 of work13 experience13 and inthose cases should be required to disclose whatever work13 experience they do have insteadof a ldquono work experiencerdquo line item13 for 1 or 2 years which might unreasonably13 prejudice13 investors against them

29 Are these proposed disclosure requirements appropriate Why13 or why13 not Shouldwe require any13 additional disclosures Should we prescribe specific disclosurerequirements about the business of the issuer and the anticipated business plan of theissuer or provide a non-shy‐exclusive list of the types of information an issuer shouldconsider disclosing Why13 or why13 not hellip

The proposed disclosure requirements regarding the ldquobusiness planrdquo of13 the13 issuer13 are13 perfect as is We recommend no changes The proposed rules understand that companiesat different13 stages have a very13 different13 idea13 of what13 a ldquobusiness planrdquo is13 and should haveflexibility in presenting the material that investors demand Formal business plans areobsolete13

38 Are these proposed disclosure requirements appropriate Why13 or why13 not Shouldwe modify13 or eliminate any13 of the proposed requirements If so how and why

While a minor point we recommend not requiring the disclosure of the number of full-shy‐time13 employees each company has This metric is not useful for investors evaluating early-shy‐stage13 startups13 and13 is likely13 to13 meaningfully increase during13 the13 course13 of a 4(a)(6) fundraise13 where the company is concurrently conducting13 a 506(c) offering13 Further many early-shy‐stage startups spend the majority of their initial funds on consultants before hiring them13 full-shy‐time


45 Is it appropriate to13 require a description of any13 prior exempt offerings conductedwithin the past three years as proposed Why13 or why13 not Would another time period(eg one year five years etc) or no13 time limit be more appropriate

To reduce the amount of manual data entry while still providing relevant and appropriateinformation to investors we recommend a simpler solution

We recommend that the total amount of funding in all prior exempt transactions bedisclosed13 as13 well as the date terms security and valuation of the last offering Onecompany on Wefunder has dozens of exempt13 offerings over the past13 few13 years13 There is not13 much benefit in detailing out every historical exempt offering over the13 last three13 years13 when an aggregate amount will do

49 In the discussion of the issuerrsquos financial condition should we require issuers to13 provide specific disclosure about prior capital raising transactions Why13 or why13 notShould we require specific disclosure relating to13 prior transactions made pursuant to13 Section 4(a)(6) including crowdfunding transactions in which the target amount was13 not reached Why13 or why13 not

Startups13 move so fast that13 prior failed fundraising attempts offer no informational value topotential investors the context six months later such as when the company has actualldelivered13 a product and13 obtained a million users can completely change

Further founders should13 not feel like13 they13 are13 being13 penalized13 for failing13 to13 raise13 funding13 inthe past13 Startup founders try to raise funds from13 the moment they have the idea althoughthey donrsquot13 often13 succeed13 until they13 have13 a prototype13 and13 initial traction13

If fundraising fails itrsquos not because therersquos something13 inherently13 wrong13 with the idea13 itonly means more progress had to be made to validate the business

51 Should we exempt issuers with no13 operating history13 or issuers that have been inexistence for fewer than 12 months from the requirement to13 provide financialstatements as one commenter suggested

Full financial statements are not relevant for early-shy‐stage investments when itrsquos little morethan a team13 and an early prototype Professional angel investors donrsquot need or wantfinancials from13 a three-shy‐month-shy‐old13 startup13 Therefore credible13 startup13 founders do notwaste their valuable energy or money putting together useless financial statements withlots of zeros Far more useful is a disclosure of how much cash is in the bank their currentmonthly loss (ie lsquoburn ratersquo) and howmuch anticipated ldquorunwayrdquo the startup has untilmore capital is required


56 Should we require some or all issuers also13 to13 provide financial statements forinterim periods such as quarterly13 or semi-shy‐annually Why13 or why13 not If so whichissuers and why Should we require these financial statements to13 be subject to13 publicaccountant or auditor involvement If so what level of involvement is appropriate

Annual financial statements are sufficient Most early-shy‐stage13 startups13 do not have13 quarterly13 financial statements as they add little value

64 Section 4A(b)(1)(D)(iii) requires audited financial statements for offerings of morethan $500000 ldquoor such other amount as the Commission may13 establish by13 rulerdquoShould we increase the offering amount for which audited financial statements wouldbe required If so to13 what amount (eg $600000 $750000 etc)

We strongly recommend that the limit for audited financial limits be increased

If the current proposed rules remain in effectWefunder will not allow any13 company to raise13 more13 then $500000 on our platform

Audited financial statements particularly for ongoing reporting requirements are so cost-shy‐prohibitive for startups that they make absolutely no sense as an13 appropriate13 use of funds13 We do not13 want first-shy‐time founders to unknowingly underestimate these costs therebythreatening13 the livelihood of their business and harming their investors

75 Should we exempt issuers from the requirement to13 file progress updates with theCommission as long as the intermediary13 publicly13 displays the progress of the issuer inmeeting the target offering amount Why13 or why13 not If so should the Commission establish standards about how prominent the display13 would need to13 be

Issuers should be exempt from13 filing progress updates with the commission on the statusof their offering Intermediaries exist to help issues navigate the complicated process ofoffering securities and should be allowed to handle this process for them Intermediariescan file13 quarterly13 reports13 on all offerings they13 have facilitated13 addressing the13 concern ofhaving13 a single13 repository13 for all offering information

76 Should we specify13 that an amendment to13 an offering13 statement must be filed withina certain time period after a material change occurs Why13 or why13 not What would bean appropriate time period for filing an amendment to13 an offering statement to13 reflecta material change Why

While we encourage issuers to update their investors on a timely basis we donrsquot believe ina legal requirement other then to properly disclose any potential13 issues five days13 before13 the round closes13


The world of startups is by nature ambiguous and chaotic13 ndash problems occur every singleday Some of these problems are solvable with time and effort ndash itrsquos13 not always13 immediately clear what is a permanent material change13 and what can be fixed with a littletime The only legal requirement should be proper disclosure of all outstanding potentialmaterial changes before the fundraise closes

81 Two13 commenters noted that compliance with the exemption would not be known atthe time of the transaction if the annual reports are a condition to13 the exemption underSection 4(a)(6) hellip Should the requirement to13 provide ongoing annual reports be acondition to13 the exemption under Section 4(a)(6) If so for how long (eg until the firstannual report is filed until the termination of an issuerrsquos reporting obligations orsome other period) Please explain

The proposed rules13 that condition raising further13 funds13 via 4(a)(6)13 on the13 filing of the13 required13 annual reports13 is fair13 and13 reasonable

It is important that13 the proposed rules are not modified to cause startups to lose theirability to take advantage of 506 or other exemptions by accidently neglecting to file anannual report This would destroy some startups and make the community as a wholemore reluctant13 to risk13 conducting13 4(a)(6) offerings13

94 In what format would the information about an issuer be presented on anintermediaryrsquos platformWill there be written text graphics charts or graphs orvideo13 testimonials by13 the founder or other key13 stakeholders Will the information bepresented in a way13 that would allow for the filing of the information as an exhibit to13 Form C on EDGAR If not how should the rules address these types of materials

There will be13 text13 videos interactive13 graphics13 charts13 and graphics Our goal13 is to enable abeautiful online presentation in rich HTML and give investors as much relevantinformation about an issuer as possible Some examples on our platform13 include 506(c)offerings such as

httpwefundercomwefunder

httpswefundercomfreightfarms

It will not be practical to embed videos and interactive graphics (such as the Freight Farmscontainer) in Form13 C filings nor will the visual presentation be the same More practical13 will be including a URL to the source material While a video may be linked to directly fortechnical reasons some interactive exhibits will only work if loaded within the profile


96 Should we allow issuers to13 refer investors and potential investors to13 theinformation on the intermediaryrsquos platform Are the proposed methods (websiteposting or e-shy‐mail) to13 refer investors effective and appropriate Would issuers haveaccess to13 the investorsrsquo13 e-shy‐mail addresses Are there other methods we should considerIf so what methods and why

Issuers should be able to refer investors to the intermediaryrsquos web site for all materialssuch as ongoing annual reports and company updates On Wefunder issuers will not have13 email addresses for investors however there are communication channels that allow theissuers to send messages to all investors which are also e-shy‐mailed to the investorrsquos inbox

102 Should we limit the issuerrsquos participation in communication channels provided by13 the intermediary13 on the intermediaryrsquos platformWhy13 or why13 not If so whatlimitations would be appropriate

Our goal is to encourage as much participation as possible from13 the issuer (properlydisclosed)13 in all communication channels One of the most important criteria for startupinvestments is the quality of the team and their ability to answer critical questions

On Wefunder we have two main communications channels of which the most importantand active is ldquoAsk a Questionrdquo Potential investors13 ask questions13 which13 can only13 be13 answered by the issuer13 The answers13 are13 viewable13 by13 all other13 potential investors13 who13 view the13 offering

Limiting the issuer from13 interacting in these public communication channels would onlylead to less informed investors The only requirement should be that the relationship withthe issuer is properly disclosed

114 Is it anticipated that issuers may13 want to13 conduct crowdfunding offerings ofsecurities under Section 4(a)(6) alongside non-shy‐securities-shy‐based crowdfunding such asa crowdfunding campaign for donations or rewards If so please describe how theseofferings may13 be structured Are there any13 issues in particular that our rules shouldaddress in the context of such simultaneous crowdfunding offerings Please explain

We intend to allow13 an issuer the option13 of listing13 one reward13 perk alongside13 their13 securities13 offering For instance investors who invest $500 or more in a restaurant may also receivea lifetime 10 discount card when dining

We believe this method will increase the amount of capital available for small localbusinesses where acquisition13 or IPO13 is unlikely13 Small businesses benefit not only from13 additional capital but also by forming a base of customers prior to their storeopening And investors are more adequately compensated for the risk they are taking13 rather13 then charging an exorbitant interest rate13 that would13 put the13 business13 at risk by13 decreasing13 their13 cash13 flow


115 Should we require or prohibit a specific valuation methodology If so whatmethod and why Should we specify13 a maximum valuation allowed as suggested by13 onecommenter305Why13 or why13 not

Other then market value there is no valuation method that will work across the diversetypes of companies ndash at very13 different13 stages in13 their life cycle -shy‐ that13 will13 take advantage ofcrowdfunding Wersquove already had 506(c) offerings from13 startups ranging from13 two guys in13 a garage with a prototype to companies with a dozen employees and $10 million in funding

The best way to determine a fair market value is to match the terms of a startups last financing round from13 accredited investors For this reason we will only allow startups toraise funding via 4(a)(6) offerings after they have received funding from13 an independentaccredited investor that13 sets the price

As for a maximum13 valuation that makes little sense Why shouldnrsquot a company destined tobe as big13 as Facebook13 do a 4(a)(6) fundraise several13 years before their IPO13 as a way ofrewarding their13 users13

138 Should we specify13 the types of information that an intermediary13 must obtain froman investor as part of the account-shy‐opening process If so what information and why

152 While the proposed rules do13 not specify13 the types of information that anintermediary13 must obtain from an investor at the account opening stage we recognizethat this stage provides an opportunity13 for intermediaries to13 collect certaindemographic information about investors Should we require intermediaries to13 collect and provide some or all of this information to13 us and the applicable nationalsecurities association

Wefunder does not13 intend to collect13 any additional13 data13 during13 account13 creation13 that13 is not13 legally required by AML CIP or FINRA13 rules No one likes13 filling13 out long forms eachadditional input box on a form13 decreases the likelihood13 that it will be13 filled13 out13 Or13 in other13 words13 each additional13 input13 decreases cash available to startups

Of course making an investment online should not be as easy as backing a project13 on13 Kickstarter or making a ldquoone clickrdquo purchase on Amazon We understand wersquoll13 need torequire an SSN birthday address an investment limit calculator a review of educationalmaterials and such But requiring even more data ndash such13 as13 professional affiliations13 oreducational level ndash serves no immediate purpose for investor protection and can onlydecrease the amount of capital that will be available to companies


145 Should we require intermediaries to13 submit the educational materials to13 us orFINRA (or other applicable national securities association) for review Why13 or why13 not If we should require submission of materials should we require submissionbefore or after use when they13 are first used when the intermediary13 changes them orat some other point(s) in time Please explain

Currently we13 intend13 to13 have13 a full-shy‐time team13 of writers constantly updating educationalmaterials based on feedback and questions from13 our users We take our responsibility toeducate13 seriously

If wersquore required to submit such materials for review we will not update the legallyrequired materials as often The likely outcome is having inferior and slightlyoutdated13 ldquolegally mandated and reviewedrdquo materials that are sent to investors uponaccount13 creation13 while we place our true efforts at investor education13 on13 a ldquonot13 legally13 mandatedrdquo educational blog that does not require a bureaucracy to review or approve

147 Should the proposed rules require intermediaries to13 take any13 different oradditional steps to13 help achieve compliance with the requirement for promoters to13 disclose the receipt of compensation If so what other steps would be appropriate andwhy hellip 148 Should the proposed disclosures to13 investors be required to13 be made atsome time other than at account opening

We strongly recommend that the SEC not mandate the exact method by which theintermediary achieves compliance with the requirement for promoters to disclose theirrelationship Product designers whose profession and expertise is information design cancome up with superior solutions that will achieve better results than13 what13 is currently13 envisioned in the13 proposed rules

For instance we believe the disclosure obligation regarding promoters should be not bemade at account opening (where they will be ignored) Instead13 they should appear as soonas a user clicks on the text field to make a comment in the communication channels Thesudden appearance of text underneath the comment box as they are typing will draw theeye of the commenter so they canrsquot miss it Further if they are a promoter they can simplyclick a link -shy‐ right in the13 text that just appeared -shy‐ to properly disclose their relationship

There is a drawback to13 including13 this13 disclosure13 in the13 account opening process The moretext13 that13 appears on13 a screen13 the less likely users13 will actually13 read13 it13 As 01 of ourusers at the account opening stage are likely to be promoters and 999 potentialinvestors13 we13 believe13 the13 text at the13 account opening stage13 is better13 devoted13 to13 discussinthe risks of startup13 investing We donrsquot13 want to have a lot13 of fine print13 that13 no one reads13


150 Is the requirement for an intermediary13 to13 disclose how it is compensated anappropriate requirement Why13 or why13 not Would a time other than at accountopening be more appropriate for this disclosure Please explain

For our13 506(c) offerings Wefunder13 currently13 discloses our compensation on the companyprofile itself and in the subsequent email transactions We donrsquot believe account opening isan appropriate time to mention compensation particularly as it may differ between 4(a)(6)and 506(c) offerings13 both of which we support13 Moreover13 the account13 opening stage13 isbetter dedicated to discussing the risks of startup investing The more text that ismandated to be on this page the more likely it will be fine print that no one reads

154 Section 4A(a)(6) requires an intermediary13 to13 make available the information thatan issuer is required to13 provide under Section 4A(b) Should we require anintermediary13 to13 make efforts to13 ensure that an investor who13 has made an investmentcommitment has actually13 reviewed the relevant issuer information

This is impossible to implement in practice in a reliable13 way From13 our current experiencerunning 506(c) offerings13 and13 interviewing investors13 afterwards we13 know potentialinvestors can spend weeks thinking about funding the company while perusing theoffering materials available and doing13 due diligence on13 their own13 without creating anaccount Investors usually decide to13 open13 an13 account ndash or log13 in-shy‐ if they13 decide to13 fund the13 company

Requiring investors to spend X minutes re-shy‐reading the offering materials after theyrsquovedecided to13 invest is not only13 technically13 unreliable13 but a very poor13 experience that13 will13 reduce the total investment received by startups

155 Instead of or in addition to requiring that intermediaries make issuer13 information available on their platforms should we require13 that intermediariesdeliver this information to13 investors Why13 or why13 not If so should we specify13 aparticular13 medium13 such as13 e-shy‐mail or a screen the investor must click through

Offering materials are displayed on Wefunder as interactive HTML There are moviesinteractive exhibits links to educational materials that explain obscure terms and real-shy‐time questions and answers from13 the founders A web page is the only medium13 possiblethat13 will13 appropriately display this content in a format readable by the investor

160 Should we require an intermediary13 to13 avail itself of readily13 available informationconcerning investor limits such as a centralized database containing informationrelating to13 whether particular investors were in compliance with the investment limitsshould one become established Why13 or why13 not

This rule13 should13 only13 considered after13 such a centralized13 database13 is established13 We areskeptical that any13 third-shy‐party service other then a dominant crowdfunding platform13 (which


will13 take a couple years to establish) will13 have the power to create such a centralizedrepository with the majority of startup investors in America We think it more likely manythird parties with inferior platform13 technology13 high costs or a poor user interface13 will try13 to become centralized providers but fail The high cost of conducting13 4(a)(6)13 offerings isalready concern adding this additional requirement that would likely have an associatedcost adds to13 the13 likelihood that startups will not take advantage of the exemption

161 Should we require intermediaries to13 request other intermediary13 accounts that aninvestor may13 have before accepting an investment commitment Why13 or why13 not

There will potentially be hundreds of intermediaries Since they will not have astandardized API (application programming interface) for requesting or authenticatingdata13 requiring13 an13 investor13 to13 input (and13 continually13 update)13 all of their other accounts13 serves no practical purpose13 Humans cannot affordably review and confirm13 the data Moreelegant and useful is one text box that requires the investor to input the dollar amountinvested on other platforms

162 Should we require intermediaries to13 have investors acknowledge issuer-shy‐specific13 or security-shy‐specific risks as part of the transaction process Why13 or why13 not If so to13 what extent

We strongly agree that intermediaries have a responsibility to ensure that investorsacknowledge risks We do this13 at Wefunder even for accredited13 investors13 in 506(c)offerings

However counter-shy‐intuitively we are concerned that requiring acknowledgements forevery commitment ndash even those made on the same day ndash actually decreases investor safety

At Wefunder we encourage13 our accredited investors13 to13 employ a diversified investmentstrategy13 by13 investing in a portfolio in startups13 not to ldquoput all their eggs in one basket ldquo Forexample if an investor wants to invest $1000 we encourage them13 to make 10 $100investments instead of one $1000 one With our current13 506(c) offerings13 we see investorstake this advice13 They will13 often13 invest13 in up to 10 companies in one day after spending aweek or two reviewing all the opportunities on the platform

If investment commitments feel laborious because investors are forced to constantly re-shy‐acknowledge the risks (even when they already did it several other times that day) we areconcerned that investors will ldquoget tiredrdquo of filling out forms and not finish diversifying theirinvestments in a portfolio Less diversification leads to more risk

Instead we recommend that the rules not require re-shy‐acknowledgement for eachcommitment but instead one13 re-shy‐acknowledgment for each day that a commitment is made


165 Should we provide a recommended form of questions and representations Why13 or why13 not If so should the Commission provide the form as a starting point and not asafe harbor so13 that intermediaries can adapt the questions and representations to13 particular offerings Why13 or why13 not

Wefunder would prefer the flexibility to adapt our own form13 of questions andrepresentations to the particular needs of our community of investors We are concerned astarting13 point would13 be13 seen as13 an13 effective13 safe13 harbor13 and13 constrain13 our effectiveness

168 Under the proposed rules we limit the ability13 to13 post in the communicationchannels to13 only13 those persons who13 have opened accounts with the intermediaries andthereby13 identified themselves to13 the intermediaries Is this restriction adequate Why13 or why13 not Would it be appropriate to13 permit anyone including persons who13 have notidentified themselves in any13 way to13 post comments in intermediariesrsquo13 communicationchannels Why13 or why13 not

Requiring intermediaries to allow anonymous comments will be a recipe forchaos Message forums that do not require authenticated accounts to post commentsalways devolve into meaningless and vulgar banter13 Itrsquos reasonable13 to say13 that not a single13 anonymous forum13 is effective13 at providing13 intelligent critiques

From13 a practical standpoint allowing anonymous comments makes it extremely difficult forthe intermediary to design a system13 that protects investors from13 more devious issuerspromoting their stock through multiple fake accounts endorsing their offering Unethicalissuers can easily use ldquoincognitordquo browsers combined with IP tunneling to post hundreds ofldquosock puppetrdquo comments that would drown out commentary from13 legitimateusers13 Requiring13 registration increases the odds an intermediary can spot ndash and block13 ndashsuch13 activity

183 Should an investor be required to13 reconfirm his or her commitment to13 invest whena material change has occurred Why13 or why13 not Is the five business day13 period forreconfirmation after material changes appropriate Would another time period bemore appropriate If so what time period and why

We recommend allowing the13 investor to decide how to handle material changes For anearly13 stage13 startup13 changes13 are13 practically13 guaranteed13 to13 happen13 during a fundraise13 Giventhe ambiguity of what is ldquomaterialrdquo we expect startups to be conservative and nearlyalways toggle material changes requiring13 a re-shy‐confirmation

From13 our current experience with 506(c) offerings we believe a large segment of investorswould prefer not13 to have to re-shy‐confirm13 their investment In the past wersquove had investorsupset when they missed a deadline and had their investment cancelled They assume theyare confirmed investors when funds hit escrow and they are not happy to find outotherwise if they were too busy to read their emails on a timely basis


The best solution is to give investor the option of automatically re-shy‐confirming investmentson material changes

187 Should we permit an intermediary13 to13 compensate a third party13 for directingpotential investors to13 the intermediaryrsquos platform under the limited circumstancesdescribed above Why13 or why13 not Should any13 disclosures be required Why13 or why13 not Please identify13 reasonable alternatives to13 this approach if any

We agree with the proposed rules that allow intermediaries to compensate third parties fordirecting investors to the platform Paid advertising and referral programs are standardpractice and integral to any well functioning web platform While intermediaries13 should13 not be allowed to pay for investorrsquos personal information they should be able to usestandard13 Internet marketing techniques to inform13 investors of companies they may beinterested13 in For instance an13 ad for a new medical device should be able13 to13 be13 displayed13 next to a Google search for ldquoInvest in medical device startupsrdquo Interested investors canthen click through and see the publicly available offering information Disclosing thisprocess does not seem13 to be pertinent information for investors13 since this13 is standard13 internet marketing practice and thus should not13 be required

222 Under the proposed safe harbor should we permit a funding portal to13 post newssuch as market news and news about a particular issuer or industry on its platform13 Why13 or why13 not hellip

As a service to our investors Wefunder currently posts all news articles we can find to afundraising13 profile13 and13 then13 after13 the13 round13 closes13 continue13 to13 send news13 updates13 to13 investors13 If this were13 perceived to threaten13 our safe harbor because we accidently misseda couple of articles we would have to stop Investors would have less information uponwhich to make a decision

251 Should the Commission permanently13 exempt securities issued pursuant to13 anoffering under Section 4(a)(6) from the record holder count under Section 12(g) asproposed Why13 or why13 not Should the Commission exempt securities issued underSection 4(a)(6) only13 when held of record by13 the original purchaser in the Section4(a)(6) transaction an affiliate of the original purchaser a member of the originalpurchaserrsquos family13 or a trust for the benefit of the original purchaser or the originalpurchaserrsquos family Why13 or why13 not Are there other ways to13 implement Section 303that may13 be more appropriate Please explain

The commission should keep the proposed rule that securities issued pursuant to a 4(a)(6)offering be permanently exempt from13 the holder of record count As one of the most activeintermediaries conducting 506(c) offerings we13 have13 had13 the13 chance13 to13 speak with13 hundreds of first time investors many of whom13 have never before invested in a privateplacement One of the primary concerns we hear from13 these new investors is the fact thatthey may not be able to gain liquidity for upwards of 7 years or longer13


This is generally13 the13 reality13 when13 investing13 in startups13 but were13 the commission to requiresold13 or transferred13 securities13 to13 be13 included13 in the13 holder13 of record count13 issuers13 would13 surely contractually prevent 4(a)(6) investors from13 doing so 4(a)(6)13 investors13 should13 where possible have the same rights as accredited investors and causing sold13 ortransferred securities to be included in the holder of record count would more than likelyreduce13 their13 chances13 for liquidity

Page 28013 Intermediaries should ldquoconduct a review of the issuerrsquos offering documentsbefore posting them to13 the platform to13 evaluate whether they13 contain materially13 falseor misleading informationrdquo

We agree with the points raised by the Milken letter that the strict limits on funding portalactivities make them13 ldquotechnology-shy‐based platforms that are in many respects more akin to abulletin13 board or eBay than13 they are to a registered brokerdealerrdquo13 This is such a great example because eBay could not exist were it required to internally verify all seller claimsabout their items

Funding portals should not be saddled with liability for issuer statements Ifthe commission elects13 to13 prevent portals13 from13 establishing criteria for the kind of offeringsthey list the cost associated with verifying every statement made by hundreds of smallissuers would destroy the possibility for portals to make enough money to survive IfPortals are permitted to establish such criteria they will not list issuers seeking smallamount of capital to get off the ground because by definition they will lose money on themThis is not the13 statutersquos intent

-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐-shy‐

Thank you for the opportunity to comment on the proposed crowdfunding rules Please13 contact me at nickwefundercom or 508-shy‐308-shy‐7226 if I can provide any further help

Sincerely

CEO WefunderNicholas Tommarello


bull 2 No integration13 between13 Rule13 506 and13 4(a)(6)3 The $1 million investment limit on4(a)(6)13 fundraises13 should not be integrated with other exemptions Integration13 thatprevents startups from13 raising follow-shy‐on capital would potentially bankrupt the mostsuccessful rapidly growing startups and harm13 their investors

For example one13 startup13 on Wefunder13 raised13 $50000 seed funding via Rule13 50613 andsix months later raised13 an extra13 $14 million in venture capital to finance their rapidgrowth If they had raised via 4(a)(6)13 and faced integration13 issues that13 delayed their nextventure13 round bankruptcy would have been a likely outcome13 Another company13 which13 has already raised $10 million via Rule13 506 wants13 to13 reward13 their unaccreditedsupporters by letting them13 invest up to $100000 using 4(a)(6)13 Isnrsquot13 it less risky forunaccredited investors to invest13 after professional investors13 vet and fund13 the startup

Startups must also be able to fundraise13 in concurrent 506(c) and13 4(a)(6) offerings13 Founders in Silicon Valley are always meeting with potential investors13 If they13 canrsquotimmediately accept13 an offer because they have an open13 4(a)(6) round13 no founder13 of ahigh-shy‐growth startup will put their venture13 financing13 at risk by crowdfunding

bull 3 Flexible13 Oversubscription4 The oversubscription13 policy13 in the13 proposed rules13 shouldremain the same Founders13 often have multiple plans for how to13 accelerate13 growth13 ifthey receive additional unexpected funding13 They take the advice of Paul Graham aninvestor13 in over 500 startups13 collectively13 worth13 $144 billion5 who wrote13 ldquoIts a mistaketo have fixed plans in13 an undertaking13 as unpredictable as fundraising13 The right strategy in fundraising is to have multiple plans depending on howmuch you can raiserdquo6

Further13 issuers must be able to decide which investors are13 accepted13 Startups on13 ourplatform13 have seen investment applications from13 employees of competitors13 as well asclearly13 deranged13 individuals13 Startups will13 not13 use 4(a)(6) if they are forced to acceptinvestment from13 every online stranger in a pro-shy‐rata or first-shy‐come first-shy‐served13 basis13 Prohibiting startups from13 using their judgment serves no investor protection interest

II Suggestions13 for Improvements

The proposed rules13 reasonably balance investor13 protection with expanding capital forsmall business However13 the rules13 could be improved to better attract high-shy‐growth13 startups13 with alternate sources of capital13 These are the companies investors are mostinterested13 in and the ones who13 will create13 many of the jobs the statute was named after7

Our mission at Wefunder is to destroy the ldquoinsiderrsquos clubrdquo so that all Americans not justthe wealthy and well-shy‐connected13 can participate13 in high-shy‐quality private investments Butfor credible13 startups13 to13 consider using13 4(a)(6)13 three improvements must be made

3 Response to Request for Comment 2 amp 34 Response to Request for Comment 109 110 amp 1115 httptechcrunchcom20140113yc-shy‐pg-shy‐2014-shy‐update6 httppaulgrahamcomfrhtml7 httpwwwkauffmanorgnewsroom201308young-shy‐hightech-shy‐firms-shy‐outpace-shy‐private-shy‐sector-shy‐job-shy‐creation



























Sincerely




15

January13 30th 2014




























































































































8013 Intermediaries should ldquoconduct a review of the issuerrsquos offering documentsbefore posting them to13 the platform to13 evaluate whether they13 contain materially13 falseor misleading informationrdquo





Sincerely




























Sincerely




15

January13 30th 2014

































































































































Sincerely



January13 30th 2014

































































































































Sincerely

























































































































Sincerely



re:improvingregulationcrowdfundingtoattracthighqualitystartups2014 submissionviawebsite...

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