BitLicense: It's not just for New Yorkers

Periodically, Engine will invite policy experts to weigh in on specific topics with guest blog posts. Today’s expert is Peter Van Valkenburgh, Director of Research at Coin Center. As Bitcoin's leading advocacy group, it is Coin Center's mission to ensure that any regulatory reaction to digital currencies is based on a sound understanding of the technology. As the bitcoin ecosystem grows, we are keeping a pulse on the policy environment it faces as it disrupts age-old financial regulatory systems. One new regulatory system with major implications is New York’s recently approved BitLicense, which will go into effect August 8. If you have even the most broad interactions with bitcoin, we suggest you read the summary below - with one month to go until unlicensed businesses will be prosecuted, we want to make sure startups understand the potential impacts of the new law.  

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We’ve one month to go until the grace period ends and the BitLicense—New York’s new digital currency regulations—comes into full effect. What’s a BitLicense? The short of it is don’t get caught engaging in virtual currency business activity with a New York resident or visitor without one after August 8th!

If that sentence reads like a bad civics PSA or a Jaden Smith tweet, don’t worry - you’re not alone. The BitLicense is a confusing new regulation, but this is the top line: it can apply to your business even if you are not located in New York and even in some situations where you may not think you are offering digital currency transmission. So, in the spirit of not ending up on the wrong side of a prosecution, here are 8 things everyone involved with a digital currency business should know:

• Whether or not you run your business from New York has nothing to do with whether you need a BitLicense. The BitLicense isn’t interested in where you are; it cares about where your customers are. So if you have a New York resident using your website or app, or you have a California resident traveling in New York City using your product, you may need a license. That’s true even if you have no way of knowing that the user is in NY. There’s a federal law, the Bank Secrecy Act, that makes it a felony to operate a money services business in a state where you don’t have a license, and there is no “knowledge” requirement to that law. Take a customer who’s in New York but spoofing their IP to appear like they are from elsewhere? You could be violating a federal law—and facing prison time—without even knowing it.   

• You probably need a BitLicense if you do any of the following as a business: transmit digital currency; store, hold, or maintain custody or control of digital currency for another; buy or sell digital currency as a consumer business; or control, administer, or issue a digital currency. Therefore, asking whether you need a license is a process that involves asking whether any of these words—like transmit, store, or control—is an apt metaphor for something specific you do in your business. Holding the private keys to a customer’s bitcoin is the easier fact-pattern: “storing” and “holding” both sound like obvious metaphors for that technical activity. Maintaining and updating an app that helps a user store her own keys? That’s harder and you’d probably want to at least talk to a lawyer or seek clarification from DFS.     

• No one really knows what “administrating, issuing, or controlling” means in the context of bitcoin or other cryptocurrencies; if you think you might be doing these things maybe you should ask. The definition of a virtual currency business in this section of the regulation is tricky. It makes some sense in the world of centralized digital currencies, where the centralized company or entity creating the currency can decide when to issue new units of currency and how to control or administer their allocation. The section doesn’t make any sense in the world of decentralized currency like Bitcoin. Bitcoin has no definite “issuer,” “administrator,” or “controller.” People mine new bitcoins (“issuing?”), yes. Others write software that miners run (“administering?”). Others run nodes that help the P2P network communicate (“controlling?!”). Are any of these activities covered? Probably not: Benjamin Lawsky, the outgoing Superintendent of the DFS, repeatedly said that miners and software designers will not need a license. Trouble is, the law is the text of the regulation, not the speeches given by its author. That text is vague, so, again, the best advice is to ask a lawyer and get clarification from DFS regarding your particular facts and circumstances. Maybe we need an abbreviation for that answer. Let’s call it A(sk) L(awyer); S(eek) C(larification). AL;SC.   

• Awesome new tools, like multi-sig, may not be excluded from licensing. Cryptocurrencies can do pretty neat tricks, like dividing control over some amount of currency between two or more people. People in a bitcoin multi-sig transaction, for example, can effectively vote to decide where the money moves. It all happens with cryptographic keys that are linked to cryptocurrency addresses. So, if you run a business that only holds one key to some amount of bitcoin, and your customers hold the other keys, do you need a license? What if you could never even spend those bitcoins on your own, or lose them, or get hacked and have them stolen? Your business certainly isn’t like the traditional banks or money transmitters we talked about above—the technology limits your losses and makes you less risky!—but do you still “maintain custody or control,” as per the regulation? We’d like to think that the answer is no, because these tools are amazing innovations that provide security and limit consumer risk rather than create it. The safe answer: AL;SC.

• Nominal, non-financial uses are excluded but what that means isn’t crystal clear. The bitlicense has an exemption for companies that are transmitting “nominal” amounts for “non-financial uses.” This is seemingly aimed at exempting so called Bitcoin 2.0 or Blockchain companies that want to use cryptocurrency ledgers to record non-financial metadata—i.e. a document notary service or an identity validation tool. This may be where colored coins, app coins, or sidechain businesses could fit. But “nominal” isn’t defined, and neither is “non-financial,” so the prudent next steps for your blockchain business? AL;SC.    

• Software development is excluded as long as that’s all you’re doing. If you are writing an app that lets people check the price of Bitcoin, you’re home-free because of this exemption. But what if you write software for mining clients, and you also mine for fun? Or what if you write a mobile wallet app that stores users’ keys on their device? Or what if you are a core contributor to the protocol?! Are you really just writing software, and will DFS agree with that self-portrait? Sadly, and First Amendment problems aside, you should probably AL;SC.

• You can ask for a conditional license but there’s no clear guidelines for when it will or will not be granted, or how much easier it will be to get. If this is all starting to sound hard and expensive, take note: the BitLicense can be tailored to be lighter-touch and cheaper at the discretion of the Superintendent. This is called a “conditional license.” Unfortunately, however, there’s no obvious way to qualify for a conditional license. Some commenters in the drafting process asked for a formal threshold, something like “all companies under two-years old, and dealing with less than $5 Million in obligations annually can get conditional license.” Those thresholds didn’t make it into the final draft however, so if you want a conditional license . . . sorry . . . AL;SC.  

• If you need a license and get one, you’ll have to do some hard work keeping records, filing reports, and asking permission to make new products. Unlike normal money transmission licenses, a BitLicense comes with some special obligations. You’ll need to keep specifically formatted records of all your customer’s activities. You’ll need to file reports about transactions to New York in situations where you didn’t already have to file them with federal regulators like the Department of Treasury. You’ll need to ask permission if you make “material” changes to your apps or products, and if you decide to release any new products. The specifics requirements are far too complicated to learn in a blog post, you’ll need to AL;SC, a lot.

So what do you now know for sure with regard to the BitLicense? AL;SC! Ask a lawyer and seek clarification from the DFS. We can say this for sure: the BitLicense just drummed up a whole bunch of new business for the legal profession. We also know that it will be harder to operate a legal digital currency business than it will be to operate a traditional money transmission business—don’t forget those additional recordkeeping requirements and change-of-business requirements. These are some unfortunate new realities, and they make it hard to believe that this new law is really the pro-innovation regulation some politicians hoped or said it would be. Whatever it is, it’s here and the grace period ends in one month, so don’t be caught off guard. And if you’re bothered by all this, consider supporting organizations that are working with the state to improve regulations.

SEC Finalizes Rules for Title IV of the JOBS Act

Today, the Securities and Exchange Commission convened to vote on adopting rules to implement Title IV of the JOBS Act. The Commission voted unanimously, finally putting Title IV into effect nearly three years after the original legislation was signed into law.

Title IV addresses Regulation A, a securities registration exemption that allows private companies to raise a limited amount of capital without having to meet many of the onerous disclosure and reporting conditions required of publicly-traded companies. The JOBS Act gave Regulation A, (now reframed as Regulation A+,) new life by raising the offering cap from $5 million to $50 million. Some are calling  Reg A+ a kind of “mini IPO”, since it allows companies to raise funds from the wider public, including unaccredited investors, so long as their investment does not exceed 10% of their income or net worth.

The rules that were ultimately adopted divide Regulation A+ raises into two tiers, up to $20 million and up to $50 million. In the $20 to $50 million range, companies no longer have to register their securities with each state individually. The preemption of state blue sky laws, regulations that govern securities sales in each state, is being lauded as a huge win for the wider business and investment communities. These laws were a big reason why Regulation A was rarely utilized as a capital formation tool before the JOBS Act, when the maximum raise was capped at $5 million.

Nonetheless, companies seeking investment up to $20 million may still have to register their deals at the state level. The SEC’s rules include a coordinated state review process  managed by the North American Securities Administrators Association (NASAA), which could simplify the state-by-state registration process if implemented correctly.

“This mandate, often referred to as Regulation A+, is designed to help enhance the ability of small companies to access capital,” said White. “Small companies are essential to the livelihood of millions of Americans, fueling economic growth and creating jobs.” We couldn’t agree more with this statement. However, while Regulation A+ now offers a new financing option for growing companies, we still need alternative sources of financing for emerging startups seeking to raise far less than $20 million. These companies may still be subject to costly oversight under Regulation A+, especially if the proposed “coordinated review” process doesn’t streamline the system as promised.

The final piece of the JOBS Act—Title III crowdfunding from non-accredited investors—could help fill this gap for small, early-stage funding. However, the SEC has been unwilling to implement Title III crowdfunding thus far. And many experts in the wider startup and investment communities believe that even if the SEC were to enact the Title III rules it’s proposed, the costs of raising capital under Title III would limit its value to most startups.

Whether through Title III equity crowdfunding or some other approach, there continues to be a stark need for alternative financing options for entrepreneurs, particularly those from groups that have traditionally faced greater difficulty raising venture capital funds.

The SEC’s new Reg A+ is an exciting and important new funding mechanism. It will certainly help grow the startup economy and it opens participation in startup financing to the public like never before. But policymakers’ work is not done. They must do more to provide additional alternative pathways for creative and promising entrepreneurs to launch and finance the next wave of innovative startups.

States Pave Way to Equity Crowdfunding as SEC Stalls

As the Securities and Exchange Commission continues to stall in finalizing the long-anticipated crowdfunding and investment rules for startups and entrepreneurs, states have steadily been enacting their own laws to spur intrastate economic activity and open new avenues to capital. Maine is the latest state to pass a new crowdfunding law, which went into effect January 1, joining 13 other states that have passed crowdfunding legislation since 2012. These laws enable entrepreneurs building businesses in their state to raise capital in the form of equity or debt in a company, giving investors ownership in the businesses they choose to support.

Jess Knox, president of Olympico Strategies, a startup consulting group in Maine, believes laws like this one support the growth of the state’s budding innovation ecosystem. The new crowdfunding legislation complements Maine’s Seed Capital Tax Credit, a program designed to encourage private equity investments in eligible Maine businesses. Crowdfunding now opens investment opportunities for all of Maine’s 1.3 million citizens. “There are people who invest in their community in a variety of ways,” said Jess, and equity crowdfunding, “reduces barriers to people to become investors in their community and their state.”

Meanwhile, entrepreneurs and small business advocates in Minnesota are working with state officials to pass equity crowdfunding legislation there as well. The grassroots movement has named the legislative proposal, MNvest, which was recently introduced in the Minnesota state legislature. The group of business and community leaders behind MNvest believes their new law will  “allow ordinary Minnesotans to own a stake in emerging Minnesota businesses.” And from our travels to Minneapolis this fall, we saw for ourselves the thriving community of young technology companies there.

Plenty more states are joining the trend too: Virginia’s House of Delegates passed a bill last week, sending the proposed crowdfunding legislation to the state’s senate. Arizona and Colorado lawmakers recently proposed similar bills and Washington D.C. just authorized its first equity crowdfunding offering after finalizing rules in November.

Ultimately, however, many of these new financial tools are limited in their scope, because most state crowdfunding regulations restrict companies and their investors to the states in which they live and do business. Further, as one corporate lawyer and startup adviser explains, utilizing these intrastate funding tools may preclude businesses from pursuing some of the new funding opportunities provided by the JOBS Act such as general solicitation and a new SEC exemption for raising funds, Regulation A+. While Maine’s new law does allow entrepreneurs to raise money from investors outside the state, the SEC exemption the statute relies on can require issuers to provide the state with lengthy disclosure documents. Thus, while companies may be afforded broader reach, that could come with much higher costs.

Despite the inherent limitations of intrastate funding, these laws demonstrate the appetite for expanding capital opportunities for emerging businesses across the nation. Traditional sources of capital investment are often out of reach for burgeoning entrepreneurs outside the coasts or established tech hubs like Austin. While venture capital soared in 2014, the highest amounts of investment are nonetheless concentrated in these areas. These laws also indicate a willingness to allow middle-income Americans to take part in the growth of our startup economy. Without final rules on the JOBS Act from the SEC, startup investing nationwide remains limited to accredited investors, individuals with a networth of at least $200,000.  

We hope officials in Washington are paying attention to the flurry of state-level activity and take the hint. Capital access is critical to sustaining the startup economy. Their lack of action leaves much-needed sources of capital untapped.

The JOBS Act Isn’t Just About Crowdfunding

Entrepreneurs and investors may have to wait until 2016 for the true equity crowdfunding that the JOBS Act was meant to establish. But the SEC will likely soon finalize rules that open another funding avenue for small businesses. Regulation A+, an amended version of a securities registration exemption referred to as Regulation A, could serve as a viable capital source for small, emerging growth companies. Though it hasn’t been as well-publicized as other provisions of the JOBS Act, startups would be wise to pay attention.

The Securities Act, which lays out the laws governing how companies and investors can buy and sell shares, authorizes the Securities and Exchange Commission to decide which types of securities are subject to onerous registration requirements. Recognizing that smaller, private companies may not have the resources to comply with full SEC registration rules, the SEC created an exemption to its registration rules, called Regulation A, that  allows non-publicly traded companies to file a sort of mini-registration with the SEC and avoid the kind of full-blown disclosure and review that publicly-traded companies undergo. Using Regulation A has other advantages, too: for instance, unaccredited investors can participate in Regulation A offerings alongside accredited investors. (You can read our post on the accredited investor definition here.)

Despite its benefits, the previous version of Regulation A has not been widely used. Before the JOBS Act, companies could raise a maximum of $5 million, but relying on this exemption required issuers to navigate the dozens of varying blue sky laws, state laws that regulate the buying and selling of securities. Though such laws play a needed role in protecting consumers from fraud, the resulting complexity and costs of complying with the different filing and review regulations in every state simply wasn’t worth it for most companies. With the JOBS Act, Congress gave Regulation A (now Regulation A+) new life by raising the offering cap to $50 million. What’s still a sticking point, however, is whether the SEC’s final rules will include provisions that preempt state blue sky laws. That could determine whether this underused investment tool becomes a true financial opportunity for small businesses.

As for equity crowdfunding (outlined in Title III of the JOBS Act), while it remains a promising avenue for startup funding, especially in filling the need for pre-seed and seed capital, the SEC may be nowhere near issuing final rules (despite our emphatic pleas). Industry experts also worry that some of the disclosure, compliance, and financial auditing costs required under proposed SEC crowdfunding rules may ultimately deter companies from using Title III, as other, less costly funding options are available. For now though, without final rules from the SEC, both Regulation A+ and Title III crowdfunding remain unavailable to capital-seeking startups. We and thousands of entrepreneurs around the country still eagerly await the agency's long-anticipated action.

It’s not too late to add your name to our letter urging the SEC to finalize the JOBS Act. While the letter has been sent to the SEC, add your name to show support and receive occasional JOBS Act updates from Engine.

2014 Year in Review — The JOBS Act: What’s Happened and What’s Next for Startup Capital Access

This post is one in a series of reports on significant issues for startups in 2014. In the past year, the startup community's voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world's policy goals in 2014, from net neutrality to patent reform, remain unfulfilled. Stay tuned for more year-end updates and continue to watch this space in 2015 as we follow the policy issues most affecting the startup community.

With overwhelming bipartisan support, the Jumpstart Our Business Startups Act—or the JOBS Act—was signed into law on April 5, 2012, and for entrepreneurs and startup investors, the bill was easily one of the most promising pieces of new legislation to come out of Congress in some time. The JOBS Act updated Securities and Exchange Commission rules dating back to the 1930s to enable growing companies—from seed stage to IPO—to more easily raise capital. In the past two years, parts of the JOBS Act have proved effective and even essential for startups and investors while other portions of the act, notably public equity crowdfunding, continue to languish in the SEC rulemaking process. We’re hopeful that the intent of the JOBS Act—to open new avenues for capital formation and spur great participation in the startup economy—can finally come to fruition in the new year.

At the very least, 2014 proved the JOBS Act’s “IPO On-Ramp” to be a major success, whether or not the bill’s authors can take direct credit. Aiming to revitalize the struggling IPO market of recent years, this provision created special rules for emerging growth companies approaching IPO, including loosening disclosure requirements. In 2013, the rate of IPOs began to accelerate, and 2014 saw the most IPOs since the late nineties tech bubble, including tech startups GoPro, Zendesk, and Grubhub. As Steve Case writes in the Wall Street Journal, taking companies public is significant not only for a company’s owners and investors, but also for the economy as a whole: most job growth at emerging-growth companies comes post-IPO. If the economy continues to recover, we hope 2014’s banner year is just the beginning for the role tech startups can play in reviving the economy.

Another significant section of the JOBS Act lifted the ban on general solicitation, meaning companies can now publicly advertise that they’re raising money. Historically, entrepreneurs could only seek investment from people with whom they had pre-existing relationships. Soliciting investors online or over social media was strictly prohibited. This ban was officially lifted in September 2013 and within the past year, hundreds of startups like Scoot Networks in San Francisco and Dinner Lab in New Orleans have embraced this new approach to finding investors. Anyone on the Internet can now browse through lists of hundreds more startups seeking funding on crowdfunding portals like Angel List, Circle Up, SeedInvest, Flashfunders, and Alphaworks.

Yet compared to traditional capital-raising options taking place behind closed doors, general solicitation makes up an extremely small portion of the offering market. According to the SEC’s private offering filings from September 2013 to September 2014, only around 3% of issuers chose the general solicitation route.

That so few businesses are taking advantage of these new funding opportunities may be the result of poorly defined rules. What is properly considered “general solicitation” and just how businesses must go about verifying that their investors are accredited (a requirement of the act) has not been clearly articulated by the SEC. Further, proposed SEC rules made public in September of last year hint at onerous additional disclosure requirements that would make this offering much less attractive.

Though there is uncertainty surrounding the act’s general solicitation provision, it’s at least seen the light of day. Other highly anticipated portions of the JOBS Act continue to be held up in the SEC rulemaking process. Equity crowdfunding, which would allow for non-accredited investors to buy small amounts of equity in startups, awaits final rules, as does another kind of offering referred to as Regulation A+, a sort of public offering for smaller private companies attempting to raise up to $5 million. Whether the SEC has been bogged down in finalizing Dodd-Frank rules, or they’re taking extraordinary caution and due diligence in crafting crrowdfunding rules, the exact cause of the remarkably long delay is unknown. Whatever the source of the SEC’s inaction, we were frustrated with the SEC and decided to rally the startup and investor community around the issue, telling the SEC that it’s time to act.

In November, Engine crafted a letter signed by over 200 entrepreneurs and investors to the SEC, urging it to finalize rules for equity crowdfunding and Regulation A+ raises, a loud and clear reminder of the widespread community of supporters and stakeholders awaiting the Commission’s action. Nonetheless, the SEC has given no indication of a timeline for issuing rules, though some have speculated those rules may not be released until later in 2015.

Meanwhile, many experts in the investment community believe that even if SEC does finish the job, between the current statute and any additional SEC requirements, equity crowdfunding will be too costly and cumbersome for startups raising just small amounts of capital. Spending the time and money to file tax returns, audit financial statements, and provide detailed accounts of business information could make crowdfunding an expensive undertaking that just isn’t worth the potential rewards, given the other, less costly fundraising avenues available to entrepreneurs. Thus, as the SEC continues to stall, interest grows in returning to Congress to draft better legislation. If the SEC fails to promptly issue rules in the new year, folks in Congress may begin writing a new version of the JOBS Act that addresses concerns with the crowdfunding provisions and limits the SEC’s discretion to issue implementing rules.

In 2015, we hope to see our government step up with a renewed, spirited policy approach that opens new avenues for capital access. Whether the SEC can finally get the job done or Congress can come together like it did in 2012 to pass a revived version of the JOBS Act, policymakers should ensure that promising businesses of any size, and committed investors of any net worth, can contribute to and grow our economy.  

Entrepreneurs and Investors Sign Letter to the SEC

Today, we sent a letter signed by more than 200 entrepreneurs, investors, and members of the startup community to the Securities Commission to tell the agency it’s time it fulfills its statutory obligation and finalize rules to make the JOBS Act a reality. You can find the full text of the letter with its signatories below.

It’s been over two years since Congress passed the JOBS Act, yet much of its promise remains unfulfilled, because the SEC has simply not done its job. The Commission is now an astounding 700 plus days past the statutory deadline to issue rules that will enable equity crowdfunding for companies attempting to raise up to $1 million a year as well as additional capital-raising options for small private companies.

Until the SEC acts, opportunities for entrepreneurs to raise capital and for potential investors to contribute equity to new businesses remain grossly limited. Without these new rules, only a small subset of Americans who qualify as accredited investors can participate in driving capital to thousands of small, diverse, and promising startups across the country. Take Dinner Lab, a New Orleans-based startup: when CEO Brian Bordainick decided to tap into his existing customers and food-lovers as prospective investors, he had to turn half of them away because they didn’t qualify. And Alphaworks, a new equity crowdfunding platform with just a small number of deals, has already had to turn away hundreds of potential investors from contributing to companies on its site.

Capital access is often an entrepreneur’s greatest challenge, especially for businesses who find themselves on the outside the traditional hubs of venture capital and angel investors—whether they’re based in parts of the country where startup communities are just beginning to prosper or they’re simply not well-connected to investment circles. And while 13 states have now taken it up themselves to legalize equity crowdfunding and spur economic activity, these state laws only allow investment within a state’s borders.

The JOBS Act could unleash a new wave of entrepreneurship across the country. Yet without these rules in place, much of the JOBS Act remains an empty promise. We call upon the SEC to make what the JOBS Act set out to do a reality as mandated by Congress over two years ago. It’s time it finalize the rules without further delay.

Engine's Letter to the SEC

Want to join our efforts? You can still sign the letter and learn more about what we're doing at www.engine.is/jobsact.

A New, More Inclusive Approach to Startup Funding

You can also read this post on Medium.

Many immigrants who come to the U.S. to work in technology dream of starting their own companies, but the limited visa system makes this ambition near impossible to achieve. Other aspiring entrepreneurs may be U.S. citizens, but simply can’t incur the risks and costs of starting their own companies without a reliable salary or health insurance. The founders of a new angel fund, Unshackled, rethought what it means to support entrepreneurs who may face these obstacles despite showing great promise. The fund they’ve created will consequently enable a greater diversity of passionate entrepreneurs to take the leap into building their businesses.

“We saw an opportunity to be more inclusive from the funding side,” explained Manan Mehta who, together with his business partner, Nitin Pachisia, launched Unshackled just weeks ago. As experienced and solution-oriented entrepreneurs themselves, Manan and Nitin built an innovative kind of angel fund.

In addition to investing in the startup teams selected for funding, Unshackled will sponsor visas for entrepreneurs already authorized to work in the U.S., but “shackled” to their current employers. Most high-skilled immigrants come to the U.S. on H-1B visas, but if they leave their sponsoring company, they’re no longer eligible to remain in the U.S. This restriction thus bars talented, would-be entrepreneurs from devoting meaningful time to starting a new company. Madhuri Eunni, for instance, is originally from India and worked at Sprint for nearly 10 years. But when she decided to launch her own venture, she uprooted from the U.S. and moved to Toronto where she could more easily and quickly secure a visa.

Visa sponsorship isn’t the only benefit Unshackled offers. They also pay founding teams steady salaries and provide health insurance, aspects that may attract other potential entrepreneurs who would otherwise be unable to pay their student loans, rents, or health costs out of pocket while committing resources to their startups. This unprecedented fund liberates founders from what are debilitating yet unavoidable challenges for many people.

“The funding model has been the same for the last 50 years. How can we modernize it to reflect realities in our country?” asked Manan.

With a $3.5 million fund financed by heavyweights in the investment community, Unshackled plans to work with up to 25 teams of two to three founders over the next couple of years.

Like many other potential investors, Unshackled will evaluate a prospective startup’s founding team, business plan, and prototype in deciding whom they’ll accept. Selected startup teams will then become employees of Unshackled and receive a working space in the Bay Area, a salary that allows them to cover living expenses in the region, and benefits. Unshackled will cover legal costs, visa sponsorships--if and when necessary--and manage banking. And the fund will also connect entrepreneurs to an experienced network of mentors and advisors from the very beginning.

Unshackled is now accepting applications for prospective teams and Manan says they’re already attracting impressive proposals, which doesn’t surprise him. The high-skilled immigrants Unshackled may appeal to, as Manan points out, have “already had to beat out the best in their country,” to even be accepted to study at a U.S. university or acquire one of the very limited visas. They’ve already proven they “have the hustle and the passion to become the best entrepreneurs.”

And data overwhelmingly supports this: in one study the Kauffman Foundation concluded that immigrants are nearly twice as likely to start businesses in the U.S. as are native-born Americans.

Eventually, Congressional immigration reform could both expand and ease the visa process for high-skilled workers and aspiring entrepreneurs. President Obama’s recently announced plans for reform expressly recognize the enormous talent pool among our immigrant population and the economic importance of diversity among entrepreneurs. And one initiative the president has proposed could provide founders with a special exemption from the company sponsorship requirement if founders can prove they’ve created jobs. Yet a true “startup visa” similar to those in other countries starting to attract and retain entrepreneurial talent and innovation will require congressional action.

Meanwhile, Manan and Nitin plan to enable a pool of entrepreneurs who at this point in time may otherwise be excluded from accessing capital and growing their businesses here in the United States.

“I hope we can prove to not only the venture community, but the global community that America can retain the top talent by giving everyone an equal opportunity in innovation,” said Manan.

The SEC Could Drastically Limit the Pool of Startup Investors

It’s no secret that the availability of capital is critical for early stage startups. While entrepreneurs may find some initial financial support by tapping into the generosity of friends and family, once those pockets dry up, they often turn to angel investors—individuals who put their own money into what they see as promising ventures. While a small cadre of wildly successful angel investors have made millions from betting early on companies like Google and Twitter, thousands more across the United States are investing in early-stage startups in dozens of industries every day.

According to the Angel Capital Association (ACA), angels provide 90% of outside equity raised by startups. And in 2013, this group invested $25 billion in 71,000 companies. That’s impressive. But this number could drastically change depending on if and how the Securities and Exchange Commission acts after their review of the accredited investor definition, a status most angels depend on to pursue these private investments.

Whether the Commission should revise the definition of accredited investor was one of the topics at issue during the SEC’s Government-Business Forum on Small Business Capital Formation held last Thursday at its DC headquarters. The Dodd-Frank Act—the 2,300 page financial regulation bill—mandates, among other things, that the SEC undertake a comprehensive review every four years of what some consider an outdated definition.

By current SEC standards that were originally adopted in 1983, an individual is qualified as an accredited investor if she makes over $200,000 in annual income, her household has made over $300,000 in income, or she’s worth at least $1 million in assets, excluding her house. While this income level far surpasses the median household income in the United States, over 7 million individuals or nearly 4 million households still qualify, for now.

One proposal on the table at the SEC suggests adjusting these thresholds for inflation, which means you’d need to make around half a million dollars in order to invest your own money in a startup. According to numbers analyzed by the ACA, raising the income bar for inflation would disqualify nearly 60% of the accredited investor population. A decision like this could significantly reduce the pool of capital available for early stage startups.

This possibility is alarming. So it wasn’t surprising to hear many of the participants from the business community at the SEC’s forum express outright opposition to raising this threshold, not only because it would eliminate existing investors, but also because an income threshold to begin with misses the point. The entire reason for defining this class of people is to protect them from making poor investment choices.

Yet income is hardly an indicator of financial sophistication in undertaking risky investments, especially in the world of novel startups and high tech. By today’s standards it would be illegal for a bio-chemistry PhD making $190,000 a year to invest equity in a biotech startup on a site like Angel List. And if adjusted for inflation, someone making even twice that amount would still be prohibited from investing.

Voices in the startup and investment communities have suggested an alternative set of criteria which could include years of experience, licenses issued by a qualifying test, or relevant degrees to measure investor sophistication rather than only relying on an income threshold that offers virtually no insight on an individual’s understanding of capital markets.

Whatever the ultimate criteria, there’s clear opportunity for the SEC to expand participation in the startup economy, and facilitate capital formation, by allowing those with both interest and knowledge in innovative new companies to support the entrepreneurs building them.

At the end of the forum, attendees gathered to submit recommendations to the SEC as they review the definition. We hope the Commission takes these recommendations seriously. If not, they could end up significantly stifling a community that’s been an enormous asset for the startup economy, instead of expanding opportunity in it.

And whether anybody can invest equity in startups through crowdfunding—well, that’s another question the SEC will have to consider, but rules to regulate the equity crowdfunding market have only been proposed thus far. As far as we can tell, the SEC first wants to figure out who’s accredited. Visit engine.is/jobsact to learn more about the crowdfunding part of the JOBS Act and why we think that’s important, too.

The JOBS Act Could Open Startup Investment to More Americans, but it’s Stuck at the SEC

One of the core promises of the 2012 JOBS Act is that it would open the doors for investment to many more Americans, and—in turn—many more worthy startups. Currently, only a so-called “accredited investor” can make investments in startups, which means that only individuals making $200,000 in annual income over the past two years or with over $1 million in assets, excluding their home, qualify to take part in investing in the startup community. This high threshold unfortunately guarantees that average Americans cannot take advantage of investment opportunity and, in turns, limits the money that makes its way to growing companies.

The JOBS Act intended to change this, but as the new lively podcast, Startup, explains, the JOBS Act has been “stuck” at the SEC for over a year now. The SEC simply hasn’t issued the  rules it’s required to under the law that would make this kind of investment—what’s been called equity crowdfunding—widely accessible. This is why we’re urging the SEC to finish the job Congress set out for them when it passed the JOBS Act in 2012 and allow supporters of great ideas to invest in ventures they care about, regardless of income level.

Take for instance Nadia, one of the podcast Startup’s listeners. As explained more fully in the episode, Nadia reaches out to the podcast producers and offers to invest in their new podcasting startup company (more on that below). It’s only then that the company’s founders realize that, as ridiculous as it sounds, they actually can’t take Nadia’s money.

If you haven’t listed to Startup, a new podcast from former Planet Money and This American Life reporter Alex Blumberg, then find time in your day to check out Startup. The “public radio journalist turned entrepreneur” Blumberg’s newest venture is a podcast network called Gimlet Media, a startup based on the idea that there’s a massive market opportunity in well-produced, journalistic storytelling via podcasts. And fittingly so, Blumberg’s producing a podcast, called Startup, on the efforts behind building this new company. In each episode, he documents the challenges familiar to many entrepreneurs—like raising money. You should listen to the whole series.

In the most recent episode, where we meet Nadia, Blumberg explores financing this new venture utilizing avenues provided by the 2012 JOBS Act.

As Blumberg explains, before the JOBS Act was passed in 2012, the SEC prohibited private companies from publicly soliciting investment. Businesses of any size seeking funding needed to have an established, pre-existing relationship with a defined accredited investor in order to raise money from them, or as Blumberg succinctly concludes, “Only rich insiders could invest in these companies.”

In an age of social media, near seamless access to information, and well, podcasts, this rule was clearly outdated. And on September 23, 2013, the SEC lifted the ban on general solicitation, making the primary intent of Title II of the JOBS Act effective. (Title I of the law addresses how startups pursue IPOs and went into effect immediately after the bill’s passage.)

The law now allows for the mass marketing—posting on social media, a crowdfunding website, or in a podcast—of these more common security offerings. Consequently, Blumberg invites listeners over the air to invest in Gimlet Media: “If you share in our vision, and you want to share in our business,” he asks you to check out their crowdfunding portal to invest. But here’s the thing: even still, you have to fit under the limiting definition of an accredited investor.

So while the JOBS Act originally set out to change the accredited investor requirement and make investing a possibility for a wider range and income level of Americans, this hasn’t yet happened. Experts have proposed rules based on experience or investor education as alternatives, yet there’s been no sign of progress at the SEC. “Today, to become an investor through one of those public solicitations, you need to be the exact same rich person you were before the JOBS Act was passed,” says Blumberg.

Blumberg’s business, Gimlet Media was able to raise $200,000 from accredited investors in the seedround announced on the podcast. Nonetheless, “there are still a lot of regular people who are not allowed by law to invest in our company,” says Blumberg, and for that matter, hundreds of other exciting ventures around the country.

We’re telling the SEC it’s time they issue JOBS Act rules and fulfill the promise of what Congress set out to do when it passed the bill two years ago: booster the startup economy and spur participation from a wider range of Americans. Sign and share our letter at engine.is/jobsact.

Why We're Writing the SEC

In 2012, Congress passed the Jumpstart Our Business Startups Act with resounding bipartisan support. For startups, entrepreneurs, and investors, the JOBS Act is easily one of the most exciting pieces of legislation to come out of Congress in the past few years. Among other things, the bill allows businesses—principally startups—to go public more quickly and raise money more easily. And many of its provisions have already had a significant impact on startup growth and capital formation. In the year after the Act passed, the rate of IPOs increased by 58 percent.

When Congress passed the JOBS Act, it recognized that the pre-existing laws dating back to the 1930s no longer reflected today’s financial system. It recognized that the growth of startups is essential to America’s long term economic vitality. And it recognized the potential for new investment platforms to spur participation in the startup economy from a wider range of Americans.

Despite this, in the two years since its passage, much of the JOBS Act’s promise remains unfulfilled. This is not because of bad legislation, but simply because the Securities and Exchange Commission has not done its job.

Two crucial pieces of the Act—1) making it legal to raise capital through online crowdfunding; and 2) allowing for companies to openly seek investment—will only take full effect if the SEC puts forth implementing rules. Such rules will clarify how companies can pursue these new investment channels that are vital to growing our country’s startup economy. 

It’s been over two years since the passage of the bill and months since the comments period has closed on SEC’s proposed rules. Yet, we’ve seen nothing from Commission. Without these rules in place, much of the JOBS Act remains an empty promise.

We now call upon the SEC to fulfill its statutory obligation and make what the JOBS Act set out to do a reality.

On behalf of entrepreneurs, startups, investors, and crowdfunding platforms, we’re asking the SEC to finalize the rules without further delay.

Check out our letter to the SEC, follow #JOBSActNow, and make sure you’re signed up for our email updates. 

RFP-IT: Making It Easier for Government to Support Startups

Our Federal Government spends a lot of money. I mean, a lot of money. And with that money, they purchase many goods and services. Increasingly, many of those purchases have intersected with technology: technology that makes existing products more efficient, solutions for new and existing problems, new infrastructure to help the government manage its processes, and so on. In fact, the government buys so much stuff, whole industries (yes, plural) have been built with the singular goal of selling to the government. While these processes and industries are largely pretty boring, every once in a while something happens, the system stops functioning properly, and it becomes news.

That is exactly what happened with the mangled rollout of the much-maligned healthcare.gov website late last year.

Among the many problems uncovered by the process, we realized that those systems in place to spend the aforementioned sums of money are not always best at finding the most efficient projects, programs, and services to buy. In fact, healthcare.gov was just latest high-profile example of the problem. Many, if not most, of the issues faced in federal government procurement are situated squarely in the fact that these laws and regulations represent a different time, and have been made archaic by advances in technology.

Stepping into that breach with an innovative solution of her own is Silicon Valley’s own representative, Anna G. Eshoo. The Democratic Congresswoman, a longtime supporter of the technologies that lead the world from her home district, today introduced the Reforming Federal Procurement of Information Technology (or, RFP-IT) Act which seeks to make these processes more open, easier to navigate, and more accessible to startup companies looking to sell to the Federal Government.

The bill, co-sponsored by a bipartisan coalition of Rep. Eshoo’s House colleagues, has three specific goals. First, it will enhance competition in the marketplace by enabling more small businesses to bid on federal IT contracts without having to spend thousands on compliance costs by lifting the threshold for a streamlined contracting process from $150,000 to $500,000. According to Eshoo’s summary of the bill, “expanding the use of simplified acquisition procedures will shorten procurement lead times and help level the playing field for start-ups and small businesses – a critical factor in an IT marketplace that is characterized by the constant influx of new entrants and rapidly evolving IT products and services.”

Second, the bill takes a number of steps to promote innovation, including codifying the popular Presidential Innovation Fellows program, and asking the General Services Administration to recommend how to slim-down certain procedures.

Finally, the bill moves to ensure more accountability by establishing a Digital Government Office within the Office of Management and Budget, strengthening the existing CIO office in the White House and improving transparency and oversight.

You can read the full text of the (very short!) bill here. We thank Rep. Eshoo and her colleagues for highlighting one of the ways our government functions, and working to bring more efficiency and innovation into the process.

New Legislation Revives JOBS Act Intentions

When I sat in the Rose Garden in April 2012 watching President Obama sign the JOBS Act into law, I remarked to myself, and anyone who would listen, just how far “the Internet” had come in terms of polished political activism and policy coherence in such a short amount of time: The JOBS Act was passed in six weeks. As originally intended, JOBS Act would have opened up new avenues for investment in early-stage startups, providing new ways for entrepreneurs to secure the funding they need to turn their ideas into reality.

But, just two years later, there are many within this community who have been left disheartened by the haphazard implementation of such an important law, and have also become hamstrung by the limitations put on them by the Securities and Exchange Commission -- in stark contrast to the spirit of that legislation.

The crowdfunding for equity provisions have yet to become a reality. And, perhaps more importantly, provisions on general solicitation aimed at making it easier for startups to widen their investor base in a more rational way, as opposed to the previous, wink-and-nod style capital formation, have made the situation worse to the point of being untenable for many early-stage companies, especially those who grow through accelerator programs.

Luckily, news from Washington this morning signals the beginning of a solution we hope will make the JOBS Act work for startups, angel investors and all those who wish to join their ranks. Dubbed the Helping Angels Lead Our Startups, or HALOS, Act (clever, because they’re supporting angels!), this important legislation, offered in a bipartisan manner in both houses,but led by Illinois Democrat Rep. Brad Schneider and Ohio Republican Rep. Steve Chabot, would change the Regulation D rules governing General Solicitation to once allow “Demo Days” to continue once again.

Demoing early stage startups and their products has been a key way for companies to accelerate growth, but the unintended consequences of JOBS Act’s rulemaking at the SEC have complicated the process by which these startups can present their groundbreaking ideas. The current status quo stands in total contrast to the original intent of the legislation, and unfortunately we need a further fix.

Luckily, Reps. Schneider and Chabot have been joined by Sens. Chris Murphy (D-CT), Patrick Toomey (R-PA) and John Thune (R-SD) to provide that legislative fix in the form of the HALOS Act. You can read the (short) bill in its entirety here. We encourage you to reach out to the co-sponsors and thank them for their foresight here, as well as to your own representative and Senators urging them to pass this important legislation.

California Tax Change Will Hurt Entrepreneurs and Job Creation

The removal of a state tax incentive for investment in startups is likely to make capital scarcer for California companies most poised for high growth—harming job creation and an already vulnerable state economy in the process. The change breaks with current federal policy and puts California’s entrepreneurs at a relative disadvantage to those in other states. We estimate that investments in California’s startups will decline by a conservative 2 percent each year from the tax change—translating to a drop of at least $85-$127 million annually based on 2011 data.

In December, the California Franchise Tax Board (FTB) announced changes to capital gains tax exclusions on Qualified Small Business (QSB) stock holdings. The change stemmed from an appellate court ruling that found minimum in-state asset and employment requirements during the holding period of the QSB stock unlawful under the U.S. Commerce Clause. Rather than remove the in-state asset and employment threshold requirements, the FTB instead chose throw the baby out with the bathwater and eliminate the capital gains tax exclusions altogether—effectively increasing state taxes on investments held in QSBs from 4.65 percent (under a 50 percent exclusion) to 9.3 percent (under zero exclusion).

The real attention grabber has been the FTB’s choice to make the change retroactive to 2008—with penalties and interest—despite the fact that investors were following what was then current law. While investors are up in arms over this, entrepreneurs may actually have the most to lose moving forward. 

Capital is the lifeblood of startups. This move by the FTB, which amounts to a tax hike for investors, will likely make capital scarcer for young businesses. Fewer startups means less job growth; for the last 30 years, young companies have provided all of the net new job creation in California and the United States as a whole.

Matching an existing framework with data on California, it’s possible to generate a conservative, back-of-the envelope, estimate of investment startups in the state might lose. This drop would likely have a negative impact on the California economy—not only have startups been the engine of new job creation in the state, but the QSB capital gains tax exclusions were targeted especially at businesses with the highest growth potential.

Estimating Investment Impact of Tax Change

A 2012 Kauffman Foundation report provides the framework for estimating the impact of tax changes on early-stage investments in startups. The report yields a conservative estimate of the additional investment in startups that would occur if 100 percent of the capital gains held at least five years were excludable from federal taxation, compared with an earlier exclusion of 50 percent. In other words, the report tells us how much investments of this nature might increase when taxes are reduced.

We employ that same framework here but move in the opposite direction, answering the question: how much would investments in startups decline from what amounts to a tax increase? Then we apply this estimate to data on investments in California startups.

Let’s unpack the potential investment response to the tax increase by using a hypothetical example. The Kauffman report states that a reasonable assumption for a real pre-tax return on privately held investments in startups in the current interest rate environment is 10 percent. At least one prominent angel investor group agrees, and so do we. 

Under this assumption, an investment of $100 would be worth $161 after five years on a pre-tax basis. If the tax rate were 4.65 percent, as it was under the previous 50 percent exclusion in California, that same investment would be worth $158, for an average annual return of 9.6 percent. Under a 9.3 percent tax rate regime (zero exclusion), that same investment would be worth $155—returning 9.2 percent per year on average. Capital gains in QSBs are currently fully excludable from federal income taxes and were in 2011 as well—the base year used in our analysis.

A change in the effective tax from 4.65 to 9.3 percent results in a 4 percent drop in the average annual return on the investment (from 9.6 percent to 9.2 percent). Based on previous research on the topic, and conversations with experts in the field, the Kauffman report concluded that the responsiveness (the “elasticity”) of such a change in the rate of return on aggregate investments is a conservative 0.5—or half the change in return. In other words, the 4 percent decline in a typical return would result in a 2 percent drop in investment overall. Two percent may not seem like a big decrease, but when applied to a large base like in California, it can be.

To see how big of a dent 2 percent could make, the baseline estimate of equity invested in California startups is tabulated from three sources of “seed funding”:

Seed-Stage Investments in California Startups (2011)

Source of funding	$ (in Billions)
Venture capital	$0.5
Angel investors	$2.8-$4.4
Entrepreneurs' equity	$0.8-$1.2
Total	$4.1-$6.1

 Sources: PricewaterhouseCoopers MoneyTree, Center for Venture Research, Silicon Valley Bank, Kauffman Foundation; Engine calculations

In total, an estimated $4.1-6.1 billion was invested in California seed-stage startups in 2011. It is reasonable to assume that essentially all of these seed funds were invested in traditional C corporations—the type of company that is most suitable for startups and is eligible for the QSB tax deduction. For scope, that amounts to between 32 and 47 percent of such investments in the entire United States.

With a baseline of $4.1-6.1 billion, and a 2 percent reduction in investments from the tax change, we’re left with a decline of $85-127 million in investment in startups each year in California. Now, $85-127 million per year may not sound like a whole lot of money relative to total investments in startups broadly, but over ten years it totals between $853 million and $1.27 billion. Moreover, whether we are talking about an annual or decade-long framework, considering that seed-stage companies may receive as little as $15,000 in funding (though a typical amount is in the hundreds of thousands), we’re talking about a lot of companies that may be adversely affected.

What’s more, this is almost certainly an underestimate of the value of investments in California startups and the effect the tax change would have. To begin, the Kauffman report reiterates that its framework is likely to yield conservative estimates. Most notably, it states that the elasticity estimate of 0.5 is likely conservative—meaning that for each 1 percent decline in a typical rate of return, overall investments would fall by more than 0.5 percent.

Secondly, since QSB status in California applies to companies with up to $50 million in assets, many businesses beyond the “seed/startup stage” would qualify. As a result, we are surely undercounting the pool of investment in the state that would be affected by the tax change.

Third, the 2011 statutory state tax rate applied here (9.3 percent) is lower than the marginal rate charged to those with incomes above $1M (10.3 percent), which would apply to a non-trivial number of investors in startups. These investors would be adversely affected even more than our rough estimates indicate.

Finally, the Kauffman framework was previously applied to federal tax—which would be applied uniformly across states. Holding federal tax rates and all other factors constant, other states would have an advantage against California. According to the Angel Capital Association, twenty states have tax incentives for angel investors and California isn’t one of them. For example, states like Wisconsin are actively partnering with investors to increase investments in startups.

In addition to all of this, Proposition 30, which was adopted by California voters in November, raises state income taxes to varying degrees on individuals who earn more than $250,000 per year. Though this is outside the scope of our analysis—both because the year studied pre-dates that particular tax hike and because arguing the merits of state tax policy broadly goes beyond what we’d like to accomplish here—it will further compound the issue, potentially leading to even more declines in investments in California startups.

Economic Impact

Though data are not readily available to directly tie investments in QSB-type businesses specifically to the economic impact in California, data from the Census Bureau can illustrate the important role that new businesses play in job creation in the state.

California Private-Sector Annual Net Job Creation by Firm Age (1980-2010)

 

Source: U.S. Census Bureau, Business Dynamics Statistics

Between 1980 and 2010, businesses in their first year added an average of 398,193 new jobs each year. Companies aged one year or more, as a group, subtracted an average of 192,501 each year during that same period. This occurred because the forces of job destruction (through business contractions and closures) were stronger than the forces of job creation (through firm births and expansions) for businesses older than a year old as a group. In other words, outside of startups, net job creation in California was negative during the past three decades.

In addition to the job creation dynamics of new firms, among existing businesses it is young firms (those less than five years old) that have the biggest effect on job creation. Taken together with the chart above, we can say that new and young firms are responsible for all net new job creation during the past few decades.

Conclusion

The FTB’s tax change is likely to reduce investments in California’s startups by a conservative 2 percent each year, translating to $85-$127 million fewer investments annually based on 2011 data. This can’t be a good thing for the economy or job creation in the state. At a time when the state unemployment rate hovers around 10 percent, California can hardly afford to place any of its companies at a competitive disadvantage—especially not those poised for high growth. On top of that, a recent survey of small businesses sponsored by the Kauffman Foundation found California to be among the least friendly for entrepreneurs. 

Though it is understandable that state authorities are searching for ways to improve the fiscal situation of California, this isn’t a good way to go about it. The entire point of providing a tax incentive for these investments is to make them more attractive to investors, relative to others, precisely because seed-stage investments are very risky and because startups have important spillovers to the economy—namely that they fuel economic growth and job creation.

Moving forward, not only should state policymakers reinstate the QSB capital gains exclusion, they should extend it—making capital gains on these investments fully excludable. There is already precedent for this at the federal level too: in 2010 Congress temporarily made these investments fully excludable and recently extended this policy through 2013. If Washington can see the wisdom in doing this, why can’t Sacramento?

Ian Hathaway is the research director at Engine

CircleUp Cofounder Rory Eakin on JOBS Act

The passage of Jumpstart Our Business Startups Act in February was praised by entrepreneurs and investors as a long overdue update to the startup financial regulation landscape. The JOBS Act eases access to investors for startups raising capital by removing the ban on general solicitation and allowing equity crowdfunding. However rules need to be set by the Securities and Exchange Commission before these provisions can be taken advantage of by startups.

Rory Eakin, cofounder of CircleUp, a startup that connects startups and investors, testified at a Joint Session of the Committees on Oversight and Government Reform and Financial Services September 13 to urge government to rapidly implement provisions of the bill. He spoke to Engine about his experience as an entrepreneur engaging directly with policymakers about the issues that affect his startup. Eakin’s testimony served as a reminder of the spirit of the bill as well as a timely nudge to keep the implementation process in motion, and demonstrates the value of startups participating in the policy making process.

Engine: How was the experience of testifying?

Rory Eakin: It was tremendously exciting, and pretty encouraging to see the level of engagement and attendance from the two subcommittees and on both sides of the aisle. There was a lot of enthusiasm for the JOBS Act. Many people have different perspectives on the ways it should be implemented, but there’s a lot of unity on the overall mission to support startups and to help them grow.

E: In your testimony you talk a lot how JOBS Act might help to open the investor market up. How do you think this would help your business and other startups?

RE: One of the most important messages we were bringing to light at the hearing is how concentrated the early stage investment market is. When you look at the data, a lot of venture capital and angel investment is concentrated in technology startups and in specific geographies. The real benefit of the JOBS Act for CircleUp is being able to spread investment to broader geographic areas and to areas not historically associated with early stage investment. CircleUp connects high growth startups to networks of accredited investors -- the JOBS Act represents a great opportunity to lift some of the burdens associated with investment in companies or geographic areas not previously well served by investor networks.

E: The rules just came out for the changes to general solicitation last month -- what impact do you think this provision will have for startups?

RE: We haven’t seen a direct benefit yet because we’re still waiting for implementation. Title II (the change in general solicitation) to us is the most important part of the bill, because it will enable companies to reach out to their consumers, and others very familiar with the brand already, to inform them that the company is raising capital and there are opportunities to invest. It’s a way of making a more efficient marketplace where buyers and sellers can come together. We want there to be an ecosystem that attracts high quality companies and high quality investors. We’re also anxiously awaiting the rules for Title III, crowdfunding, which will be very important for a number of other startup companies in gaining access to investor capital which will allow their businesses to grow and thrive.

E: What advice would you have for other entrepreneurs about engaging with policy that directly affects their business?

RE: There’s a lot of receptivity in Washington for hearing the perspective of startups. We found our way to the panel through our own blog. It was a relatively smooth path from engaging with the issues through writing about the subject to then providing testimony. Legislators have so much on their plate -- the role of the startup in this situation is to make it accessible for them to understand how policy and legislation affects startups both negatively and positively. We take our knowledge on these issues for granted, but translating them for the legislator audience is key -- which is an important part of what you do at Engine. Implementation of JOBS Act is an ongoing issue, and we hope more folks pay attention to and recognize they can be influential in DC - I’d love to connect with anyone who is looking to do that through twitter @circleup.

Read or view Eakin’s full testimony

UberX Threatened by DC Council Proposal

The Council of the District of Columbia is slated to vote tomorrow on a price-setting measure that, if passed, will block competition in the district’s transportation market. Uber, an Engine member and a startup that will be immediately affected by the proposal, is urging its users and concerned parties to call, email, and tweet to members of the council. For more information on how you can help, read Uber co-founder Travis Kalanick’s blog post. A petition has also been launched to oppose the measure. 

The so-called Uber Amendment contains language that sets a minimum fare for sedan drivers offering transportation services. Startups like Uber, who offer a popular and efficient service, would not be permitted to charge less than five times the fare of a taxicab. Sedan prices would be set by law higher than those of competitors. Under the proposal, UberX, a lower-cost car service the company unveiled July 4, would not be able to operate in the Washington DC market.

Not only does the proposed amendment stifle competition, it poses a danger to a healthy and vibrant economy by preventing the growth of startups and the jobs they provide in the DC market. Engine urges its members to support healthy competition and disruptive startups like Uber by voicing your concerns with council members.

Update 7/10/2012: After receiving thousands of notes from Uber customers, the DC Council has dropped its plans to add the minimum fare amendment. Report in full at the DCist.

DC City Council Set to Vote Against Lower-Cost Transportation

The City Council in Washington DC is set to vote tomorrow on a measure that would stifle progress in the transportation industry -- specifically it would prohibit startup company Uber from offering a competitive service in the sector. Join us in calling members of the Council to ask them to protect innovation by voting against this proposal. 

With a long, blighted history of corruption and malfeasance in the taxi industry, the city of Washington has long stood against progress in a vital area of transportation for the Nation's Capital. Earlier this year, Uber, who we're proud to say joined us last month for our Startup Day on the Hill event, launched their innovative, disruptive service in Washington alongside many other cities throughout the U.S. and around the world. Almost immediately, this move was met with resistance from the Taxi Commission, Mayor Vincent Gray and the City Council in an attempt to protect an existing taxi industry which has been fighting modernization for some time.

Tomorrow, the Council is looking to take another step backward against modernization of transportation in the District with the impending passage of a so-called "fare floor" for Uber riders. The proposal, according to an email sent earlier this afternoon by Uber CEO Travis Kalanick to the product's users, would set rates no less than five times higher than a minimum taxi rate. Instead of investing in a modern taxi fleet, or welcoming innovation in transportation in DC, Mayor Gray and the Council will instead seek to make an alarming move against innovation and a popular small business in DC by forcing rights sky high and making programs like the recently-announced UberX -- a lower-cost alternative to Uber's popular black car services that uses hybrid cabs -- impossible in the Nation's Capital.

Amidst the furor surrounding the impending votes, there is still an opportunity to change hearts and minds and keep transportation in Washington free for innovation and modernization. If you live in the District, or use Uber to get around DC, we are encouraging you to call members of the DC Council and register your displeasure with the proposed regulations. Here are their numbers, we hope you'll make the call.

Phil Mendelson (Chairman), (202) 724-8064, pmendelson@dccouncil.us
Mary Cheh, Ward 3, (Chairperson of Committee on the Environment, Public Works and Transportation), (202) 724-8062, mcheh@dccouncil.us, @marycheh
Michael Brown, at-large, (202) 724-8105, mbrown@dccouncil.us,
@cmmichaelabrown

Jim Graham, Ward 1, (202) 724-8181, jgraham@dccouncil.us, @jimgrahamward1
Jack Evans, Ward 2, (202) 724-8058, jevans@dccouncil.us, @jackevansward2
Muriel Bowser, Ward 4, (202) 724-8052, mbowser@dccouncil.us, @murielbowser
Kenyan McDuffie, Ward 5, (202) 724-8028, kmcduffie@dccouncil.us, @kenyanmcduffie
Tommy Wells, Ward 6, (202) 724-8072, twells@dccouncil.us, @tommywells
Yvette Alexander, Ward 7, (202) 724-8068, yalexander@dccouncil.us, @cmyma
Marion Barry, Ward 8, (202) 724-8045, mbarry@dccouncil.us, @marionbarryjr

David Catania, at-large, (202) 724-7772, dcatania@dccouncil.us, @cataniapress
Vincent Orange, at-large, (202) 724-8174, vorange@dccouncil.us, @vincentorangedc

Federal Trade Commission Review of Facebook-Instagram Gives Pause

The Federal Trade Commission is probing Facebook’s $1 billion purchase of Instagram, according to a May 10 Financial Times report. That the government is looking into the deal is no surprise -- the Hart-Scott-Rodino Act compels companies striking large deals to notify the FTC and Justice Department. While this first look is procedural, a deeper review may signal regulatory concerns about the deal.

Facebook’s purchase dwarfs the threshold for a “large” transaction under antitrust law, which uses an inflation-adjusted figure that was set at $68.2 million for 2012. So the Instagram purchase is literally a “big deal” to regulators, which means there is a 30-day waiting period before the deal can be consummated, or potentially much longer if the FTC decides to apply further scrutiny.

The two regulatory authorities -- the FTC and DOJ -- review transactions to ensure that companies do not possess “market power” that would harm competition. What does this mean? A post-merger company isn’t permitted to raise prices, reduce innovation or output, or otherwise harm consumers. It is important to note that it is harm to consumers, not competitors, that regulators primarily monitor. A transaction’s impact on competitors raises regulatory concern where it hits consumers, such as when a company controls supply of a good, which opens up the opportunity to unilaterally raise its price. An unnamed source suggested to the New York Times Bits Blog that the deal presents a threat to mobile advertising competition, potentially affecting prices.

A May 15 Securities and Exchange Commission filing by Facebook has ignited some speculation that the federal government is initiating a further review of the purchase. Facebook amended its S-1 ahead of the company’s initial public offering to extend the estimated closure of the deal. The filing originally anticipated the deal would close by the end of the second quarter, but the amended filing states that the deal is “expected to close in 2012.” (see page 66) Facebook also agreed to pay a $200 million termination fee to Instagram if the deal falls through.

In-depth antitrust review would likely play out over several months. Reuters reported May 10 that the FTC made inquiries to Google and Twitter about the transaction. Twitter also was rumored to have considered purchasing developer Tap Tap Tap’s Camera+ app after Facebook struck the Instagram deal. Neither the companies nor the agency are commenting on the process, so it is impossible to tell whether moves by other companies may have influenced the agency’s questions.

While a lot of noise has been generated about the regulatory probe, is it really likely that the government will pursue an antitrust injury created by the purchase of Instagram? The Obama administration has increased antitrust enforcement, particularly on horizontal mergers -- deals where companies acquire their direct competitors (think AT&T buying T-Mobile). Vertical mergers -- where one company purchases another in a different line of business -- have tended to see less competitive scrutiny (think Ticketmaster merging with Live Nation).

Moving to block the purchase of Instagram may pose a variety of new questions to antitrust experts, but should startups be concerned about the reports of an FTC probe? At this point, the likely answer is no. Most purchases won’t face the regulatory scrutiny that a buyer like Facebook generates. Between the company’s multi-billion dollar IPO, privacy investigation by the FTC, and acquisition activity, Facebook has repeatedly drawn attention from the government in 2012.

Government scrutiny of large companies’ acquisitions may be of growing importance to startups going forward, especially where industry-leading firms such as AT&T and Verizon aim to make acquisitions and face FTC or Justice Department review. Delaying the close of a deal can impede the development of small businesses and harm startups making the next step in the evolution of their businesses. Engine will update as the review progresses.

Midweek Policy Highlights

This week in Washington: the FTC goes deeper on privacy, Facebook amends its SEC filing to account for potential regulatory review, and immigration and spectrum remain hot topics.

Finance

Facebook amended its S-1 filing with the Securities and Exchange Commission ahead of its initial public offering May 15. The filing extended the expected closure date of the $1 billion Instragram purchase from the second quarter of 2012 to 2012 generally. The move could signal deeper scrutiny by regulators on the competitive impact of the deal. Currently, the transaction is in a procedural 30-day review under the Hart-Scott-Rodino Act premerger notification program. Engine will continue to monitor the review and its potential impact on future startup acquisitions.

Privacy

Associate director of the Federal Trade Commission’s division of privacy and identity protection Maneesha Mithal spoke at a Congressional Internet Caucus event on Monday about the agency’s recent report on privacy. She highlighted recent settlements with social networks including MySpace that involved companies’ adherence to their privacy policies.

Edward Felton, the agency’s chief technologist on leave from Princeton University’s Center for Information and Technology Policy, also blogged this week on the technical details of recent moves by the government to address privacy on social media platforms.

Immigration

Engine blogged earlier this week on moves by the Department of Homeland Security and Congress that may help startups gain access to more highly-skilled immigrant workers. Senator John Cornyn is said to be introducing a bill that would boost the number of visas available to immigrants with graduate degrees in science, technology, engineering, and mathematics fields.

Spectrum

Federal Communications Commission chairman Julius Genachowski is slated to give a speech May 17 at 10:30 EST on spectrum reallocated to support “medical body area networks” (MBAN). GE Healthcare and Philips Healthcare are scheduled to demo MBAN devices. Repurposing spectrum for new technologies is a major priority to open innovation across industries and MBAN is a major development in the healthcare field. A live stream can be viewed here.