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.

Report on Impact of Copyright Law on Investment

Engine, Fifth Era Release Report on Impact of Copyright Law on Investment

89% of investors said legal environment makes them less likely to invest

Engine and Fifth Era, an advisory and investment firm, today released a new report entitled "The Impact of Internet Regulation on Early Stage Investment". The report makes a compelling case for copyright reform, and will be used by Engine and other advocates to push Congress to enact reform legislation this session.

In 2014, Fifth Era surveyed 330 investors in eight countries around the world (Australia, France, Germany, India, Italy, Spain, the UK and the US) to assess the degree to which future legal environment might impact their willingness to invest in Digital Content Intermediaries (DCIs). These countries represent 56% of world GDP and 25 %of world population.

The survey found significant concerns among investors in all eight countries around a number of issues, including:

• Legal Environment - Globally investors view the legal environment as having the most negative impact on their investing activities with 89% of the investors surveyed saying it had a modest or strongly negative impact. A large majority of early stage investors around the world feel that the current legal environment has a more negative impact on their investing than either a weak economy or an increased competitive environment.
• Regulatory Ambiguity - When asked what it was about the legal environment that so concerns investors and impacts their investing behavior, the ambiguity in the current regulatory environment was identified as of significant concern. 88% of worldwide investors surveyed said they are uncomfortable investing in DCIs that offer user generated music and video given an ambiguous regulatory framework.
• Uncertain and Potentially Large Damages - In all eight countries surveyed, early stage investors view the risk of uncertain and potentially large damages as of significant concern as they look to invest in DCIs. 85% agree or strongly agree that this is a major factor in making them uncomfortable about investing in DCIs.
• Secondary Effects of IP Infringement Regulations - The second area of consistent concern worldwide was secondary liability. 78% of investors said they would be deterred from investing in DCI’s that offer user uploaded music or video should new anti-piracy regulations increase the risk that their investments would be exposed to secondary liability in IP infringement cases.
• These findings highlight the risk that problematic copyright regulations might greatly curtail or cut off capital from the early stage companies that are driving global innovation, GDP growth and new job formation.

The full report can be found at:

http://www.fifthera.com/perspectives-blog/2015/3/20/6enku92k815grtyz9vfpmn83lqhfsx

Engine, Fifth Era Release Report on Impact of Copyright Law on Investment

89% of investors said legal environment makes them less likely to invest

Washington, DC – Engine, a non-profit advocacy and research organization that promotes startups and entrepreneurship, and Fifth Era, an advisory and investment firm, today released a new report entitled "The Impact of Internet Regulation on Early Stage Investment". The report makes a compelling case for copyright reform, and will be used by Engine and other advocates to push Congress to enact reform legislation this session.

In 2014, Fifth Era surveyed 330 investors in eight countries around the world (Australia, France, Germany, India, Italy, Spain, the UK and the US) to assess the degree to which future legal environment might impact their willingness to invest in Digital Content Intermediaries (DCIs). These countries represent 56% of world GDP and 25 %of world population.

The survey found significant concerns among investors in all eight countries around a number of issues, including:

• Legal Environment - Globally investors view the legal environment as having the most negative impact on their investing activities with 89% of the investors surveyed saying it had a modest or strongly negative impact. A large majority of early stage investors around the world feel that the current legal environment has a more negative impact on their investing than either a weak economy or an increased competitive environment.
• Regulatory Ambiguity - When asked what it was about the legal environment that so concerns investors and impacts their investing behavior, the ambiguity in the current regulatory environment was identified as of significant concern. 88% of worldwide investors surveyed said they are uncomfortable investing in DCIs that offer user generated music and video given an ambiguous regulatory framework.
• Uncertain and Potentially Large Damages - In all eight countries surveyed, early stage investors view the risk of uncertain and potentially large damages as of significant concern as they look to invest in DCIs. 85% agree or strongly agree that this is a major factor in making them uncomfortable about investing in DCIs.
• Secondary Effects of IP Infringement Regulations - The second area of consistent concern worldwide was secondary liability. 78% of investors said they would be deterred from investing in DCI’s that offer user uploaded music or video should new anti-piracy regulations increase the risk that their investments would be exposed to secondary liability in IP infringement cases.

These findings highlight the risk that problematic copyright regulations might greatly curtail or cut off capital from the early stage companies that are driving global innovation, GDP growth and new job formation.

The full report can be found at:

http://www.fifthera.com/perspectives-blog/2015/3/20/6enku92k815grtyz9vfpmn83lqhfsx

About Engine

Engine is a non-profit organization that supports the growth of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues. The startups we represent are among the most innovative and fastest growing companies in the country, fundamentally altering and challenging entrenched business models, ideas, and institutions across all industries. These are the businesses that drive our economic prosperity, create jobs, and improve our lives. Visit engine.is to learn more about Engine.

About Fifth Era

Fifth Era is an advisory and investment firm based in the San Francisco Bay Area. Working with the founders, executive teams and boards of our advisory clients we develop compelling strategies with an emphasize on executable plans – not lofty concepts that an organization can not make happen. Visit fifthera.com to learn more about Fifth Era.

###

Taking the Tour Down South

Engine is thrilled to be participating in Revolution’s third Rise of the Rest Tour along with the teams from UpGlobal and Google for Entrepreneurs. Rise of the Rest is a road show to highlight and support entrepreneurship across America. The cities lined up for this May’s trip include Richmond, Raleigh-Durham, Charleston, Atlanta, and New Orleans. In addition to convening civic leaders, local entrepreneurs, investors, and innovators, the visit to each city includes a pitch competition among local startups. The winning company will receive $100,000 in funding from Revolution Ventures to launch or grow its business.

As Revolution’s Steve Case put it, these are “some of America’s oldest cities where entrepreneurs are creating some of the newest businesses, innovations, and jobs.” The Engine team on board the bus will be especially interested in learning how each city is uniquely fostering entrepreneurship and supporting the growth of innovation and technology jobs. During the past two tours we've seen that regions take different approaches to expanding their entrepreneurial ecosystems - whether building on the success of incumbent industries, benefiting from supportive local government policies, or tapping into the talent pool of nearby universities. The stories from America's Southeast will be sure to offer new perspectives important to our national policymakers on issues from connectivity to capital access.

We’ll be in Richmond, Virginia on May 4th; Raleigh-Durham, North Carolina on May 5th; Charleston, South Carolina on May 6th; Atlanta, Georgia on May 7th; and New Orleans, Louisiana on May 8th. If you're an entrepreneur, a community organization, or government leader and want to make sure we visit your startup or hear your story along the way, please visit the Rise of the Rest site or reach out to anna@engine.is.

VCs Agree: Startups Need Tools to Fight Patent Trolls

Today, one hundred forty early stage investors from around the country joined Engine and the App Developers Alliance in urging Congress to pass meaningful patent reform legislation this session. Their position is consistent with the opinion of the broader venture community that patent trolls are harming the ecosystem in which they operate - reflected in a study by Robin Feldman of NVCA members,. Patent trolls make an uncertain patent system even less hospitable to innovation. And, as reported by Catherine Tucker, this means less financial investment.

Patent litigation abuse is a growing problem, with patent trolls having filed 2,791 new lawsuits in 2014 - up 500% from 2005. It’s also a problem that disproportionately harms startups. 82% of troll activity targets small and medium sized businesses, and 55% of troll suits are filed against startups with revenues of less than $10 million.

In their letter to Congress, the investors write: “[W]e find our portfolio companies facing a dangerous patent troll problem. When a troll sues, or even threatens, a small startup, the results can be disastrous. Many of us have seen young companies fail in the face of such threats. In fact, a recent survey found that 70% of VCs have portfolio companies that have received patent demands, the majority of which come from so-called patent trolls. This is not sustainable.”

Engine and these investors agree that we need legislation targeted at the patent troll’s business model – threatening small businesses with ambiguous claims and taking advantage of asymmetries in the patent litigation system to force settlement.

The current system does not take into consideration a new generation of innovators and tech entrepreneurs. The massive influx of patents in this particular space creates more confusion as to what’s already been invented and who is infringing - and this confusion builds on the large amount of uncertainty that already accompanies patent litigation.

Enter the Innovation Act: a bipartisan bill that was recently reintroduced by Rep. Goodlatte, aimed at making patent litigation a more fair assessment of infringement rather than a tool for intimidation. The Innovation Act is carefully tailored so as not to weaken patents but rather require plaintiffs to bring better cases in a number of key ways:

• By requiring judges to consider end-of-case fee-shifting; the looming threat of fees will pressure bad actors to act more “reasonably” from the beginning of the case in order to avoid the possibility of paying the defendant’s fees.
• By limiting a troll’s ability to drive up the cost of discovery (and by default increase the time it takes to complete this step) early in the case, the language addresses a frequently used method for leveraging the high cost of this step early in a suit to extort settlements.
• By requiring a more comprehensive complaint from the plaintiff at the beginning of the case, the defendant will not only be properly informed but the “reasonableness” of the plaintiff’s claims will be clearer.

These provisions set out better litigation practices that will lead to more efficient litigation. And better litigation reduces the burden for plaintiffs, defendants, and the courts.

At the moment, startup defendants do not have access to justice in the courts. Most simply can’t afford the ongoing costs of patent litigation. If everyone is forced to settle, without invalidating the patent, we feed the beast and encourage a growing number of startup casualties.

The one hundred forty VC partners that signed today’s letter are part of the growing chorus in favor of real patent reform. But we need to make sure everyone’s voice is being heard by Congress, to combat the powerful entrenched interests that are opposed to change. So please go to fixpatents.org to learn more about the problem, and to use our handy tool to tweet at your representatives. Together we can stop patent trolls and protect the future of American innovation.

Engine Response to Release of Net Neutrality Rules

Today, the FCC released its long-awaited Open Internet Remand Order that establishes the strongest net neutrality protections the Commision has ever enacted. While the rules are not perfect, they are an incredible victory for the many startups and advocates that fought so hard for the past year against some of the most well-funded corporate lobbying interests in the nation to preserve and protect the open Internet.

The Order is critically important for two main reasons: first, the FCC took the politically difficult step of reclassifying broadband under Title II of the Communications Act—essentially labeling broadband Internet as a “common carrier” service—in order to build its new rules on a legally secure foundation. While the FCC’s prior net neutrality orders had important protections that supported the growth of the Internet we enjoy today, the Commission has repeatedly seen its rules thrown out in court due to a failure to provide an adequate legal framework supporting the rules. The order’s reclassification of broadband as a Title II service is a necessary prerequisite for strong rules, as the court in Verizon v. FCC noted. The FCC had the courage to stand up to the powerful telecom lobby and do what was once considered politically impossible, and for that, all Internet users should be grateful.

Secondly, the Order contains strong, bright-line net neutrality rules and demonstrates a clear recognition of how important the open Internet is to startup activity. The FCC’s use of flat bans rather than case-by-case adjudication in dealing with paid prioritization, throttling, and blocking is meant to relieve “small edge providers, innovators, and consumers of the burden of detecting and challenging instances of harmful paid prioritization.” As the Commission recognized, bans on ISP discrimination are useless to startups if these small, cash-strapped companies must bear the burden of challenging violations. In addition, the order creates a “no-unreasonable interference/disadvantage” standard that is meant to give the FCC the flexibility to address future threats to the open Internet. It is unclear at this point whether the FCC’s general discrimination standard will prove effective in blocking future ISP activities that undermine net neutrality. Still, it is encouraging that in considering whether to allow these practices, the FCC will evaluate their impact on innovation and competition. Since the central value of an open Internet is the freedom to innovate and compete on the quality of one’s ideas rather than the size of one’s legal team, the FCC is right to put the concerns of innovators at the center of any inquiry into discriminatory ISP practices.

The rules, however, are not without fault. As we expected, the Order does not impose a flat ban on zero-rating schemes. Without such a ban, carriers may enter into agreements with large edge providers to exempt data from those providers from consumers’ data caps. Considering more than half of all smartphone users with data capped plans report altering their online behavior because of these caps, startups that have to compete with zero-rated companies will be at a huge competitive disadvantage, and future innovation may be stifled as a result. Similarly, the Order is somewhat unclear on how it will treat interconnection disputes, though it appears that the FCC will review claimed abuses on a case-by-case basis.

All in all, the Order released today is a monumental victory for Internet freedom. There is still significant work left to do fighting the inevitable legal challenges and congressional meddling that will seek to undo the FCC’s actions, but the plan appears to offer strong rules built on a solid legal foundation—the cornerstones of any successful net neutrality plan.

Tell Congress: It's time to #fixpatents

There’s never been a more critical need to fix our broken patent system than there is right now. Patent trolls filed 2,791 new suits in 2014, up 500% from 2005, and 82% of troll activity targets small and medium sized businesses.

That’s why Engine is ramping up our ongoing efforts to pass meaningful reform legislation. We’re starting with the relaunch of fixpatents.org—a website that will educate and mobilize both startups and individuals around patent reform.

We also released a new white paper (with an accompanying executive summary) detailing the patent troll problem and the need for action by Congress, the courts, and the U.S. Patent and Trademark Office. The paper discusses the very real impact of patent trolls on the startup community, the current state of patent litigation, and why we need legislation now.

Conversations in Congress are ongoing, and we are cautiously optimistic that a bill will pass this session. But we need legislation that is multi-pronged, closing the many litigation loopholes patent trolls use to force meritless settlements. At the same time, we can’t weaken the powerful—and affordable—alternatives to litigation that were set out by the America Invents Act to challenge bad patents. Together, these provisions will equip startups and small businesses with the tools they need to fight back in the courts, keep innovating, and building a competitive economy.

Engine and our partners are pushing for targeted, comprehensive legislation to help startups fight the patent troll problem in the courts—legislation like the Innovation Act introduced by Rep. Goodlatte in January. If we’re going to win this fight, Congress needs to hear from the individuals and small businesses that are disproportionately affected by the troll problem.

So please go to fixpatents.org and use our handy tool to tweet at your Representative and Senators, urging them to pass a reform bill this session.

The Mothers of Tech: How One Organization Supports Moms to Stay and Succeed

You can also read this post on Medium.

Your company’s talent will probably have kids. That’s a fact that Tina Lee wants everyone to know. Tina is the founder of MotherCoders, a non-profit that provides a tech orientation program for moms. Another fact: 81% of women become moms. Tina thinks moms are one demographic that too often gets overlooked in the conversation about how to increase diversity in technology fields.

Not just women, but mothers in particular, are an enormous population with insight, perspective and influence. MotherCoders makes that case explicitly on its homepage, pointing to the fact that moms represent a $2.4 trillion market. “And with many of them already online and using technology, their participation in driving innovation can result in better products and services for everyone.”

 It’s clear that the tech industry can’t afford to miss out on mothers as valuable contributors. Yet both anecdotal evidence and data indicate that tech companies both large and small can be inhospitable for expecting, new or even seasoned mothers.

In a recent survey of 716 women who left the tech industry, two thirds cited “motherhood” as the primary reason. Whether companies had bad or no maternity leave policies, “lack of flexible work arrangements…or a salary that was inadequate to pay for childcare,” women who become mothers have faced significant strains in staying and succeeding in tech jobs. Even Sheryl Sandberg had to ask Sergey Brin to designate parking spots for expectant mothers at Google—he admitted that it hadn’t ever occurred to him.

“I just have so much empathy for moms who’ve had to step out of the workforce,” said Tina, who has years of experience as an IT consultant and a technical recruiter, an M.A. in Learning, Design & Technology from Stanford’s Graduate School of Education, and programming skills she’s picked up along the way. However, when she wanted to gain more proficiency after having her first child in 2011, she couldn’t find a resource that worked well for her as a working mom. Weekend workshops and weeknight meetups conflicted with her parenting responsibilities and the online classes she tried after her second child was born weren’t conducive to her learning style.

Needless to say, in most environments, Tina was the only mother with young children, exacerbating her feelings of loneliness and frustration. “I came from tech and understand tech. I’m not afraid of it, and I was having this many problems?”

In 2012, Tina launched MotherCoders in San Francisco in an effort to create an open and supportive community of moms either entirely new to technology or interested in relaunching their careers in tech. MotherCoders offers a series of eight Saturday classes to introduce students to major themes in computer programming. By the end of the course, students have built a personal website, learned about the technology landscape and tools driving innovation, and connected with women—many of them moms, too—who expose students to the many career possibilities that tech skills enable, from full stack engineering to user experience design.

In addition to fostering an open and supportive space, for a little extra money MotherCoders also provides onsite childcare, a benefit very few, if any, of the more mainstream technology education programs offer.

Two classes of women have now graduated from MotherCoders and each of the 13 graduates has taken a different path. Some moms have used MotherCoders to prepare themselves for intensive tech education bootcamps while others have used the skills they gained to grow their own businesses.

Tina is now figuring out how to scale the program to attract more students, and far beyond San Francisco. She’s received inquiries from mothers across the U.S. as well as in Ireland, New Zealand, and India who face similar challenges, and she wants to build a curriculum and an infrastructure that could support these women too. This includes attracting more donors to support the organization’s mission.

Meanwhile, more Silicon Valley companies have stepped up and re-evaluated their company policies in efforts to retain talented women. The Atlantic reported that many leading tech companies, like Apple, Facebook, Google, and Yahoo, have some of the most generous parental leave policies is the U.S., across industries. And even smaller companies are starting to follow suit.

That’s a start, but the industry has a long way to go. Beyond parental leave, childcare has to be an integral part of the equation, along with a broader cultural shift in the way employers and fellow employees view women who become mothers in their careers.

 “Employees have to have peace of mind about their kids to do good work,” Tina explained, “It’s a systemic problem to women participating fully in our economy and women being able to lean in. The motherhood penalty is real. The fatherhood bonus is infuriating.” 

It’s time companies see motherhood as an asset. MotherCoders instills women with the skills and the confidence to prove it.

We Won the Internet! What’s Next?

This post originally appeared in re/code.

*****

For everyone who cares about the future of an open Internet, today is a day of celebration. The Federal Communications Commission’s vote for net neutrality will not only allow today’s startups to compete and grow and create new jobs, it will also allow future generations of innovators to develop world-changing technologies that we can’t yet even imagine.

This victory was especially meaningful for the thousands of startups whose combined voices convinced the FCC to take action. Many find themselves wondering where we go from here, and how we can use that newfound power to drive positive change in the future. To answer that question, let’s look at how we got here, and what the net neutrality fight has taught us.

More than just SOPA/PIPA 2.0

For many observers, the Internet’s massive response to 2011’s SOPA/PIPA legislation represents both the founding moment and the high-water mark of the tech community’s political engagement. The scope and coordination of the online protests that followed introduction of those bills surprised lawmakers who had not realized that tech companies were able to muster such powerful civic engagement.

The net neutrality movement that has dominated headlines for the past year struggled at first to break free from comparisons to SOPA/PIPA — even within the tech policy community, many doubted that Internet users would generate enough momentum to reverse the FCC’s initial watered-down plan.

How quickly things change. Starting last fall, net neutrality began to gather steam behind an online protest — the “Internet slowdown” — that echoed SOPA/PIPA’s “Internet blackout.” More than four million commenters weighed in with the FCC, an overwhelming majority of which supported a proposal to reclassify broadband as a common carrier service — an idea once considered preposterously unlikely amongst the telecom elite of Washington, D.C.

And after numerous attempts by big telecom to snatch some victory from the jaws of defeat, the FCC voted today to approve the most comprehensive net neutrality plan in history, one rooted in the Commission’s Title II common carrier authority.

Be proactive

The net neutrality effort resembles the SOPA/PIPA movement in several ways. Both involved an unexpectedly strong public response to a policy that would have undermined the continued vitality of the Internet ecosystem. Both were spurred on by digital activists and online, grassroots community engagement.

But in other ways, net neutrality represents the next phase in the Internet community’s political maturity. While SOPA/PIPA involved convincing Congress not to act (read: to behave as it normally does), the net neutrality movement had to convince three unelected officials to adopt a policy that was fiercely opposed by an industry far more well-funded and adept at D.C. lobbying than the MPAA. This time, against all odds, tech put forward an affirmative agenda, and won.

The tech community is made up of innovators and entrepreneurs — people who see yes where others see no. We need to bring that same attitude to or political engagement, working towards policies that make things better, not just fighting back against potential harm.

Stay at the table

SOPA/PIPA and net neutrality both showed that the tech world can effectively mobilize and react when confronted with existential threats. But if the tech community wants to take the next step in shaping the political landscape in which it operates, we must be willing and able to set the agenda. To do this, we must engage with Washington more regularly, and pay closer attention to seemingly smaller issues that nonetheless impact how the Internet functions.

Of course, most startups simply don’t have the time or resources to spend influencing policy that big telecom and other entrenched industries do. That’s where organizations like Engine can help, maintaining regular dialogues with policy makers and harnessing the combined voices of hundreds of startups. Which brings up our next lesson …

Small startups speak with a big voice

Unlike during SOPA/PIPA, many of the larger and more established tech companies stayed out of the net neutrality fight all together. That left it to smaller startups to take the lead in convincing both the FCC and elected officials to support net neutrality.

This made it much harder for opponents to argue against Title II without appearing to be against startups — and the good jobs they create all over the country. And while net neutrality proved to be a surprisingly partisan issue, in general, both parties want to be known as “the party of tech,” and are eager to be on startups’ side.

This should prove an advantage in some upcoming fights: Both patent reform and high-skilled immigration already find support on both sides of the aisle. And many of the issues that will impact the tech world in the coming years don’t yet have clearly drawn political lines, giving us all a chance to proactively define them as bipartisan.

Forge partnerships outside of tech

Today’s victory was the result of a massive team effort that included not just tech organizations like Etsy, Kickstarter, Vimeo, and Foursquare, but also diverse groups like the National Association of Realtors, the Future of Music Coalition, and the National Hispanic Media Coalition. This allowed us to simultaneously articulate the importance of an open Internet to high-tech startups and traditional mom-and-pop businesses; to independent media companies and civic organizations; to students, artists and working families.

As the walls between the tech industry and every other aspect of American life continue to disappear, we need to make clear to policy makers that these are not just tech issues. These issues affect Americans from all walks of life. And the way we can do that is by continuing to build diverse coalitions and looking for partners in unexpected places.

With net neutrality, the tech world has emphatically proven that its voice can move mountains in Washington. If we want to put that voice to more regular use, the opportunity is limitless. Now it’s on all of us to figure out how we want to use it next.

Statement on Historic Net Neutrality Vote

 

 

Statement from Engine Policy Director Evan Engstrom

Re: Historic FCC Net Neutrality Vote

 

Today the FCC took a momentous step to secure the future of an open Internet. With today's vote the FCC has stated loud and clear that the Internet must remain a level playing field. This decision will not only allow today's startups to compete and grow and create new jobs, but it will also allow future generations of innovators to develop world-changing technologies that we can't yet even imagine. And while these rules may not prevent all future exploitation by Internet Service Providers, they are a tremendous victory for the Internet community in its efforts to fight discrimination.

We're grateful to Chairman Wheeler and Commissioners Clyburn and Rosenworcel for their commitment to net neutrality. And we also know that none of this would have been possible without the unprecedented efforts of thousands of startups around the country. It was their hard work that turned back a potentially devastating defeat, and it was their voices that convinced the FCC to enact the strongest protections the Internet has ever seen. 

Today is a day for celebration, but our work is far from finished. In the months and years ahead we'll continue to harness the incredible energy of our startup community to combat future threats to an open Internet, and to ensure all startups can access the tools they need to thrive.

Why A Patent Verdict Against Samsung Is Bad News for Startups

Last night, I tweeted this:

 

The full story is here, which you should go ahead and read. But the gist is that Samsung lost a $15.7 million verdict in the Eastern District of Texas (the hallowed home of patent litigation) to Rembrandt, a party that claims to own the technology behind the Bluetooth 2.0 standard.

My tweet got a lot of attention (way more than my average missive), including countless replies basically calling me an idiot. Rather than engage with the twitter trolls (see what I did there? Clever, no?), I decided this would be a good time to talk about the patent troll problem and what it means for big companies and startups alike.

For starters, if you think I am particularly worried that Samsung, a huge company, lost a $15.7 million lawsuit, you don’t understand my feelings on patent reform, how the troll model works at all, or, apparently, how the patent system works. Let me tell you what I—and anyone who cares about protecting startups and innovation in this country should—care about.

Last week, when a jury found Samsung infringed three valid patents that supposedly cover the technology behind the Bluetooth 2.0 standard, it conferred on the patent owner, a company that neither makes nor sells anything, a monopoly on that standard. And, according to the Ars Technica article, which cites the patent owner’s complaint, Rembrandt asserts that these patents don’t just cover Samsung’s products, but “all products using Bluetooth 2.0 and later.”

So here is the problem: The inventor and the owner of the patents (two different parties) had nothing to do with the implementation of the popular Bluetooth 2.0 standards. In fact, so far as the story goes, the inventor has had no part in producing anything but 100 patents, which he sells to the current owner to use in patent litigation. Not to create new technologies (the type of progress of science and useful art the Constitution contemplated when it enacted a patent system), let alone to grow new businesses and create jobs. Instead, they serve as a tool for him and the patents’ current owner to extort money out of companies who do want to do those things.

Which is why I tweeted last night that this is very bad news for startups. Bluetooth technology is key to today’s growing technology marketplace. And it’s a market that is already regulated to some extent by the Bluetooth Special Interest Group (SIG), which maintains the technology’s standards. This is a particularly important point: tech companies rely on the concept of interoperability, meaning that anyone can use Bluetooth technology and it will work with different devices across the board. Currently, the SIG facilitates this in the Bluetooth space.

Before this verdict, a company who wanted to use Bluetooth could work with the SIG, a one-stop shop, to get access and necessary legal rights to the proper technology. But now there is a giant unknown: will Rembrandt sue? Demand a license to use Bluetooth? If a startup asks a lawyer about its new project that implements Bluetooth 2.0 or later, it’s likely to get an answer that someone else owns that technology, and it should either not work in that space or get ready to pay up.

I really am not overly concerned that Samsung finds itself on the hook for a $15.7 million verdict (though that’s not good news, either). I fundamentally care about the chilling effect that cases like these have on further innovation and—as I tweeted last night—on startups. Right now, we have a system that is, simply put, broken. We need real reform to get it back in working order, where everyone—big companies, startups, and garage tinkerers—are incentivized to innovate and create.

Startups Send Letter to FCC in Support of Title II

Today, Engine released a letter signed by over 100 startups making clear that entrepreneurs and innovators fully support Title II reclassification to preserve an open Internet. Earlier this month, FCC Chairman Tom Wheeler announced his plan to implement strong net neutrality rules. Fellow FCC Commissioner Ajit Pai—in a last ditch effort to argue against Title II reclassification—claimed in a press release that “small, independent businesses and entrepreneurs” did not support Title II. Startups from across the country, including Automattic, Dwolla, Etsy, Foursquare, Imgur, Kickstarter, Tumblr, and Yelp, wrote today to set the record straight.

Startup support for Title II and net neutrality is nothing new, as the letter notes: “Because net neutrality is such an important issue, the startup community has been engaged in the Commission’s Open Internet proceeding to an unprecedented degree. The clear, resounding message from our community has been that Title II with appropriate forbearance is the only path the FCC can take to protect the open Internet. Any claim that a net neutrality plan based in Title II would somehow burden ‘small, independent businesses and entrepreneurs with heavy-handed regulations that will push them out of the market’ is simply not true.”

These startups were built and thrived under a de facto net neutrality regime, and if the Internet economy is to continue its unparalleled growth, preserving an open playing field is crucial. Allowing ISPs to use their gatekeeper power to pick winners and losers on the Internet is the real threat to the continued viability of these startups, not a regulatory structure based in Title II.

Startups Head to DC for Final Push on Net Neutrality

Earlier this month, FCC Chairman Tom Wheeler announced a plan to reclassify broadband as a Title II common carrier service, prompting cheers from the Internet community. After a year of debate it appears that the pro-net neutrality movement has won the day. But while the Chairman has released broad outlines of his net neutrality plan, there’s no guarantee that the specific measures the FCC adopts will be sufficient to preserve an open playing field for startups.

To make sure that the FCC gets the details right, Engine and the Open Technology Institute at the New America Foundation organized a fly-in last Thursday, bringing a group of top startups to DC to make the innovator’s case for strong net neutrality rules. Representatives from Union Square Ventures, Bigger Markets, Capitol Bells, Etsy, Foursquare, Keen.io, Spend Consciously, and Vimeo spent the day at the FCC and on Capitol Hill meeting with key policymakers to discuss the future of the open Internet.

In the morning, the startups met with FCC Commissioner Jessica Rosenworcel and senior staff from Chairman Wheeler’s office to discuss the nuances of the Chairman’s proposal. We focused specifically on the need for rules that prevent ISP discrimination at interconnection points, and ensuring that the Commission’s general ban on discriminatory practices does not put an impossible burden on startups looking to challenge ISP activity.

The startups next moved on to the Hill, meeting with members of Congress and senior staff to discuss the proposed net neutrality legislation circulated in January. Pending FCC action renders legislation of any kind unnecessary, and the current draft bill fails to provide many basic net neutrality safeguards while simultaneously stripping the FCC of authority to protect against future ISP threats to the open Internet. The startups met with members of the House and Senate Commerce committees and let them know that startups did not view the bill as a good starting ground for a compromise, and that any legislation that offered weaker protections than those in the FCC plan would be viewed as a non-starter.

We are deeply grateful for the hard work of these startups and so many others, which has helped get the FCC to where it is today. It’s not easy for startups to take time away from their businesses to travel to Washington, but their efforts are paying dividends. With the FCC’s rulemaking in its final days, we must make sure the rules they issue are strong enough to keep the Internet open for generations of future innovators.

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.

Statement on Startups Meeting with FCC and Congress on Net Neutrality

Representatives from several prominent startups joined Engine and New America's Open Technology Institute in Washington DC today in advance of the FCC's upcoming net neutrality vote. They met with FCC members and staff as well as legislative leaders to discuss the importance of an open Internet to the startup community, and the need for strong net neutrality rules and enforcement mechanisms.

Evan Engstrom, Engine Policy Director, and Alan Davidson, Director of the Open Technology Institute, released the following statement:

"Engine and the Open Technology Institute are proud to have organized a group of leading startups to continue championing a truly open Internet. FCC Chairman Wheeler's recent announcement that he intends to reclassify the Internet under Title II was a major victory for the startup community and all advocates for net neutrality. However, the battle is far from over.

"Today's meetings will allow us to push for specific rules that are strong enough to prevent any form of ISP discrimination and flexible enough to allow the FCC to preempt future threats to the open Internet. We have seen the tremendous impact that startups can have on the net neutrality debate. In the weeks ahead, we'll be working with these startups and many others to ensure that the Internet remains open for innovation for generations to come. The Internet has flourished as a space for innovation without permission, and strong net neutrality rules will ensure that remains the case."

Patent Troll Targets Crowdfunding Startups

This post originally appeared in VentureBeat and was written in collaboration with D.J. Paul, a member of the Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies, and the co-chair of the Crowdfund Intermediary Regulatory Advocates (CFIRA).

On Thursday, House Judiciary Chairman Bob Goodlatte (R-VA) re-introduced the Innovation Act, a bipartisan bill targeted at fixing the out-of-control patent troll problem.

This comes not a moment too soon, as patent trolls have begun to target one of the newest areas of innovation and job creation: the crowdfunding industry.

AlphaCap Ventures, an entity that claims to offer “strategic, operations, and financial advisory services in the United States” and whose website resolves to nothing, has so far sued at least 10 companies engaged in some form of crowdfunding. They accuse each company of infringing upon multiple patents (you can see one here) that allegedly cover the very basic workings of managing customer information as it relates to private equity and debt markets.

On its face, the AlphaCap cases look sadly typical. There’s no evidence that AlphaCap has its own crowdfunding platform. Instead it appears to be using its patents as a tool of extortion against those who are actually creating something valuable for our economy.

Crowdfunding platforms have become an important part of the innovation economy, giving entrepreneurs unprecedented access to the capital they need to grow a business or launch a project. They’re also beginning to democratize finance: Women are nearly four times more successful when crowdfunding than when raising funds through traditional means like venture capital.

Unfortunately, many of these platforms are small and young — the most popular targets for patent trolls. In fact, 55 percent of troll suits are filed against companies with revenues of less than $10 million.

Fortunately, the Innovation Act gives the startup community a chance to fight back against trolls. This bill won’t stop patent holders from filing legitimate lawsuits, but it will give those unfairly targeted by trolls important tools to fight back. Among other things, it will require more transparency, shift costs of discovery — one of the most expensive costs of litigation — and shift legal fees when plaintiffs bring particularly baseless suits.

As the Innovation Act makes its way through Congress, it’s sure to meet opposition from some of the same powerful special interests groups, namely trial lawyers and pharmaceutical companies, who thwarted previous attempts at patent reform as recently as last spring. That’s why both startups and individuals who care about innovation need to make our voices heard in the weeks ahead. We need to send a message to members of both parties: Move quickly to support and pass this critical legislation.

Patent Litigation and the Continuing Need for Robust Reform Legislation

Tomorrow, the House Judiciary Committee will hold a hearing to review recent Supreme Court cases in patent law. Do not let the wonky subject matter fool you—this is an important hearing that should help set the groundwork for much-needed legislation that will finally fix the patent troll problem.

To understand what’s at stake, you have to understand a bit about patent reform and why it’s become such a critical issue to the startup community. In the past decade, patent litigation initiated by non-practicing entities—so-called patent trolls—has increased tenfold. This increase has been primarily targeted at tech companies, and the data show that the smallest of those companies—most often, startups—are in fact targeted the most frequently. This led to the recent push for patent reform. And last year, we made some real progress: not only did we come close to passing legislation, but the FTC took up the issue, as did more than 20 states, who introduced or passed legislation, or whose attorney general investigated, and in some instances sued, patent trolls. Even more, the Supreme Court stepped in, deciding six cases unanimously, each of which should help fix a broken patent system.

That’s the good news. The bad news is that opponents of patent reform now claim that because of those victories at the Supreme Court, we no longer need patent reform legislation.

They couldn’t be more wrong.

First, the most important of those cases—Alice v. CLS Bank and Nautilus v. Biosig—deal with patent quality. In other words, tightening the standards around what can and can’t be patented, an update that’s critical to eliminating trolls who thrive on low-quality patents  But it will take years, if not decades, for the impact of these cases to actually be felt. Patents last for 20 years, and the Patent Office has been in the business of granting approximately 40,000 software patents annually, which means at least hundreds of thousands of them currently exist. The vast majority of these patents won’t be reevaluated under Alice and Nautilus unless someone actually challenges that patent, either in court or at the Patent Office. Those challenges can cost tens or hundreds of thousands of dollars. So we don’t expect to see the number of bad patents falling dramatically any time soon.

Second, these cases do not address the patent troll’s other most favored weapon: the outrageous costs of patent litigation. Patent litigation is notoriously expensive, costing each side easily into the millions of dollars in legal fees, not to mention other valuable lost resources, like employee time. Trolls exploit this, often successfully demanding payments to go away instead of going to court. While one important Supreme Court case, Octane Fitness v. Icon, addressed at least some of this problem, it’s so far had limited effect. The Court held that a judge could make a loser pay a winner’s legal fees in “exceptional” cases, but, unfortunately, troll cases are no longer “exceptional.”

Despite help from the Supreme Court, we still need real, robust patent reform that will give judges discretion over when to grant fees, increase transparency in lawsuits and demand letters, even out the burden of litigation on both parties, and help protect technology’s innocent end users.

We’ll be watching tomorrow’s hearing closely to make sure that opponents of patent reform—those who benefit from a broken system—don’t mislead members of Congress and the public by overstating effect of the Supreme Court’s recent docket. We are thankful the Court has stepped in and sent a strong message that the system is broken. But lasting change that repairs the patent system for good will require an act of Congress.

Patent Reform: We’re Ready for Round II

Today, a bipartisan group of House members re-introduced the Innovation Act, an important piece of legislation that would directly address a patent troll problem that has ballooned out of control, costing our economy tens of billions of dollars annually.

You might recall that last year similar efforts got incredibly close to becoming law (In fact, the last time the Innovation Act was introduced, it passed the House with a 325-91 vote!), before stalling out at the eleventh hour in the Senate. We were disappointed at the time, saying then:

"This news is devastating to the welfare of startups who will continue to face the threat of patent trolls. That no agreement could be reached, especially in light of the efforts being made across the committee to find common ground, is also bad news for the economy where annual losses from patent troll litigation are billions of dollars."

More importantly, though, we noted then that the hard work we did transformed the political framework, and said to you, our community: “you changed the conversation from a wonky, back room discussion of legal tenets, to real world examples of harm. With your continued support, and the support of our friends in Congress, we can be on the winning side.”

Well, that time is now.

Despite some important progress in the courts and from the states on patent reform, trolls continue to be a serious threat to the innovation and startup ecosystem. Which is why we need comprehensive legislation to really fix the problem.

The reason why is fairly simple. Patent trolls are “successful” because they are armed with two weapons: low-quality patents, usually covering software-type inventions, that are nearly impossible to understand; and the ballooning costs of patent litigation (it can costs each side easily into the millions of dollars to fight a patent suit in court). Most of last year’s progress, especially an important case called Alice v. CLS Bank, dealt with the first problem, trying to improve patent quality. While that’s good news, it has—at least in the short term—only limited effect.

The Alice ruling can only be helpful in three distinct circumstances: 1) for new patents being issued by the Patent Office; 2) in litigation where a defendant attempts to invalidate the patent at issue; or 3) in one very specific proceeding at the Patent Office called a covered business method review (CBM). Let’s unpack each for a second:

• It’s critically important to have better standards for patentability going forward, but currently, there are approximately 2.24 million active patents in the United States. More than a million of those represent a software-type invention. And each of those patents has a lifespan of 20 years. The potential damage from this existing world of patents alone is enough to warrant legislation.
• As mentioned above, litigation can easily cost each side millions of dollars in legal fees, not to mention years of distraction from a business’ core function. Which makes the barrier to startups essentially impossible to overcome.
• CBM review is a great program, allowing affordable and efficient review of existing patents at the Patent Office. Yet it is currently limited to patents that touch financial products or services and—unless the law changes—the entire program is set to expire in 2020.

What’s more, none of this touches the out-of-control patent litigation system. Which is precisely why we need the Innovation Act. The Innovation Act, and other comprehensive efforts like it, use a combination of provisions to level the playing field, giving defendants more affordable access to make their case in a federal court. These provisions include common-sense reforms like requiring transparency when filing a lawsuit or issuing a demand letter (who are you? what patents do you own? what product do you claim infringes those patents?); shifting fees to winners when a losing party brought a particularly baseless lawsuit; shifting some of the costs of discovery, usually the most expensive part of litigation; and creating a vehicle for suppliers and manufacturers to help protect their customers when those customers become the trolls’ target.

Of all the good work we’ve done so far, the most important piece was earning a seat at the table. For the first time the startup community has a critical voice in this important debate. It is important that we use it and let Congress know the time has come to make the Innovation Act law.

Engine Statement on Proposed Net Neutrality Rules

In response to today's announcement on FCC net neutrality rules, Engine Policy Director Evan Engstrom released the following statement:

Today’s announcement from Chairman Wheeler represents a tremendous victory for the Internet and startup communities in the debate over net neutrality. Just one year ago, nobody imagined the FCC would reclassify broadband under Title II. And then the community mobilized. Engine was proud to work with hundreds of startups and other partners in urging the FCC use all available policy tools—including Title II—to protect the open Internet. Many of those startups spent the past year meeting with policy makers and making a public case for strong protections. The impact they had on the FCC’s rulemaking shows how powerful the technology community’s voice—particularly that of startups—has become in Washington.

 

While reclassification is a big win for startups, it’s only part of the equation. The FCC must now ensure that the rules it creates under Title II authority are strong enough to prevent ISPs from discriminating against startups and flexible enough to allow the FCC to preempt future threats to the open Internet. We at Engine look forward to being part of that process and making sure the voice of the startup community continues to be heard in Washington.

How Code2040 Sets Students up for Success in Tech

You can also read this post on Medium.

If the Census projections are accurate, by the year 2040 people of color will make up the majority of the U.S. population. This statistic inspired the name of the organization Code2040, a summer program to help Hispanic and black engineering students succeed and ultimately, become leaders in technology. According to Code2040’s website, jobs in STEM are the fastest growing category of professions in the United States. Yet, fewer than 4% of Black and Latino students pursue degrees in computer science. That gap is significant, it’s problematic and Code2040 aspires to narrow it, one fellow at a time.

Increasing the talent pool in STEM fields, especially from underrepresented minorities, doesn’t only require more degrees. Education is just one of the steps in a long pipeline to both success and leadership in a technology profession. Code2040 recognizes that many aspiring individuals who start down the path towards a career in technology may drop out due to lack of preparedness or even because they lack of the right connections.

“A lot of African American and Latino students don’t realize Silicon Valley is a place,” Tristan Walker, one of the co-founders of Code2040 told SV411 in an interview last year. “And once they get here, it’s very hard for them to find a way in, to make those connections and get in a room with people who can fund their idea.” That’s where Code2040 steps in.

Code2040 provides internships, mentorship, leadership training, and network development for the fellows admitted to its summer program. Since 2012, the organization has selected a group of students studying computer science and engineering to be placed with some of Silicon Valley’s top technology companies. Their interns have worked at LinkedIn, FourSquare, Tumblr, and a handful of tech startups. And through the course of their summer, the fellows attend workshops, meet with mentors, and tour Silicon Valley companies.

Ben Harvey was admitted into Code2040’s program for the summer of 2014, Code2040’s third class of fellows. Ben grew up in Baltimore County, and while he didn’t know many people who worked in technology, he did know that he enjoyed working with computers. Tinkering with HTML code and trying out new apps came naturally to him. He attended Towson University in Maryland and began pursuing a major in computer science. When he learned about Code2040, he had a feeling the program would offer an unmatched opportunity to jumpstart his career.

For Ben, the summer at Code2040 opened an entirely new realm of job possibilities—even life changes. He interned at a San Francisco edtech startup, Panafold, where he learned what it takes to work in a professional setting, built several Android apps, and ultimately received a job offer from the company. He accepted their offer, extended his stay in the Bay Area and most recently took another offer to work as a mobile developer for Disney. While Ben still has another couple of semesters left to complete his degree back at Towson, he isn’t in a rush to return. He hopes to become a top developer at a big company or a tech entrepreneur himself one day. He’s already built at least one Android app as a side project and is working on another.

“I wasn’t aware of all the potential for me in Silicon Valley until I got there,” Ben said. “People get funding for ideas, because they can build them. It was a culture shock. It’s inspiring.”

Getting more minorities into the tech field is a complicated problem, Ben acknowledges, but he thinks if students like himself were at the very least more aware of the kinds of opportunities that would open up to them, more people would be learning to code.

Code2040 just closed applications for their 4th summer of fellows. They plan to accept up to 40 fellows who will intern at around 20 Silicon Valley companies starting in June. By 2040, hopefully those fellows will serve as the mentors and advisors to a new generation of even more diverse programmers and aspiring entrepreneurs.