Last week in my post on the Startup Exemption I wrote about hearings starting in Congress.  Having reviewed the startup exemption proposal that is presently circulating on the Internet and reading some of the testimony from last week’s hearings I realize what the main problem it is not the concept of the startup exemption.  It is, however, the concept of doing this is an open offering process on the Internet.

The argument for the startup exemption is that the offering will be done within social networks groups that trust one another.  Small investors and entrepreneurs will be able to raise money without all of the costs associated with the highly regulated capital raising process available presently.  I guess in an effort to cut down costs the use of technology such as the Internet and secured platforms makes sense, however, the use of those platforms takes away the underlying premise that this money is being raised in small amounts from people who trust the small business person.

The Internet essentially brings together large numbers of people who don’t know one another.  Information is shared accurate or not.  All of this seems to go against the basic premise that in allowing small business persons to raise capital from within their social network all sorts of fraud will be avoided.

Last week in hearings before the House of Representatives Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs Sherwood Neiss, the sponsor of the startup exemption testified as follows:

“Almost 80 years ago when the telephone was a luxury item, and television and the Internet didn’t exist, we crafted rules to hold companies accountable and transparent.  Today, we have 24-hour eyewitness news, the Internet and a wide array of social media where deceptive practices and false moves are documented and discussed by thousands on Facebook, Twitter, and other platforms. “

Here’s the problem, if I’m going to give you $100 as an investment in your new technology business am I likely to spend hours on the Internet reading information about other technology companies or about you? If I know you or your family member or close friend and you ask me for $400 and you tell me that you’re trying to raise a million dollars asking other people from the family, college friends, and high school friends for $400 to $5000 I am likely to give it to you. But an ad on a Facebook page that sends me to a link is not a private placement and certainly requires more regulation than is anticipated in the present startup exemption.

So what’s my solution? I think for the most part the proposed startup exemption makes sense for small businesses and startups. But a startup exemption is not the same as crowd investing.

So the drafters of the various versions of the exemption that are floating around  need to go back to the drawing board and come up with a mechanism that allows for a cost-effective process for small business persons to raise money from their true social networks and not the crowd.

©2011 by Sharon M. Davison, you may share this article if you attribute it to the author.