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11/15/2013 McKinsey & Co - Why crowdfunding appeals to the Middle East
12/20/2013 Gulf Times - Silatech Hosts Seminar on Crowdfunding in Cairo 12/19/2013 Kiplinger - Investing in...

Venture Markets are Necessary for Continued Growth in SME

While Americans have made significant advancements with the passage of the JOBS Act, there are still more changes that can be made to our securities laws that will increase the robustness of our economy. shutterstock 71191306

One such area in which we have room for improvement is our lack of Venture Exchanges, public exchanges where smaller entrepreneurial firm (often called Small and medium-sized enterprises or SMEs) can have their shares bought, sold, and traded in a manner similar to firms that have undergone an Initial Public Offering (IPO) to a major exchange.

Why Are SME’s Important?
Small businesses are the core of the US Economy. 99.7% of US employer firms are small businesses1. The largest firms in this class employ up to 500 people and produce millions or billions of dollars in revenue. Small firms accounted for 64 percent of the net new jobs created between 1993 and 2011 (or 11.8 million of the 18.5 million net new jobs). Since the latest recession, from mid-2009 to 2011, small firms, led by the larger ones in the category (20-499 employees), accounted for 67 percent of the net new jobs2.

What is Wrong With the Status Quo?
Small Businesses are being starved of much needed capital by antiquated laws that unfairly favor large, well connected, publicly traded companies.

The attractiveness of an investment is heavily influenced by whether the investment can be easily sold at a reasonable price. Without liquid markets to provide an exit opportunity to investors, only those with the ability, capital, and wherewithal to invest for the long term can benefit from growth in these small private firms. Without the presence of the greater market these investments are artificially depressed in value compared to equally situated public companies. The result is fewer people are interested in investing in these Main Street companies when they know they can buy into a Wall Street offering today, and sell tomorrow or in three or six months depending on how the market is performing.  Without the ability to sell your shares and exit, Main Street’s businesses will always lack cash because their investors are missing exit opportunities, along with other market benefits.

What Other Market Benefits Could be Provided by Venture Exchanges?
The proposed venture exchanges will be able to provide greater transparency, research coverage, and market making when compared to the current way small business investment is conducted.

Having companies audited financials and investment offerings available to the world will provide a kind of day-light to what has always been the wild west of investing. Knowing that the numbers you are looking at are the same number that have been evaluated by neutral third parties like accounting firms or the SEC will provide greater transparency in transactions.This transparency will help place an objective market value on the company’s business.

How do you know you are making a good investment? Most methodologies of answering that question involve looking at similarly situated firms, analyst recommendations, in addition to the released company data. Currently, how and where one acquires this information for SME’s can make a large difference in how they evaluate an offering. With Venture Exchanges, you will have a greater field of analysts and investment media providing information on your target and similarly situated firms. This can greatly level the playing field for small investors, without huge teams of researchers, in determining the value of a potential investment.

 In addition to transparency and research coverage, Venture Exchanges will provide greater liquidity to investors. By either acting as a market maker themselves, or simply matching buyers and sellers, Venture Exchanges will provide the necessary low cost entries and exits into investments in SME’s that larger stock exchanges have provided to publicly traded companies.

Aside from these obvious positives, there are additional benefits to the listing company and its consumers. A company may experience increased value in the exposure and coverage they receive by being listed on a Venture Exchange. This could increase both the inherent and perceived value of the company to investors and customers. Another less obvious benefit would be that a company listed on an exchange would be better situated to make acquisitions bankrolled by their quoted shares.

Have These Types of Exchanges Worked Elsewhere?
While the US is a center for financial innovation, several other countries have already created similar venture exchanges with successful outcomes. In our neighbor to the north, Canada’s TSX Venture Exchange (Formerly the Canadian Venture Exchange until its acquisition in 2001) has provided a public venture capital market for emerging companies since 1999. Since then the firm has raised more than $80 billion in capital for these small issuers.

Across the pond, the London Stock Exchange, a historic institution founded in 1801, has lent its credibility and knowhow to their own version of the Venture Exchange. Billing itself as “the world’s most successful growth market,” London’s Alternative Investment Market (AIM) has employed its trading platform for over 3,100 companies since its inception in 1995, raising over £67 billion to fund their growth3. A wide range of businesses including early stage, venture capital backed as well as more established companies join AIM seeking access to growth capital.AIM offers smaller growing companies the benefits of a world-class public market within a regulatory environment designed specifically to meet their needs4.

What Do We Need in the US?
Maybe the concerned voices of the entrepreneurial community are right, and any venture exchange in the US would be better than no exchange, however, I believe that with the forces looking to maintain the status quo, we will only have one opportunity to get this right. We need to look at the strengths and weaknesses of the various international venture exchanges in formulating how ours will work. We do not want an overly burdensome regulatory regime which could snuff out the flame of innovation, nor do we want rules so lax they would let the whole exchange burn down. It is our opinion that the most reasonable way to move forward would be to have scaled and appropriate regulation based on the size of the offering. Less regulation for smaller offerings, more regulation for larger, and hopefully a few intermediate stages in between to allow right-sized regulations when they are appropriate.

What is the Current Proposal?

There is a  bill designed to amend the Securities and Exchange Act of 1934 to allow for the creation of Venture Exchanges to promote liquidity. The Main Street Growth Act, sponsored by Rep. Garrett, would add a new Exchange Act Section 6(m) to allow the trading of small company stocks on venture exchanges.  These small companies will include the SME definition of small companies from earlier, but also include any non-publicly traded firm with under $2,000,000,000 in assets.

This bill’s provisions include the following structure around these exchanges5:

  1. They will only be able to bring together buyers and sellers and perform a match making of them.
  2. For some securities, they may elect to hold mid-day auctions instead of continuous trading.
  3. They may not extend unlisted trading privileges to any venture security.

They will be exempt from requirements under several regulatory measures including6:

  1. Rule NMS, 242.600 through 242.612 of title 17 of the Code of Federal Regulations
  2. NMS basically required exchanges to coordinate in order to ensure price uniformity across multiple exchanges. This included a requirement to provide quotes in $0.01 increment, and provided rules for dissemination of information to ensure uniform and timely pricing7.
  3. Rule ATS, 242.300 through 242.303 of title 17 of the Code of Federal Regulations. Rule ATS requires each Alternative Trading System (ATS)  to report weekly volume information and number of securities transactions for each security to FINRA. It also require broker-dealers operating as ATS’s to each acquire and use a unique market participant identifier (MPID) when reporting information to FINRA. The rest of the rule applies to increased requirements for record keeping and record preservation standards8.
  4. Submit any data to a securities information processors
  5. Use Decimal pricing. ( the proposal specifies $0.05 cent ticks)  


What Do We Do About It?
We have a great opportunity here to make a significant positive impact on the US economy. This could mean more jobs for the people, more tax revenue for the government, and new products for consumers. The SEC’s new Regulation A+ final rule implementing Title IV of the JOBS Act has proven that the people can produce dramatic re-regulations in the public interest if they aren’t afraid to ask. Venture exchanges may be the next step. These new exchanges could trade the securities issued by smaller public companies, and those issued under the JOBS Act Regulation A+ and crowdfunding provisions. This could drive more investment into crowdfunding and small businesses in general, creating a tide of new opportunities and innovations.

The SEC, the House and the Senate have all been exploring the idea of introducing venture exchanges recently. The House and Senate have even held hearings on the matter to gather information. The Financial Services Committee in the US House of Representative has introduced the The Main Street Growth Act as a bill for consideration. When it comes time for the vote, we don’t want a congress of laymen voting on a bill they might not understand having only heard misinformation from critics. Call your Congressperson. Write an Oped article on the topic. inject truth into the debate.

There are plenty of established interests that won’t benefit from a stronger small business market. Lots of firms are happy to keep small investors out of these lucrative deals. Some bureaucrats fear that by opening venture exchanges, they will lose the power to make your investment decisions for you. It is the job of those whom will benefit, ordinary citizens, to take hold of the debate and demand Venture Exchanges as part of a strategy to improve the economy for everyone.


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Beware of SEC Enforcement Actions Against Crowdfunding Platforms

The following post comes courtesy of Ellenoff, Grossman & Schole and should be read by all crowdfunding platforms

On November 10, 2014, the SEC announced one of the first enforcement actions against a crowdfunding platform, Eureeca Capital SPC, a company incorporated in the Cayman Islands and based in Dubai, for failure to implement procedures reasonably designed to prevent U.S. investors from accessing and investing in securities through its website. Despite a disclaimer that Eureeca's services could not be used by U.S. persons, users who selected "United States" as their country were allowed to register on the Eureeca website and gain full access to offering materials, and under certain circumstances, deposit funds with Eureeca for the purpose of investing. All visitors to the Eureeca website were permitted access to the names of issuers and amounts of offerings on its site, as well as informational videos; after registering, potential investors could access additional information regarding offerings and were sent automated emails detailing specific offerings. Eureeca did not require users to represent they were accredited investors during registration, its website did not contain any disclaimer or definition of "accredited investor", and communications to investors requesting confirmation of their accredited status did not define or otherwise explain what the term "accredited investor" meant.Screen Shot 2014-12-06 at 10.12.48 AM

The SEC determined that Eureeca had acted as an unregistered broker-dealer and violated the securities laws by generally soliciting U.S. investors prior to the implementation of Rule 506(c) in September 2013 and, after that Rule 506(c)'s implementation, failing to take reasonable steps to verify that purchasers of securities through its website were accredited investors. Eureeca was ordered to cease and desist from committing or causing any further violations of U.S. securities laws and was assessed civil penalties totaling $25,000.

Since the passage of the JOBS Act, the SEC, states and FINRA have been closely monitoring accredited investor crowdfunding platforms, with a particular focus on those platforms that generally solicit investors. In addition to Rule 506(c) compliance, particular issues of regulatory interest include the platforms' reliance on the exemption from broker-dealer registration; the accuracy of representations regarding the issuer's business; and the disclosure of the platform's compensation. Companies intending to form or currently operating crowdfunding platforms should work closely with securities lawyers to draft appropriate language for their websites and strictly adhere to the regulations implemented by the SEC to avoid sanctions.

Recommended action: The ability to respond quickly, credibly and effectively to regulatory inquiries depends upon recordkeeping. Platforms should therefore not only implement and maintain recordkeeping policies but also test that the information is readily available if requested on short notice. Records to preserve should include investor and issuer information in secure format (our intellectual property team can provide guidance on state-of-the art protocols); all agreements among parties, offering materials and subscription documents.

If you need more information regarding this, the team at Ellenoff, Grossman & Schole is available to discuss the information in this Alert with you. Please don't hesitate to contact the attorneys below or the primary attorney with whom you work.

Douglas Ellenoff ( This email address is being protected from spambots. You need JavaScript enabled to view it. )      

Joan Adler ( This email address is being protected from spambots. You need JavaScript enabled to view it. )

David Selengut ( This email address is being protected from spambots. You need JavaScript enabled to view it. )      

Adrienne Ward( This email address is being protected from spambots. You need JavaScript enabled to view it. )                             

Michael DeDonato ( This email address is being protected from spambots. You need JavaScript enabled to view it. )

The New Broker Dealer - More Focused Brain Work and Less Manual Labor

Broker dealers of the distant past (circa 2010) who worked in the private capital markets never thought their jobs would change.  They thought only other industries could be disrupted by the Internet and technology.  They assumed investment banking was secure because securities regulations written in 1933 and 1934 were fixed in place.  It was generally assumed that public solicitation of private stocks would never be allowed.  Screen Shot 2014-07-24 at 9.37.23 AM

Fast forward to 2014 – Parts of the JOBS Act are in full effect, general solicitation has been lifted, and the average American is about to be allowed to partake in the private capital markets.  Everything is changing and some are still in denial.  Remember what happened to most travel agencies in the 1990's?  

Unlike travel agencies that could fully be displaced by websites, broker dealers play a critical role in the capital markets. However the time has come for them to make some radical shifts in how they approach their businesses.  Here are three things every broker dealer needs to be working on now to avoid the same fate as the travel agents who said "why would anyone buy an airplane ticket himself? It’s too difficult!"

  • Much time and resources will be spent on background and diligence checks for the many new issuers entering the market.  Looks at ways to outsource this.  Leverage powerful and scalable due diligence technologies that go way beyond just the basic "bad actor" checks. This will allow BDs to focus their time and resources on what they do best: curating deals, matching them to investors, and raising serious cash.Screen Shot 2014-07-24 at 9.36.46 AM
  • Look at every step in the transaction process to see how new technology solutions can replace skilled professionals needing to shuffle paper or run process.  In doing so, BDs can increase transactions and decrease the number of hands that have to touch everything.  Nothing replaces the judgment of seasoned professionals in making the decision to work with a client or not.  But seasoned professionals shouldn’t conduct their work like it is 1985.
  • Use new sourcing tools for high quality deal flow.  Crowd finance platforms are coming online, entrepreneurs are listing their offerings with them, and deals are getting funded. Use these platforms to quickly and easily find companies that have proven they have a market, a customer, can raise money, and can execute.  Most likely these companies will need follow on capital.  Most likely the crowd won’t have deep enough pockets for follow on rounds.  This is where BDs can acquire deal flow and raise money for these firms faster.  Consider ways to partner with crowd finance platforms for early access to these deals.  More deals means more money in the BD’s pockets.  


Broker/Dealers and securities professionals in the US and abroad need to heed this advice.  Those who focus on this intensely over the next 12-18 months are the ones that will thrive in the future.  Those who do not, may be wondering what happened to their businesses 2 years from now. 

Crowdfunding Platform in Romania


During Jason Best’s recent visit to Romania as part of a US State Department mission, he met Crestemidei, one of three Romanian Crowdfunding Platforms.  This women-led team has been doing pioneering work and we asked them to write a guest post, which follows.   This is an example of hard work and early traction.  If you are creating new crowdfunding platforms or services and have stories to share, please send them to us. Screen Shot 2014-04-28 at 5.22.41 PM ( is a Romanian crowdfunding platform based in Cluj-Napoca (the so called Sillicon Valley of Transylvania) set up by 3 young women and launched on December 2012. The idea behind it all was to turn innovative and creative ideas that generate benefits to community into reality – the motto is ‘We change Romania for the better, idea by idea!’

To test the concept and to collect the funds needed to come up with the platform, the founders ran their own campaign on their own platform (beta version of at that time):

  • The financial goal of the campaign: 1000 EUR in 28 days.
  • The outcome: 41 Romanians (Honorary Founding Members) contributed with 1076 EUR - enough to launch the platform and create the basis for an innovative start-up in Romania.

It was probably the only crowdfunding platform in the world to be launched through a crowdfunding campaign which provided credibility and first hand experience with implementing the concept in a new market and laid the foundation for the growth of the industry in Romania. is a fixed funding and reward-based crowdfunding platform, and the team applies selection criteria before publishing the campaigns (innovation and positive impact in community, financial goal, project team expertise). Anyone can finance innovative projects borne in Romania from 17 domains ranging from writing&publishing, theater to technology, environment, health.

Few key figures (valid as of April 2014):

  • 24 campaigns on the platform: 3 active, 11 successful, 1 campaign was purchased entirely by another company and 9 were unsuccessful
  • Projects’ financing rate: 55%
  • Aprox 14.000 EUR worth of donations
  • No. of contributers: > 600 (2013)
  • Unique vistors: > 50.000 (2013)

The founders are:

  1. 1.Catalina Amihaiesi -
  2. 2.Oana Man -
  3. 3.Judit Katona -

The team also includes Oana Rus, Projects Coordinator, and Catalin Vasile, business angel.

In case you would like to get in contact with us, drop us un email at This email address is being protected from spambots. You need JavaScript enabled to view it. . We are also on twitter, G+ and Facebook:

CCA Survey of Findings from an Audit on the US Crowdfunding Ecosystem

Recently, the CCA Group performed an audit on the crowdfunding ecosystem in the United States. Speaking with industry experts, performing original research, and updating
a database of all active and inactive crowdfunding portals in the country, we were able to develop a “30,000 foot” view of the ecosystem, including a closer look at the types of platforms in the space (e.g. lending, reward, equity, etc.), the verticals (e.g. business, non-profits, etc.), and comparative social metrics. In this post, will take a look at three takeaways.

Niche Plays Tend to Survive

Business programs around the world often teach that startup businesses who identify and exploit a niche have a much higher chance of surviving. In their paper New Firm Survival: Industry, Strategy, and Location, authors Sterns et. al. write “niche purveyors were found to have increased survival chances” and from our initial analysis, this rings true among crowdfunding portals in the United States. When looking at the failure ratio of crowdfunding platforms by vertical, those platforms that could only be described as crowdfunding for “everything” had a 48% chance of failure. That is, of the platforms from our previous database and with the new platforms our team was able to identify, 48% of the platforms that were set up to fund “everything” were no longer active as of the time of this study. Conversely, though there are a few funding portals that focus exclusively on environmental causes, all of the portals that we’ve been able to find in this vertical are still active. See figure 1 for a breakdown of the failure rates of US funding portals by vertical.

Funding for Businesses is a Crowded Part of the Ecosystem

Our study breaks the ecosystem down into seven verticals: everything, nonprofits and causes, creative, environmental, businesses, science, and other. Of course, these verticals are somewhat imprecise and the classification of an individual funding platform into one of these categories involves some subjectivity on the part of the researcher. Nevertheless, one striking takeaway from our study is that the space for business funding platforms is crowded. Our study found that the “business” vertical had more than double the number of platforms than the second-highest category: non-profits & causes. On the opposite in of the spectrum, the least crowded parts of the crowdfunding ecosystem in the United States are funding platforms that focus on science and environmental issues. See figure 2 for a visual representation of the crowdfunding ecosystem in United States by vertical.

The Major Players Have all the Social Proof: a Natural Oligopoly? 

When our team looked at some of the comparative social metrics between platforms in United States, we were struck by the presence of outliers. Looking at the descriptive statistics (see figures 4 and 5) of the active platforms that have at least one “like” on Facebook, the kurtosis (a measure of skew) is enormous, signaling that the distribution of these data is nowhere near normal. The same can be said for the audit of these platforms’ presence on Twitter. Instead of a somewhat normal distribution, there are a few players in the top quartile that dominate the crowdfunding presence on Facebook and Twitter. This is an important consideration given the impact that social proof has. It builds trust, attracts funders, and attracts campaign managers. This may not surprise many of the readers of this piece because a couple crowdfunding portals are becoming household names and others remain relatively obscure.


In his paper Supermarkets as a Natural Oligopoly, Paul Ellickson of the University of Rochester describes the “size of the store” as a factor that drives the success of few firms in the supermarket space: “The oligopolistic chains do not carve out separate turf, choosing instead to compete head to head with their rivals, with choice of store size behaving as a strategic complement. No other theory seems capable of explaining these facts.” Interestingly, he believes that this idea is not unique to supermarkets, but applies to many retail verticals saying, “the same features seem to characterize modern retailing in many arenas.” Could it be that a crowdfunding portal shares economic similarities with large brick and mortar retail spaces? If so, that might be a strategic lighthouse for portal owners.

Written by Davis Jones for CCA