The Walls Came Tumbling Down: Capital Raising on Wall Street, in Silicon Valley and on Main Street in the Digital Age

By: Jim Verdonik

Jim Verdonik

Founder of Innovate Capital Law

http://InnovateCapitalLaw.com/

Contact me at:

JimV@InnovateCapitalLaw.com

(919)616-3225

You can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

(This article is based on a speech about Crowdfunding at NC State University Club March 17, 2015 and will be the introduction to a soon to be released book)

Effective capital-raising in the digital era requires you to recognize that most of what you thought you knew about how to raise capital is either obsolete or soon will be obsolete, because:

• Walls protected the old ways of raising capital.
• These walls are falling down because of a combination of new technology and changes in securities laws.
• Powerful social and economic forces are driving these changes.

With every change, there are winners and losers.

Which will you be?

The biggest potential losers are Wall Street and Silicon Valley venture capital fund managers.  Wall Street and Silicon Valley are the biggest potential losers, because they currently control all the money.  So, when technology and securities law changes knock down the walls that protected their money monopoly, they are at the greatest risk.

But being potential losers doesn't mean they will be the actual losers. 

The guy in the room with the most money is always the biggest potential loser. 

Somehow, however, the guy with the most money usually manages to win.  A lot of very smart people work on Wall Street and in Silicon.  So, Wall Street and Silicon Valley may very well adapt to changes and find ways compete without their old walls.  They may even erect new walls.

Our concern here isn't to advocate for or against Wall Street making money.  Our goal is to discover the pathway to reasonable securities regulations and efficient capital-raising and to point the way to take advantage of these changes.  Achieving these goals requires:

·         Understanding the walls that have constricted capital-raising for the past four score years.

·         Understanding which walls have broken down and why.

·         Understanding which walls are still standing.

·         Understanding who wants to keep the remaining walls standing and why.

Here's a list of the ten walls we'll be talking about:

·         Social Class is Playing a Smaller Role in Determining Who Can Climb over the "Who You Know" Wall

·         Main Street Can Raise Money without Hitting the Wall Street and Silicon Valley Walls

·         Public Private Placements: Combining General Solicitation with a Private Placement Destroys the SEC's Wall Between Public Offerings and Private Placements

·         Transparent Communications Knock Down the Wall that Connected Anti-Fraud Rules Fraud and Limitations on Exemptions from Registration

·         Social Media is Destroying All Privacy Walls: Capital Raising is No Exception

·         How Disintegration of the Wall Between Communications Tools and Mass Media Complicates Securities Regulation Issues

·         How Erosion of the Wall between Business and Entertainment Affects Capital Raising

·         Going Viral within Affinity Groups is the New Door through the Investing ROI Wall - Hobbies and Social Interests Influence Investing Patterns

·         Who is a Securities Professional after the Wall between Professionals and Amateurs Disintegrate?

·         Deal Lawyers Have to Know More than the 1933 Act as Technology Enhanced Offerings Erode the Walls Between Different Securities Laws

Before we start discussing each of these walls, let's focus on the nature of these walls.

It took decades to build these walls.  1933 is as good a point in time to use as their origin.  Obviously, 1933 was an important year in the capital raising world, because that's when the Securities Act of 1933 became law.

But the late 1920s and 1930s was a significant time for other reasons.  That's when Americans first became tied together by modern telecommunications and electronic mass media.  Telephones had proliferated to the point where ordinary people had them in their homes and businesses.  Radio was at its peak.  Soon television would be born. 

You really can't understand American securities laws without understanding the media and devices that could be used to sell securities.  These media and devices shaped the rules securities regulators put in place.  A big part of securities regulation involves building walls around how people use media and devices to sell securities.

But the nature of walls is that as soon as you build a wall, it starts to fall apart.  It takes constant maintenance to keep a wall standing.  Maintenance often involves creating a checklist so that you can deal with the known threats to the wall.

That's why change can be dangerous for walls.  A changed threat may not be on the maintenance check list.  That's also why changes in media and communications inevitably affect securities laws. 

When we talk about the walls that have protected Wall Street, we're dealing with a threat that's different than just one wall deteriorating and needing repair.  Walls that support a common goal are interrelated.  Interconnected walls can create strength.  That's why a house is stronger than any single wall.  The exception is that if one wall falls, it can knock over the other walls.

Have you ever seen a giant domino event?  Even though it may have taken all day to set up thousands of dominoes, they can all fall down within minutes after you tip over the first domino.

That's what is happening in the capital raising world today.

As we'll see when we discuss these ten walls in detail, they are interconnected.  When one wall falls, it puts stress on another wall.  And then the two walls stress a third wall.  Eventually the interconnected system that looked so strong a short time ago collapses.

Now, let's start talking about each of these walls.

I chose to talk about the "Who You Know" wall and social class first, because the JOBS Act that initiated recent changes in securities laws was unique in one important respect.  It’s virtually the only major law that both the President and the Congress agreed on during the past 6+ years.

Anything that can unite two such very different ideologies must be driven by forces that are more powerful than a simple desire to make some technical changes in securities laws.  Harnessing technology to help all Americans raise capital for their businesses was the powerful force that made strange political bedfellows work together to pass the JOBS Act.

So, as we examine the other walls and the effect each has on the other walls, let's do it in the context that this isn't just of arcane interest to a few securities lawyers and investment bankers.

When fundamental social and economic forces are driving change, you have two reasonable ways to deal with it:

• Get on board and ride the wave of change.
• Get out of the way and watch it happen.

Trying to block the change really isn’t an alternative that is likely to produce positive results.

Social Class is Playing a Smaller Role in Determining Who Can Climb over the "Who You Know" Wall

Who you know has always dominated the capital raising process. 

That's why people have always paid for introductions to other people.  Knowing lots of people and perhaps more importantly, knowing "right" people, has always been a ticket to money, power and social esteem.

Since rich people usually know other rich people, rich families have always had a big capital raising advantage over people from families with fewer financial resources and contacts. 

The primary capital raising advantage rich people have is who they know.  But this advantage is shrinking, because:

• Technology is making who you knew before you started trying to raise capital less important than it was on the past. 
• Technology is making who you know how to contact and knowing how to communicate your story more important than who you start off knowing.
• Securities law changes make it legal to reach out to your extended technology enhanced networks when you want to raise capital

The "Who You Know" class wall will never entirely disappear – being rich is always an advantage.  If anyone tells you differently, they are lying.  But the combination of technology and new securities laws is creating more ladders for people to climb over the "Who You Know" wall. 

The advantages that starting with money creates in the virtual world are weaker than in the real world, because:

·         Geography is less of a restraint.  Flying to meet someone costs more money than meeting them online.

·         Time commitments are less of a restraint.  Getting the right introductions has always been important to getting someone to take the time to meet you.  But online interactions are not as big a time commitment as in-person meetings or even phone calls.  And online interactions can be squeezed into small gaps in a busy person's schedule.

·         Online activity shifts people's time into more accessible environments.  Every hour people spend online is one less hour they can spend in environments where access is limited by money, social status or geographic proximity.  Let's take golf for example.  It’s a stereotype that rich people make deals while playing golf at exclusive clubs.  The number of rounds of golf that Americans are playing has declined rapidly during the past ten years.  Golf clubs are struggling to find members.  Many factors are affecting golf, but online activity is one of them.

·         Social class still gives people a head start in education and industry connections that attract online interaction.  But overachievers who start with a disadvantage can often catch up.

·         A concerted campaign to expand your online network can produce results much quicker and cheaper than an in-person campaign.

Of course, these technology driven changes have been accumulating over the past two decades.  And people have been using them in many business and personal ways.  But recent changes to securities laws now allow you to integrate these changes into your capital raising efforts.

Main Street Can Raise Money without Hitting the Wall Street and Silicon Valley Walls

The traditional way people who started out not knowing rich people climbed over the Who You Know wall was to hire an investment banker to sell their deal.  Some investment bankers are smart.  Some investment bankers are even nice people.  But what all investment bankers have in common is that they are in the business of knowing rich people and institutions.

Investment bankers know lots of rich people and institutions, because the rest of America out on Main Street sends their money to Wall Street via mutual funds, insurance companies and pension funds.  Once your money is behind the Wall Street Wall, you have a difficult time getting it to come back to Main Street's young businesses.

Wall Street sends small pieces of Main Street's money to Silicon Valley, where it sits in big Venture Capital Funds. 

But whether the money remains on Wall Street or sits in Silicon Valley, it's difficult for most people on Main Street to tap into that money to start and grow businesses, because of:

• Monopoly power created by Government regulation.
• Inefficiencies in managing money and evaluating deals.

Let's discuss the monopoly power created by Government regulation first.

Investment bankers exercise a monopoly through Government licensing and regulation.  Even if you decide not to waste money on fancy offices and private jets, Government regulation creates huge barriers to entering the investment banking industry.  Consequently, good investment bankers can afford to be picky about their clients. 

Investment bankers like big dollar deals that produce big fees and mature companies with proven revenue streams and profitability.  Investment bankers target the 1% cream of the crop.  So, it's difficult for 99% of American businesses to access the capital stored behind Wall Street's Government built regulatory walls.

Silicon Valley is subject to much less regulation than Wall Street.  A primary impediment to raising money from Silicon Valley is that Silicon Valley promised Wall Street investors a higher return on capital than they can get on Wall Street.  Very few businesses can grow fast enough for a long enough time period to produce such high returns.

Deal capacity and inefficiency are the other impediments to obtaining money from Silicon Valley.  It turns out that relatively few people are good venture capital managers.  Hiring a bad venture capital manager is a good way to lose money.  People tried giving money to bad venture capital managers and they lost their shirts in the decade after year 2000.  So, the venture capital industry has been shrinking for more than a decade. 

Silicon Valley's venture capital community has a big inefficiency problem that limits what Silicon Valley's venture capital managers can do for Main Street .  No one has created the Silicon Valley equivalent of Wall Street's automated trading platforms.  Investing in and managing young unproven businesses is extremely time-consuming.  So, Silicon Valley usually has more capital to invest than its venture capital managers have the time to invest in and manage small companies.  For this reason, it's difficult for Silicon Valley's big venture funds to invest in very early-stage businesses – especially if the business isn't located in Silicon Valley.

The net result is that most of Main Street's money that is locked behind regulatory and inefficiency walls on Wall Street and in Silicon Valley is guarded by gatekeepers (investment bankers and venture capital managers) who either lack economic incentives or the capability to reinvest in Main Street's future businesses. 

But new technology and new securities laws are knocking down these walls.  Both technology and securities laws are making it easier to communicate with investors without going through the traditional gate keepers on Wall Street and in Silicon Valley.  The reality is that:

·         The money locked up on Wall Street and in Silicon Valley is owned by people who also live and work on Main Street. 

·         Main Street is a big place. 

·         Main Street stretches from down your block to around the world.

·         Investors who live and work on Main Street distrust the gatekeepers on Wall Street and in Silicon Valley (See any financial media story from 2008 and 2009 for the many reasons).

·         Both entrepreneurs and investors who live and work on Main Street have been searching for ways to eliminate the Wall Street and Silicon Valley middlemen.

New technology and securities laws now make it much easier for people who live and work on the worldwide Main Street to talk to one another about investing in Main Street businesses.  And Main Streets all over the world are showing that they like local businesses.  Buying and selling local is:

• Creating a craft beer industry that's starting to eat into the revenue stream of the national and international brewers.
• Changing restaurant menus to boast about using local ingredients.
• Causing local farmers markets to pop up everywhere. 

Main Street to Main Street investing that circumvents both Wall Street and Silicon Valley is just another manifestation of the going local trend that is facilitated by technology and a willingness to experience life in a less centralized and less regulated form.

In the process of business going global, it's also going local.

Public Private Placements: Combining General Solicitation with a Private Placement Destroys the SEC's Wall between Public Offerings and Private Placements

I waited to deal with technical securities law issues until the middle of this article, because legal reform isn't driving the process of tearing down the walls that impede capital-raising.  Changes in securities laws are just a necessary tool to achieve other social, economic and cultural changes.  That's why tearing down the securities law walls is taking longer than other walls.

Since 1933, the Securities and Exchange Commission has divided the capital raising world into two pieces and built a high wall between the two:

• Public offerings, which are required to be registered with the SEC.
• Private Placements, which must be structured to fall within narrowly defined exemptions from registration.

Over the decades the SEC has made minor adjustments to this wall between registered public offerings and private placements that are exempt from registration.  These modifications included issuing Regulation D, which loosed rules for offerings under $1 million and for offerings to "accredited investors," and clarifying when you could begin a private placement after a registered public offering ended.

But the SEC has always guarded the part of the wall between public offerings and private placements that prohibited general solicitations in private placements.  Conducting a general solicitation was reserved for registered public offerings.  Although there were many ways to conduct a general solicitation, the easiest way to do it in 20th Century America was to use mass media either through paid advertising or public relations stories.

The general solicitation wall made sense in a world where mass media was fairly centralized and was a one-way street.  As we'll discuss later, new technology lets every person be their own publisher and broadcaster to the world.  That changed the nature of communications and media in ways that make it much more difficult to justify or comply with SEC rules against general solicitation.  Not buying a TV advertisement was easy when it cost a fortune.  Now, it's cheap and easy to communicate with thousands and sometimes millions of people.  It takes planning to avoid doing it.  We'll discuss more about that later.  The primary thing to focus on here is that:

·         The SEC likes the general solicitation wall.

·         Congress and the President tried to destroy the general solicitation wall without the SEC's approval in the JOBS Act by requiring the SEC to authorize general solicitation in Rule 506 (c) offerings and directing the SEC to issue crowdfunding rules.  The JOBS Act also tried to clarify in Section 201 (c) that certain activities do not require intermediaries to register as a broker-dealer.  Many states are authorizing intrastate crowdfunding, which permits general solicitations to investors in a single state.

·         But the SEC seems like it's not yet ready to give up on its general solicitation ban in private offerings.  The general solicitation wall brings order to the SEC's regulatory universe.  The universe was a much more orderly place before we found out that the universe didn't revolve around the earth.  Nothing has shaped securities regulation more than the general solicitation wall, except perhaps the anti-fraud rues.  Every securities lawyer knew you had to do two things in private placements: avoid a general solicitation and not commit fraud. 

·         One reason the SEC wants to prohibit general solicitations n private placements is that proving that fraud occurred in a registered public offering is a lot easier than in a private placement.  Issuers, underwriters and other experts have a higher standard of conduct in registered public offerings than in private placement.  If people raising capital switch from registered public offerings to private placements because you can conduct a general solicitation in a private placement, the SEC and private plaintiffs will have to work harder to prove fraud.

·         The JOBS Act made it easier to avoid becoming a public reporting company.  More companies may remain private even if they raise a lot of capital and have many shareholders.  The SEC generally thinks public reporting is a good thing.

·         The SEC is fighting a rear guard action to preserve as much of the wall against general solicitation as possible by proposing Crowdfunding rules that will make it difficult and expensive to raise capital, unconscionably delaying the Crowdfunding rules and trying to neuter Section 201 (c) of the JOBS Act.

So, we sit today with a general solicitation wall that is half standing and half destroyed with the SEC trying to save as much of the general solicitation wall as possible.

Given the agreement by Congress and the President on the JOBS Act, one wonders:  Why is an unelected arm of the Government continuing to thwart policies initiated by the elected arms of the Government?

But let's not attribute bad motive to the SEC's rear guard action.  One is reminded of the many science fiction books and movies premised on the concept that computers and robots take decision-making away from humans to protect us from our own weaknesses.  The SEC is acting like a benign know-it-all robot that no longer responds to human control.

But benign robots and regulators who act like benign robots have a fatal flaw.  They don't understand human nature.

Real people won't put up with restrictions on what they do in their daily lives simply to make the universe a more orderly place.  And that's why the SEC's efforts to maintain the general solicitation wall between private placements sand registered offerings is doomed to fail:

·         It's simply too easy sand cheap today for ordinary people to conduct general solicitations in their daily lives that prohibiting general solicitation is an irrational burden.

·         General solicitation is very different than fraud.

Let's discuss the disconnect between general solicitation and fraud.

Transparent Communications Knock Down the Wall that Connected Anti- Fraud Riles and Limitations on Exemptions from Registration

Most securities lawyers who advise entrepreneurs who are trying to raise capital will tell you that their clients immediately "get" the most fundamental concept of securities law – Fraud is Bad.

Entrepreneurs may need a little assistance in identifying how their optimism and tendency to deal in generalizations might mislead investors.  They may also think some of the risks securities lawyers recommend disclosing to investors are too remote to be real threats to their business.  But once you explain why you recommend disclosing something, clients usually understand the rationale for doing it.

That's not true for the conditions for being exempt from registering securities.  Entrepreneurs generally think that, if you are telling the truth about your business, it shouldn't matter:

• How many people you tell the truth to.
• How much money the people make.
• How many people buy your securities.
• What state the people live in.

The very good reasons why entrepreneurs don't understand these things are that they are all:

·         Arbitrary.

·         Have nothing to do with morality.

·         Have nothing to do with business.

·         Don't affect whether the investor will make a profit or suffer a loss. 

So, when you tell clients the restrictions securities laws place on their sales efforts to be exempt from registration, they either comply because they dislike the risk of not complying or they ignore your advice and find investors any way they can.

People who don't regularly advise entrepreneurs might be surprised at the number one reason entrepreneurs object to the exemption from registration rules that encourage selling only to Accredited Investors.  The objection you are likely to hear most often is:  "Most of my friends and relatives aren't accredited investors.  They won't understand why I kept them out of this great deal." 

And the friends and family who are excluded from deals because they aren't accredited investors sometimes blame conspiracies.  You often hear: "The Government only wants rich people to profit from investments.  Poor people are only allowed to deposit their money in low interest bank accounts."  No one who wants to invest in their friend's business thinks the Government needs to protect them by keeping them out of the deal.  And, of course, accredited investors don't like people poking into their personal finances.

That explains why entrepreneurs and investors don't like the arcane rules that the Government uses to decide whether an offering is exempt from registration. 

But what about the SEC and securities regulators?  What's their excuse for opposing changes in how people communicate in public private placement offerings?

Using the Internet and Social Media to sell securities should be a securities regulator's dream come true:

·         All communications are in the open.  Securities regulators can see who is saying what to whom in real time

·         All communications are preserved in written digital records that securities administrators can search.

This replaces a system in which most communications with investors were:

·         Oral

·         Or in documents that securities administrators rarely saw.

And yet, securities administrators remain opposed to the transparent communications in public private placements.

When future generations look back at this era, they will probably ask:  Why did securities regulators favor private communications over transparent communications that regulators can see or that can easily be brought to the attention of securities regulators with the click of a mouse by anyone who thinks the communication might be fraudulent?

Social Media is Destroying All Privacy; Walls Capital Raising is No Exception

It would be difficult to imagine anything that is less compatible with 20th Century securities rules about registered public offerings and private placements than Social Media.

A primary characteristic of Social Media is that it creates a new space where what is public and what is private mix together.

One of the basic principles of 20th Century securities laws is that whatever is public must be registered.  Most exemptions from registration requirements apply only if you avoid making public statements about your securities offering.

These different rules for activities that are public and private activities worked when people and institutions made clear distinctions between what was public and what was private.

But this traditional distinction between public and private is becoming increasingly irrelevant to modern life.  Social Media has changed people's expectations about what is public and private in their daily lives.  This applies to both personal life and business life – which are themselves becoming increasingly mixed together.

This blurring of public and private is creating new issues in a wide range of business and personal activities.

Public business communications used to be structured and formal.  But that comes off as stiff in a blended public-private space.  So, public business communications are becoming less formal.

The meanings of words like "friends" and "communities" are changing.  Both used to be personal and limited to a relatively small number of people and were often limited geographically.  Now, you can be "friends" with many people around the world you have never met "in-person."  You may be a member of a wide range of communities that are based on your interests not where you live.  At the same time, you might have very little or no connection to people in your geographic community.

When changes like this occur, they affect:

• People's behavior toward others.
• The expectations people have about your behavior toward them.
• Social conventions and rules.
• Finally laws.  For example, we didn't have laws about cyber bullying or harassment until recently.

So, it comes as no surprise that securities laws are not immune to these changes

Many different influences are causing these changes, but Social Media is in the forefront.  Everyone knows that if you want privacy you won't find it in Social Media. 

More and more people use more kinds of Social Media services for more different types of things because it’s a useful tool.  It also helps that Social Media is usually "free" for users.  But the cost Social Media extracts is that we trade our privacy to obtain these free benefits.

Some people think the trade-off is worth it.  Others think privacy is too high a price to pay.  Most people probably don't think about it very much.  Whatever your position on Social Media and the loss of privacy (good, bad or indifferent), it's difficult to deny that these changes and tradeoffs have occurred and are likely to continue as multiple generations of people grow up in this system.

Our purpose here is to focus on how these changes and tradeoffs are affecting securities laws, including recent changes that created Public Private Placements in the form of SEC Rule 506 (c) and crowdfunding offering rules.

Let's start our analysis by discussing the basic 20th Century rules about securities offerings that regulated how businesses used advertising media and communications tools to raise capital.

How Disintegration of the Wall between Communications Tools and Mass Media Complicates Securities Regulation Issues

Let me ask you a question.  What is that thing you are always holding?  You know the one.  It's about six inches high and you would feel lost without it.  No, not that one.  I'm talking about your cell phone.  What is your cell phone?

• Is your cell phone simply a communications device like a land line telephone except that you can move it?
• Or is your cell phone a user interface to a mass media that you and everyone else is constantly using?

If I had asked you whether TV or newspapers were advertising media or communications tools, I bet you wouldn't have hesitated in answering.  Likewise, for land line telephones – and cell phones before cell phones and computers merged.  Everyone knows what these devices are for.  But I suspect you had to think before categorizing your modern "smart" cell phone.  Different people might have different answers.  Others might say it is neither or both. 

This highlights the problem the SEC faces today in formulating reasonable rules for general solicitations in public private placements.  Your cell phone and the social media you command with it are both personal communications tools and advertising media. 

One minute you are calling or texting your friends to tell them you are at a football game.  Next, you are Tweeting your opinions about something to the world during the half time show.  The mass broadcast that looks a lot like advertising media can create interactions that quickly bring you back into the world of communicating with individuals again when you click on something you see or forward it to a friend.  Mobile devices allow you to do this anytime and anywhere and to change back and forth as many times as you want.  Since it's all free, you usually don't even think about what you are doing.  You just do it.

Social Media also changes how people experience mass advertising media.  People Tweet to text their opinions about television shows and sports events while they are still watching.  You don't have to wait to tell friends and co-workers about it the next day.  This practice started ad hoc, but now entertainment networks and sports teams promote this Social Media activity as part of the overall entertainment experience.  You become part of the mass media experience as you use mass media to communicate with thousands or even millions.

The traditional wall between registered public offerings and private placements survived for about four score years, because securities laws generally permitted people to raise capital by using the same communications tools they used for other purposes in their daily lives. 

In 20th century America, you invested and you bought books and cars the same way.  First, you saw something you liked in an advertisement in the mass media.  Then, you talked to someone on the telephone or face to face to actually purchase what the media told you to buy. 

One set of securities rules governed whether you could use TV to sell securities to a million people.  Another set of rules governed whether you could use the telephone to sell securities to one person. 

When personal communications tools and advertising media were two separate things, they could be regulated by different rules.

But our communications patterns have changed wildly during the first two decades of the 21st Century.  Social Media (and the Internet generally), that you control from your mobile device, are stealing traffic from both traditional personal communications tools and mass advertising media by offering people both personal communication and mass advertising in one package. 

So, if we continue to ban general solicitations in private placements, we would be forcing people to change their normal communications behavior to accommodate a law they don't understand.

How Erosion of the Wall between Business and Entertainment Affects Capital Raising

Shark Tank is one of the most popular reality TV shows.  It is stimulating incredible interest in new businesses and how to raise money.  People are spending their "free time" watching.

Currently, Shark Tank is focused on specific celebrity investors.  The audience doesn't participate.

 But change is inevitable.  How long will it be before:

·         The audience is able to bid against the celebrity investors and one another?

·         Businesses and investors in the audience are contacting one another via Twitter sn other Social Media?

·         Online streamed television stations start taking orders for securities the way they do for products?

Recent securities law changes don't provide enough flexibility to do this with the entire mass audience.  But you can do it with verified accredited investors.  And how long will it take for non-accredited investors to demand to be allowed to participate?

This wall between business and entertainment has only a few chinks in it now, but it has the potential to erode very quickly.

Going Viral within Affinity Groups is the New Door through the Investing ROI Wall - Hobbies and Social Interests Influence Investing Patterns

People have always made investments for reasons other than maximize the return on their investment.  The many reasons for investing that have little or nothing to do with maximizing your ROI include:

• The intellectual challenge of helping a new business.
• Promoting social causes (historic preservation, green energy, locally produced organic food etc.).
• Businesses that might benefit if a particular product or service is introduced into the market – PCs, tablets and smart phones created the market for apps and other software. 
• Promoting local economic development.
• Combining a hobby with business or investments.
• Curing a disease that a family member or a friend suffers from.

People who share these interests frequently talk to other members of their affinity group about common interests - both online and in the real world.  Online affinity groups are displacing a wide range of activities (from bowling leagues to churches) where people spend their time and socialize.

Social Media is your door into these communities.  Of course, not all members of these affinity groups are accredited investors.  But online affinity groups facilitate communication across class and geographic lines.  Your goal is to motivate people to talk about why your business is important to their affinity group.  One motivated person can give you exposure to the entire affinity group.

That's why the ability to communicate with non-accredited investors about your offering is so important.  Non-accredited investors can become part of your unpaid sales team to help you sell to accredited investors.

Who is a Securities Professional after the Wall between Professionals and Amateurs Disintegrates?

Let me ask you some questions:

·         Is a blogger a "journalist?"

·         Are all bloggers "journalists?"

·         Or are just some bloggers "journalists?"

·         How do you tell the difference?

Here's another question:  Who is an expert?

In 20th Century America, encyclopedia companies paid "experts" to write articles for multi-volume encyclopedias.  People paid hundreds of dollars for these books and prominently displayed the expensive leather bound books for family and friends to see.  That display proved to others that they were educated people who knew about the world.  Whether they actually knew or understood what was inside these expensive books was beside the point.  Generations of wealthy people have displayed expensive books to impress others.

Now, Wikipedia is free and can be accessed instantly by everyone.  The experts who write Wikipedia donate their time.  Many people no longer see much of a point in storing in their brain knowledge they can access instantly for free.  Wikipedia has reduced much of human knowledge to trivia by making it too easy to get.

This raises questions about professionals and experts:

·         Are you still a "professional" if you are working for free

·         Are you still an "expert," if people don't value your work product?

One of the walls that the Internet and Social Media is breaking down is the wall between amateurs and professionals.

The technology facilitated sharing economy is breaking down similar walls in the taxi industry and the hotel industry.  Consumers are asking why Government monopolies exclude ordinary people from using their cars and homes to make money.

What does this have to do with securities laws?

The securities industry isn't immune from this trend.  People are asking:

• Are securities industry professionals worth their high fees? 
• Why Government regulations protect securities industry professionals from competition from non-professionals?
• In a world where technology can bring investors and businesses together, do the platform operators really need to be licensed securities industry professionals?
• Will securities industry software platforms really work better or protect investors better?

The 2008 economic crash proved once and for all that the "experts" at big investment banking houses have salaries that are much higher than their IQs.  They invented a monster and couldn't control it.  And the geniuses of Wall Street failed in a very public way that the whole world both saw and felt.  Then, Wall Street pulled in their favors and got bailed out.  So, unlike a true professional, Wall Street was insulated from the results of its behavior.

Prior to 2008, securities laws were based on the premise that expert professionals who are registered as a broker-dealer or an investment adviser would protect investors from fraud.  That wasn't a foolproof plan.  And that protection was expensive.

One of the major premises of crowdfunding is that members of the "crowd" of investors will protect one another from fraud.

Crowdfunding operates a lot like Wikipedia.  People in the "crowd" look at the potential investment, make comments and ask questions.  Every other investor in the "crowd" can see the questions and comments and the issuer's answers.  Investors then watch to see how many other people are committed to investing before they jump into the deal.

It's not a foolproof way to protect against fraud, but we have found out the hard way that nothing is fool proof and the crowd offers the benefit of working cheap – everyone can affrd advice from the "crowd."

Deal Lawyers Have to Know More than the 1933 Act as Technology Enhanced Offerings Erode the Walls Between Different Securities Laws

Private placements are governed primarily by the Securities Act of 1933.

But the new world of technology platforms raises many issues about whether platform operators and social media consultants are doing things that require them to register as a broker-dealer under the Securities Exchange Act of 1934.

Likewise, online venture capital firms and investor syndicates raise broker-dealer issues and issues under the Investment Advisers Act and the Investment Company Act.

• Who can be paid?
• What services can they perform?
• What registration's do they have to have?
• What exemptions are available?
• What are the penalties if you make a mistake?

So, to provide legal advice in public private placement offerings, we have to climb the walls between each of these four laws more often than we did in the past.

The Effects of Crumbling Walls

We've just briefly discussed ten types of crumbling walls that are changing how we raise capital.

But crumbling walls scare many people, because:

·         Walls signify safety.

·         Walls provide a way to organize our life.

So, the fact that securities regulators are scared, because so many capital raising walls are crumbling, because of changing technology and securities laws

But it's not only securities regulators who are scared.  Many people who should be looking at the crumbling walls as an opportunity are scared too.

Prisoners sometimes become scared after they are released from prison.  They sometimes miss the security of the walls.  Simple things like deciding what to eat and when to eat several times each day can be disorienting to former prisoners

Freedom is scary and not everyone is up to the challenges of Freedom.

But Freedom is less scary if:

• People understand all the parts.
• People know how the parts relate to one another.
• People know why changes are occurring.

If people don't know these things, they may lose opportunities to capitalize on the new Freedom the disintegrated walls afford them.

That's why it's important to establish a new theoretical framework to replace the old walls to organize how we think about using changing technology and changing securities laws to raise capital.

• Whether on Wall Street.
• Whether in Silicon Valley.
• Whether on Main Street.