To cut down on fraud in the wake of the 1929 stock market crash, Washington banned private companies from soliciting investments from the general public. Since then, only relatively wealthy people – those who qualify as “accredited investors” by virtue of income or assets – have been able to buy shares of companies not listed on a public stock exchange.
The passage in early 2012 of the federal JOBS Act – short for Jumpstart Our Business Startups – was intended to change that. Among other things, the JOBS Act embraced “crowdfunding” as a way for privately held companies, usually startups, to raise money from ordinary investors through online fundraising campaigns.
A year and a half after President Obama signed the JOBS Act, the federal Securities and Exchange Commission has released the rules of the game for public review and comment. The reasons for the delay are more complex than a federal agency stiff-arming the president and Congress.
Crowdfunding in the Internet era has largely been a province of artists, causes and special projects that don’t come with an expectation of profit. You might get an awesome T-shirt or a front-row ticket out of your crowdfunding investment, as well as some warm feelings about your involvement, but not a lot more.
That changed with the advent of “equity crowdfunding,” through which small companies may sell small pieces of their company in return for the cash needed to move it from startup to success. The expectations for investors are very different: Instead of a T-shirt, they look for a return on investment.
The concept was embraced by the JOBS Act, within certain investment limits, but it ran head-long into the SEC’s historic concern about society inventing new ways to swindle grandmothers and other unsuspecting investors.
So, while most of the nation waited for the SEC rules, several states moved ahead with crowdfunding on their own – including Wisconsin, where the Legislature has passed legislation to rewrite state securities law. To get a crowdfunding exemption under the pending Wisconsin law, a company would need to:
* Be a Wisconsin business selling stock to state investors.
* Not raise more than $1 million, or $2 million if the company issuing stock is willing to be audited and make the audit available to investors.
* Not sell more than $5,000 in stock to anyone who is not a Wisconsin-certified investor. Certified investors have to earn more than $100,000 per year, or $150,000 for married couples, or have a net worth of $750,000 or more. That’s a different standard than set by the SEC.
* Issue the stock through an Internet site registered with the state Department of Financial Institutions; file disclosure statements; and share those disclosure documents with investors. Investors would be told they could lose the entire investment.
* Have stock payments held in escrow by a Wisconsin bank.
* Not have offered or sold other stock through the exemption in the past year.
The advantages of the state bill begin with the democratizing of equity investments in private companies. Mom and Pop could invest in mom-and-pop businesses. It also brings money off the sidelines for deals too small or early for angel and venture capitalists to consider. It could become a “farm system” for angel and venture capitalists to keep an eye on emerging companies.
There are some potential pitfalls, as well. The Depression-era mentality about protecting investors from themselves wasn’t entirely Rooseveltian paternalism. People can and do fall victim to fraud – even in public markets.
A proliferation of state rules could create a patchwork quilt of laws that might hamper commerce rather than encourage it. Can a global portal like the Internet truly screen out non-Wisconsin investors if they’re determined to get around it? Upstream investors might shun buying out crowdfunded deals if the list of previous investors is too hard to unravel, which could leave those initial investors stranded.
Perhaps the biggest danger is adverse selection. If the best deals are attracting experienced money from venture capitalists or angel groups, does that mean crowdfunding investors are left to pick from a less desirable pool? Are they seeing second-tier deals?
If so, the advent of crowdfunding could give way to disappointment among an entire class of investors who aren’t accustomed to the stark reality that many startups fail, even when backed with institutional money.
Now that proposed SEC rules are out, a whole new class of investors will soon be able to take part in startup deals. Wisconsin should make sure its rules don’t make things harder for investors and companies here by contradicting federal rules that should be allowed to work nationally.
-- Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal. A panel discussion on crowdfunding will take place at the Wisconsin Early Stage Symposium, Nov. 5-6, in Madison.
Louis Ho, the director of the Hong Kong Trade Development Council's seven offices in North and South America, freely admits he didn't know that much about Wisconsin until a recent visit to Minnesota's Twin Cities persuaded him to look across the border.
The New York-based Ho is glad he made the return trip.
Wisconsin expertise in water technologies, aerospace, biotechnology, information technology and energy found its way on to Ho's itinerary during a mid-October trip to Wisconsin, during which he and others from the trade council met with company and tech sector representatives in Milwaukee, Madison and the Fox Valley.
Their message: Wisconsin companies with research, production or logistical needs in Asia should look to Hong Kong as a secure, cost-effective and relatively "red-tape-free" portal into emerging markets in China and the Pacific Rim.
Trade representatives from other nations boast competing messages, of course, but the larger point is that Wisconsin is steadily improving its standing in the global marketplace of trade and foreign direct investment.
Simple demographics should tell U.S. business owners all they need to know about the size of the opportunity: About 95 percent of the world's population lives outside the United States and a rising percentage of those people are "middle class" consumers.
American exports are projected to grow 4 percent annually over the next four or five years, outpacing overall U.S. economic growth estimates.
Less obvious to many business owners, especially smaller firms and startups, is how to efficiently and safely break into that global marketplace.
Wisconsin's exports have been steadily climbing in recent years. It hit a record $23 billion in 2012 (good for 18th among the 50 states) and is on pace for another record in 2013. Still, there are plenty of companies that could be exporting goods and services but have yet to do so.
A blend of routine business pressures in existing markets, awareness of market potential overseas and fear of the unknown – languages, red tape and economic espionage – are primary barriers. There are ways for companies to begin clearing those hurdles, however, often without leaving home.
* The Wisconsin Economic Development Corp., through its international division, has developed export mentoring programs, events and grant programs for small- to mid-sized companies to cover some of the costs related to developing an export strategy and growing sales over time.
* Organizations such as the Madison International Trade Association and the World Trade Center in Milwaukee work with importers and exporters alike, often providing market intelligence and seminars on specific markets and topics.
* The UW System is an often-overlooked source of help for businesses in need of market intelligence, business assistance or help navigating language, cultural and protocol issues. The presence of thousands of UW graduates abroad creates networks in many of the world's leading markets, and the university has established offices in places such as Shanghai.
* Finally, many countries are represented as nearby as Chicago. The Chicago International Trade Commissioners' Association has about 50 members representing 40 countries.
Nothing helps like first-hand stories, however. At next month's Wisconsin Early Stage Symposium (http://www.WisEarlyStage.com) in Madison, one speaker will talk about his company's growth in markets that might seem remote to many in Wisconsin – but which hold enormous potential.
Mark Schmitz, whose state-based ZEBRADOG creative firm is working on projects from Saudi Arabia to South Africa, and from Ireland to the Bahamas, will speak during the Nov. 5 luncheon for the Small Business Innovation Research awards.
Schmitz will talk about how one of Wisconsin's leading outputs – intellectual property – is coveted by companies and institutions in emerging economies that increasingly have the capital, the infrastructure and the expertise to put it to work. His international clients include Saudi Aramco, Kerry Ingredients and the Qatar Foundation.
Wisconsin companies cannot sell all they produce at home, in the Midwest or even nationally. Cracking into foreign markets that may want to buy what Wisconsin offers a logical business plan for many.
-- Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.
Kevin Conroy, the chief executive officer for Exact Sciences Corp., was asked the other day how the federal shutdown and the looming deadline for lifting the federal debt ceiling was affecting his publically traded biotechnology company.
Conroy dryly asked the questioner to search online for EXAS, the company's symbol on the NASDAQ exchange, and track the company's stock price since early October. Like the stock values of many other companies, Exact's price per share had fallen about 20 percent in a matter of days over investor worries about the federal shutdown.
"There was nothing about the performance of our company, before or since, that would have led to that kind of stock price decline," Conroy said.
Uncertainty in the markets is one of the most obvious indicators of the federal shutdown, but it's not confined to companies that are publically traded. Exact Sciences happens to be listed on the NASDAQ, but it's still a relatively young company that looks a lot like other promising firms in Wisconsin, especially those in industries touched by the federal regulatory system.
Exact Sciences is developing a non-invasive colorectal cancer screening test that detects both cancer and pre-cancer. That means intensive federal review, such as Food and Drug Administration clinical trials, which may be slowed or even interrupted if the shutdown continues. So far, those trials are positive.
The story is similar for other emerging companies in the life sciences, including medical devices, and extends to firms in other sectors that may be subject federal review or a grant approval process. The successful Small Business Innovation Research grant program, in place nationally since 1982, is one example of a grant program often used by young Wisconsin tech companies to grow and create jobs.
The size of the federal government's shopping list means many companies outside the tech sectors are feeling the pinch, as well. New applications for small business loans and loan guarantees have halted. Permits and reviews for planned energy and transportation projects have stalled. Many food-safety operations have been curtailed, which should make Wisconsin's agricultural industry more than a little nervous. Tourism is taking a hit because the National Park Service has closed hundreds of sites. Companies that serve as federal contractors will quickly feel the effects of delayed payments for their work.
All of this is in addition, of course, to the direct effects on federal benefit programs and federal worker salaries – dollars which eventually flow back into the larger economy.
Will everyone muddle through? Depending on how long the shutdown lasts, the answer is probably "yes." In fact, Wisconsin may be more prepared to cope than most states because it has historically done so poorly in getting back its fair share of federal tax dollars.
A report by WalletHub, a personal finance social media site, ranked Wisconsin as 47th among the 50 states and the District of Columbia in terms of its vulnerability to the shutdown. That was based on an analysis of seven areas in which the shutdown will touch each state – federal employees per capita, federal contracting dollars per capita, disruption of SBA loans, Social Security payments, student aid applications, veterans per capita, and a real-estate index tied to loan application delays.
Most likely to be affected, according to WalletHub, were Virginia, Alaska, Alabama, the District of Columbia, Maine, Maryland, New Mexico and Colorado. Joining Wisconsin on the "low-risk" list were Nebraska, Nevada, Minnesota, New York, Indiana and Iowa.
In Wisconsin's case, its historically abysmal record of attracting federal funding for just about anything, from highways to research laboratories, may pay off for a while. When the shutdown ends and life returns to normal, however, Wisconsin will go back to its status as a "donor state" when it comes to recouping its share of federal dollars.
No state is immune to the shutdown brought on by the inability of Congress and the president to come to grips with the government's budget and debt issues. Wisconsin's members of Congress should join in a more constructive debate about how to end the shutdown – and then focus on how its taxpayers get more bang for their federal bucks in the future.
-- Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.
Wildfires have enjoyed a dangerously wild year so far in 2013.
In the United States alone, fires have claimed millions of acres in western states such as Colorado, California, Idaho, Oregon, Nevada and Arizona, where the Yarnell Hill fire also took the lives of 19 firefighters in a flash.
Closer to home, a fire sparked by logging equipment charred about 8,000 acres and destroyed 17 homes in Douglas and Ashland counties this spring, and just this week a planned Department of Natural Resources burn in Burnett County leapt out of control and took 600 unplanned acres.
It doesn't have to happen this way.
Sure, the weather in many places has been extremely dry, the terrain makes fighting fires treacherous once they start, and people have a tendency to cluster just beyond the shadow of the forest canopy, sometimes courting danger like moths drawn to a flame.
But none of this changes the fact that command-and-control government policies, sometimes guarded by environmentalists who confuse preservation with sound forestry management, helped spark such fires as surely as an unwatched campfire.
The time has come to reclaim our national forests and wilderness areas from those who would smother them to death. Forests that look wild and untamed to the backpacking visitor appear sick and even frightening to experienced foresters, who know the trees are too crowded, the ground is too brushy and the fire lanes too inaccessible.
The United States is home to about 297,000 or so square miles (190 million acres) of federal forest and rangeland. This incredible resource has always been – and forever will be – susceptible to fire, natural as well as manmade. But the fire patterns of the last decade or more represent a worrying change: There have been more fires that are more devastating, harder to fight, and more costly to people and the environment.
Instead of managing our forests wisely, we have allowed wildfires to do the job for us. These fires are not simply a product of drought, lightning strikes and bad luck. They are the logical result of a century of aggressive fire suppression, coupled with mass build-ups of dense undergrowth that cause forest conditions to deteriorate to an unnatural state.
In the area around Yosemite National Park, where an August wildfire claimed 90,000 acres in two days alone, historical data helped tell the story. Researchers this year found as many as 400 trees per acre on the land. That's compared with between 60 and 90 trees per acre in 1911. There was also between 30 and 40 tons of woody debris per acre on the forest floor, compared with six to eight tons 102 years ago.
"If you don't clear trees and brush and do some prescribed burning, you are eventually going to get a very closed forest that is very dense," said Scott Stephens, a University of California-Berkeley researcher whose team studied the Yosemite region's density.
Federal efforts to fund a Forest Service thinning program will help, but fuel reduction in forests is a costly proposition for taxpayers alone. Market-based incentives can involve landowners and loggers in the fight to save the forests. So can technology and a commitment to creating jobs and opportunity.
At the U.S. Forest Products Laboratory in Madison, researchers are finding ways to use small-diameter trees in construction; use engineered wood products in wood-frame homebuilding; combine wood fiber with recycled plastics to create composite materials used in windows and doors, signs, roofing, exterior siding and automotive parts; use wood fibers to make inexpensive fibers for streams polluted by mines or farms; and use waste-wood chips or sawdust as fuel to generate electricity.
Startup companies such as Whole Trees, with offices in Stoddard and Madison, are finding ways to adapt the superior strength of small-diameter tree branches and trunks for structural support in building applications.
All of these projects could expand the market for small trees and small forest materials. It would encourage ecologically sound forest thinning, reduce the risk of catastrophic fires and make forests less disease-prone. It would also help private landowners generate income from their forest land – and resist the temptation to fragment forest areas for development.
If a profitable use can be found for material that is now choking our forests, everyone wins – including the taxpayer, who will pay less to get the job done and will actually benefit from the products.
-- Still is president of the Wisconsin Technology Council. This column is adapted from a chapter in "Hands-On Environmentalism," a book he co-authored with Dr. Brent Haglund of the Sand County Foundation. "Hands-On Environmentalism" was published by Encounter Books, New York.