2014 Year in Review

2014 Year in Review - Small Steps Towards an Immigration Fix

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This post is one in a series of reports on significant issues for startups in 2014. In the past year, the startup community’s voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world’s policy goals in 2014, from net neutrality to patent reform, remain unfulfilled. Stay tuned for more year-end updates and continue to watch this space in 2015 as we follow the policy issues most affecting the startup community.

There’s widespread agreement among policymakers and citizens alike that our immigration system is broken. But, despite this near-universal recognition that bringing foreign entrepreneurs to the U.S. to start businesses will improve our economy and create jobs, immigration reform remains elusive. Though the House has staunchly refused to consider moving immigration reform legislation, the President took action in November, issuing an Executive Order that takes small but important steps in the right direction. The President’s Executive Order expands immigration options for foreign-born entrepreneurs and makes it easier for high-skilled workers awaiting Lawful Permanent Resident status to change jobs. While these changes are important, the kind of reform that will more fully address the challenges of our country’s immigrant system remains within the purview of Congress.

Until Congress takes on the issue, an outdated immigration system continues to be one of the greatest threats to American entrepreneurship and business growth. Demand for high-skilled employees in the tech industry remains higher than ever and continues to build. And while American universities educate thousands of foreign-born students in STEM fields every year, these students often have few legal employment options in the U.S. and end up returning to their home countries. The President’s plan addresses this problem by seeking to expand the Optional Practical Training program, which permits foreign-born STEM graduates to stay and work in the U.S. Ultimately, however, the OPT program is temporary, and more action needs to be taken in order to allow these talented, U.S. educated STEM graduates to work and build companies in the U.S.

Those high-skilled workers who are eligible to stay in the U.S. often do so through H-1B visas, which have myriad complications and limitations. For one, the supply pool is capped at 85,000, and they’re only issued once a year via lottery. Companies simply can’t rely on winning this lottery, especially startups that “live and die by speed,” as the CTO of Zenefits explained. Further, visa-holders are barred from switching employers, even if they’re afforded better opportunity at another company. This particular restriction was addressed in the President’s recent executive action, which plans to allow highly skilled workers and their spouses to obtain a portable work authorization as they wait to acquire more permanent residential status. However, the executive action did not raise the visa supply, a policy request that’s been a priority for the tech community for years. Only legislative reform will increase the woefully inadequate supply of visas for high-skilled foreign workers.

When it comes to high-skilled workers, our immigration system’s shortcomings may be most devastating for the aspiring entrepreneurs it impedes. The economic case for creating opportunities for immigrant entrepreneurs couldn’t be clearer: a Kauffman study found that immigrants are nearly twice as likely to start a business than native-born Americans.

Yet, under the current rules, a potential founder cannot leave her company in pursuit of starting her own business. The President’s Executive Order also proposes to mitigate this deficiency by creating special immigration rules for founders who can prove they’ve created jobs, attained investment, or generated revenue. We’re excited to see the details of this new immigration pathway released in the next year and hope promising entrepreneurs can take advantage of the opportunity. Nonetheless, the plan falls short of establishing a true founder’s visa.

More countries around the globe are creating attractive opportunities for entrepreneurs seeking a home to build their businesses. Canada, Chile, and New Zealand are just a few of the places welcoming entrepreneurs with legal residency status and even funding through “startup visas.” While the United States Congress stands idle, entrepreneurs are packing up and moving elsewhere. As Reddit founder Alexis Ohanian told CNNMoney, “The next Stripe, or the next Google is one annoying visa application away from just starting in Canada.”

Looking to 2015, the new Republican Congress seems eager to undo the President’s Executive Order, but whether lawmakers will simply attempt to reverse the President’s actions or actually work to fix the many flaws with our immigration system remains to be seen. While comprehensive immigration reform remains a political third rail among Republicans—particularly in light of the 2016 presidential election—it is possible that lawmakers may attempt a piecemeal approach to immigration reform that addresses problems with the high-skilled immigration system, leaving more politically fraught questions relating to undocumented immigrants untouched. Whether comprehensive reform or an issue-specific approach is more achievable, immigration reform must be a policy priority for all members of Congress in 2015 if we are to maintain our position as the best place in the world for entrepreneurs to start new and innovative businesses.

2014 Year in Review - Copyright in the Courts, Legislation on the Horizon

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This post is one in a series of reports on significant issues for startups in 2014. In the past year, the startup community’s voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world’s policy goals in 2014, from net neutrality to patent reform, remain unfulfilled. Stay tuned for more year-end updates and continue to watch this space in 2015 as we follow the policy issues most affecting the startup community.

As is only fitting in a policy area where the law consistently fails to keep pace with technological developments, we are not much closer at the end of 2014 to an overhaul of the nation’s copyright laws than we were in the spring of 2013 when Register of Copyrights Maria Pallante asked Congress to begin work on the “Next Great Copyright Act.” Despite the lack of large-scale reform efforts, 2014 was a fascinating year in copyright issues, with hints at prolonged policy debates to come.

Perhaps chastened by the SOPA/PIPA debacle, Washington took a cautious, deliberate approach to copyright reform efforts this year, getting a lay of the land from a multitude of stakeholders in a series of hearings, roundtable discussions, and panels hosted by the Judiciary Committee, the Copyright Office, and the USPTO. These fact-finding missions covered everything from the DMCA notice and takedown process to the application of the first sale doctrine in digital media. In July, we participated in one of the USPTO multi-stakeholder panels to discuss how massive statutory penalties for secondary copyright infringement can chill innovation and encourage copyright trolls. That policymakers took such a keen interest in soliciting opinions from interested parties about how copyright law needs to change in the coming years suggests that the contours of new copyright legislation will start to take shape in 2015.

While legislators pondered potential reforms, the judiciary was hard at work dealing with cutting edge copyright cases (and, unfortunately, coming to some troubling conclusions). In April, we filed an amicus brief with the Supreme Court in its review of Aereo’s TV streaming business. The Court ultimately ruled that by distributing free over-the-air broadcasts to Internet subscribers via dedicated miniature antennas, Aereo was infringing broadcaster copyrights. In doing so, the Court ignored the plain text of the statutes at issue, employing what amounted to a smell test: Aereo looked like a cable TV service, so it should be governed as one, subject to a compulsory license regime. The ruling injected even more uncertainty into a notoriously vague body of law, opening up avenues for idiosyncratic judicial opinions to shut down new technologies that are in textual compliance with existing statutes.

Even more concerning for startups everywhere, the Federal Circuit in May issued its opinion in the Oracle v. Google case, holding that software APIs—bits of code that allow different applications to communicate and work together—are copyrightable. The implications of this decision are far-ranging, threatening to undermine the competition and open exchange of ideas that helped drive the rapid growth of software and applications. Requiring entrepreneurs to enter into licenses in order to use common APIs will make it significantly more difficult to create widely compatible applications, leading to an increased balkanization of software services and applications. As interoperability decreases, so too does application innovation and consumer choice. Google has appealed to the Supreme Court, and we joined an amicus brief urging the Court to take the case, arguing that allowing companies to claim copyrights on APIs would greatly harm software innovation.

Recent weeks have seen even more salacious copyright news, with leaked documents from the MPAA suggesting that the so-called “copyright wars” of a few years back may return in a big way. The MPAA has apparently been working on reinterpreting the DMCA to accomplish some of the same nefarious goals that SOPA was meant to facilitate (e.g., DNS site blocking), and it has roped several state Attorneys General into taking up its cause of holding content-neutral websites accountable for copyright infringement rather than the folks actually engaging in the “piracy” the content industry so detests. As the SOPA/PIPA fight showed and these leaked documents confirm, the content industry has little regard for the collateral damage its anti-piracy efforts would do to non-infringing activities.

In light of these reports, it seems more and more likely that Congress will begin putting pen to paper on a Copyright Act update in 2015, and it’s crucial that the technology and startup communities help set the agenda, rather than merely reacting to the demands of the content industries. Key on that agenda is restoring sanity to the copyright damages regime, strengthening and clarifying safe harbors for companies that aren’t engaging in direct infringement, and ensuring that the costs of complying with secondary liability rules aren’t prohibitively expensive for startups. The SOPA/PIPA debate showed that the Internet community is paying attention to changes in copyright policy; the next great copyright debate must show that the tech world is ready and willing to advance a proactive agenda that fosters the next wave of innovative technologies.

Patent Reform: We Must Capitalize on 2014’s Momentum to Win in 2015

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This post is one in a series of reports on significant issues for startups in 2014. In the past year, the startup community's voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world's policy goals in 2014, from net neutrality to patent reform, remain unfulfilled. Stay tuned for more year-end updates and continue to watch this space in 2015 as we follow the policy issues most affecting the startup community.

Patent reform—a highly technical and wonky area of the law—is having a moment. A long-overdue moment. While we didn’t accomplish our primary goal in 2014, namely, passing patent reform legislation that would fix a dangerous and expensive patent troll problem, we did make important strides toward leveling a playing field that had been, up until recently, completely skewed in favor of incumbent industries.

In fact, 2014 saw some really important changes to the U.S. patent laws, pretty much all of which benefitted the startup community.  For instance, the Supreme Court has been very active in patent reform—issuing six unanimous rulings last year, each of which came down in favor of the tech industry and/or patent reformers. The most important of those was a case called Alice v. CLS Bank, in which the Court tightened the definition over what can and can’t be patented, which has already resulted in fewer bad patents. This is good news, because a low-quality patent is one of a troll’s favorite weapons.

Even more, 20+ states have taken on patent trolls and the FTC continues to investigate the issue as well. Which is why we’ve argued that, despite the hold-up on Capitol Hill, our community is actually winning the patent reform debate.

That said, there is much work left to do. One of a troll’s favorite weapons might be low-quality patents, but the other is the outrageous cost of patent litigation. To fight a case to verdict can easily cost a defendant millions of dollars and can take years—resources unavailable to many startups and small inventors. This leaves a startup facing a patent threat with two really bad options: waste time and money in court, a terrible distraction from growing a business; or to settle, essentially paying the troll to go away and emboldening it to act again.

Which brings us to legislation. Only Congress and President Obama can fix the lopsided nature of patent litigation and create the proper incentives for troll targets to fight back. The good news is that bills in both the House and Senate appear poised to move in early 2015. Even better, the President has been very supportive of these efforts in the past. The bad news is that the usual opponents of reform—the ones who benefit from the status quo—are gearing up for a big fight.

We’re confident that the momentum gained in 2014 will help push patent reform over the finish line in 2015, but it will not be an easy fight. Continue to watch this space to learn how you can help join our efforts.

 

2014 Year in Review — The JOBS Act: What’s Happened and What’s Next for Startup Capital Access

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This post is one in a series of reports on significant issues for startups in 2014. In the past year, the startup community's voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world's policy goals in 2014, from net neutrality to patent reform, remain unfulfilled. Stay tuned for more year-end updates and continue to watch this space in 2015 as we follow the policy issues most affecting the startup community.

With overwhelming bipartisan support, the Jumpstart Our Business Startups Act—or the JOBS Act—was signed into law on April 5, 2012, and for entrepreneurs and startup investors, the bill was easily one of the most promising pieces of new legislation to come out of Congress in some time. The JOBS Act updated Securities and Exchange Commission rules dating back to the 1930s to enable growing companies—from seed stage to IPO—to more easily raise capital. In the past two years, parts of the JOBS Act have proved effective and even essential for startups and investors while other portions of the act, notably public equity crowdfunding, continue to languish in the SEC rulemaking process. We’re hopeful that the intent of the JOBS Act—to open new avenues for capital formation and spur great participation in the startup economy—can finally come to fruition in the new year.

At the very least, 2014 proved the JOBS Act’s “IPO On-Ramp” to be a major success, whether or not the bill’s authors can take direct credit. Aiming to revitalize the struggling IPO market of recent years, this provision created special rules for emerging growth companies approaching IPO, including loosening disclosure requirements. In 2013, the rate of IPOs began to accelerate, and 2014 saw the most IPOs since the late nineties tech bubble, including tech startups GoPro, Zendesk, and Grubhub. As Steve Case writes in the Wall Street Journal, taking companies public is significant not only for a company’s owners and investors, but also for the economy as a whole: most job growth at emerging-growth companies comes post-IPO. If the economy continues to recover, we hope 2014’s banner year is just the beginning for the role tech startups can play in reviving the economy.

Another significant section of the JOBS Act lifted the ban on general solicitation, meaning companies can now publicly advertise that they’re raising money. Historically, entrepreneurs could only seek investment from people with whom they had pre-existing relationships. Soliciting investors online or over social media was strictly prohibited. This ban was officially lifted in September 2013 and within the past year, hundreds of startups like Scoot Networks in San Francisco and Dinner Lab in New Orleans have embraced this new approach to finding investors. Anyone on the Internet can now browse through lists of hundreds more startups seeking funding on crowdfunding portals like Angel List, Circle Up, SeedInvest, Flashfunders, and Alphaworks.

Yet compared to traditional capital-raising options taking place behind closed doors, general solicitation makes up an extremely small portion of the offering market. According to the SEC’s private offering filings from September 2013 to September 2014, only around 3% of issuers chose the general solicitation route.

That so few businesses are taking advantage of these new funding opportunities may be the result of poorly defined rules. What is properly considered “general solicitation” and just how businesses must go about verifying that their investors are accredited (a requirement of the act) has not been clearly articulated by the SEC. Further, proposed SEC rules made public in September of last year hint at onerous additional disclosure requirements that would make this offering much less attractive.

Though there is uncertainty surrounding the act’s general solicitation provision, it’s at least seen the light of day. Other highly anticipated portions of the JOBS Act continue to be held up in the SEC rulemaking process. Equity crowdfunding, which would allow for non-accredited investors to buy small amounts of equity in startups, awaits final rules, as does another kind of offering referred to as Regulation A+, a sort of public offering for smaller private companies attempting to raise up to $5 million. Whether the SEC has been bogged down in finalizing Dodd-Frank rules, or they’re taking extraordinary caution and due diligence in crafting crrowdfunding rules, the exact cause of the remarkably long delay is unknown. Whatever the source of the SEC’s inaction, we were frustrated with the SEC and decided to rally the startup and investor community around the issue, telling the SEC that it’s time to act.

In November, Engine crafted a letter signed by over 200 entrepreneurs and investors to the SEC, urging it to finalize rules for equity crowdfunding and Regulation A+ raises, a loud and clear reminder of the widespread community of supporters and stakeholders awaiting the Commission’s action. Nonetheless, the SEC has given no indication of a timeline for issuing rules, though some have speculated those rules may not be released until later in 2015.

Meanwhile, many experts in the investment community believe that even if SEC does finish the job, between the current statute and any additional SEC requirements, equity crowdfunding will be too costly and cumbersome for startups raising just small amounts of capital. Spending the time and money to file tax returns, audit financial statements, and provide detailed accounts of business information could make crowdfunding an expensive undertaking that just isn’t worth the potential rewards, given the other, less costly fundraising avenues available to entrepreneurs. Thus, as the SEC continues to stall, interest grows in returning to Congress to draft better legislation. If the SEC fails to promptly issue rules in the new year, folks in Congress may begin writing a new version of the JOBS Act that addresses concerns with the crowdfunding provisions and limits the SEC’s discretion to issue implementing rules.

In 2015, we hope to see our government step up with a renewed, spirited policy approach that opens new avenues for capital access. Whether the SEC can finally get the job done or Congress can come together like it did in 2012 to pass a revived version of the JOBS Act, policymakers should ensure that promising businesses of any size, and committed investors of any net worth, can contribute to and grow our economy.  

 

2014 Year in Review — Net Neutrality: Where We've Been, and Where We're Going

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This post is one in a series of reports on significant issues for startups in 2014. In the past year, the startup community's voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world's policy goals in 2014, from net neutrality to patent reform, remain unfulfilled. Stay tuned for more year-end updates and continue to watch this space in 2015 as we follow the policy issues most affecting the startup community.

Of all the tech policy issues that got major airtime in 2014, few resonated so deeply with the general public as the fight over net neutrality. The net neutrality debate highlighted both the strength of the Internet community’s voice and the ample work we must still do to make sure Washington heeds our message. Thousands of companies that depend on the Internet’s open playing field and millions of Americans who recognize the threat posed by unchecked ISP gatekeepers mounted a sustained and effective campaign throughout the year to influence the FCC’s net neutrality rulemaking. While these efforts have been enormously successful in getting the FCC to take net neutrality seriously, the task is not yet finished.

This year’s net neutrality fight was not the first time the FCC grappled with these questions. Though the FCC in 2002 (wrongly, we believe) classified broadband Internet as an “information service” under the Communications Act of 1934, rather than a “telecommunications service,” broadband Internet has always been governed by net neutrality principles. Under such principles, ISPs are obligated to treat all sources of data equally and not block or degrade traffic from particular edge providers. The FCC enshrined these principles as enforceable rules in its 2010 Open Internet Order, which established regulations against ISP discrimination.

Earlier this year, an appellate court in D.C. threw out out these 2010 rules not because of any inherent infirmity with the logic of net neutrality itself but on something of a legal technicality: only “common carrier” services could be subject to bright line rules against discrimination, and since the FCC neglected to classify broadband as a common carrier telecommunications service, it could not now bar ISP discrimination. The court held that any rules issued pursuant to the FCC’s section 706 authority—a statutory mandate to enact policies that promote the adoption of broadband—could not include a ban on paid prioritization arrangements or other forms of access fees unless the FCC first reclassified broadband as a common carrier service under Title II of the Communications Act. Faced with this rejection of its 2010 rules, the FCC was asked yet again to reconsider how and whether to protect a neutral Internet.

Reports earlier this spring suggested that the FCC was not considering any plan involving reclassification, which signaled to the Internet community that the FCC was essentially turning its back on net neutrality altogether. The reaction to these reports was swift and effective. Engine, along with the Open Technology Institute at the New America Foundation  sent a letter to the FCC with nearly 200 major Internet company signatories demanding that the Commission issue rules sufficient to block discrimination and paid prioritization. The FCC got the message, and its notice of proposed rulemaking solicited comments on whether to reclassify broadband under Title II in order to establish meaningful net neutrality rules.

Even as the FCC discussed the possibility of reclassification in its proposed rules, few believed that reclassification had any chance of going forward. Unwilling to accept a world in which ISPs could abuse their gatekeeper power to impose rent-seeking access fees, the Internet community got to work. The path from toothless rules under section 706 to the imminent possibility of full-fledged net neutrality regulations under Title II was paved most visibly by a stunningly large public response. Nearly 4 million commenters wrote to the FCC about its consideration of new net neutrality rules, a majority of whom supported calls for stronger regulations to prevent ISP misconduct. Recognizing that the high cost of access fees that ISPs could charge edge providers would ultimately get passed on to consumers, citizens fought back against allowing ISPs to serve as gatekeepers to the Internet.

Startups also played a key role in shifting the FCC’s consideration of net neutrality rules towards more meaningful regulations under Title II. Despite having limited resources and time to devote to challenging the lobbying might of cable companies, startups from across the country worked hard to keep the Internet open for permissionless innovation, filing comments with the FCC, participating in an Internet-wide protest, and flying to Washington, D.C. to gin up political support for real net neutrality. As the dire consequences of abandoning net neutrality would be felt more deeply by smaller companies rather than larger, more established tech firms, startups took on an outsized role in the net neutrality fight.

In the face of this massive popular response, the FCC moved haltingly towards a Title II-based solution, leaking news that it was considering a so-called “hybrid” net neutrality proposal that relied in part on Title II authority, but would have entailed significant risk of being rejected again in court. Under such hybrid proposals, the FCC would divide every Internet communications into two distinct components—a communication between an end user and her ISP and a communication between the ISP and the edge provider the user wants to access—and regulating only this second communication under Title II. While news that the FCC was finally considering Title II in some form was encouraging, the Commission’s failure to recognize that full-fledged Title II reclassification represented a far cleaner path to strong net neutrality was frustrating.

With the FCC expected to circulate a final draft rule only weeks after news of the “hybrid” plans leaked, the time for action appeared to be running out. And then, almost overnight, the conversation changed when President Obama called on the FCC to use Title II reclassification to protect an open Internet. The President’s announcement was game-changing; the once-impossible prospect that the FCC would invoke full Title II reclassification became plausible, perhaps even likely. Politicians rallied behind the President’s plan in droves, and many of the largest tech companies in the country vocally supported the President’s call for full Title II. Even conservatives, often assumed to be opposed to net neutrality, overwhelmingly supported real net neutrality.

But, despite the FCC’s apparent shift from weak net neutrality under 706 to full-fledged Title II reclassification, the net neutrality fight is not yet over. All indications from the FCC suggest that it will circulate its proposed rule this spring. Though most believe that the FCC will propose reclassification (and apply net neutrality principles to mobile broadband—an important protection omitted from the 2010 rules), there is no concrete proof that the FCC will follow the clear will of the people and the Internet economy to enact real net neutrality. While it is crucial that the FCC makes sure that its new rules are strong and sufficient to withstand the inevitable legal challenge from ISPs, we must continue to pressure the FCC to do what’s right and do it promptly, lest carriers use the delay to sap the FCC’s courage to stand up to ISP malfeasance and protect the open Internet.

And, even if the FCC reclassifies broadband in order to craft strong net neutrality rules, the debate will likely continue in the new Republican Congress, which has already signalled its opposition to meaningful net neutrality. Whether Republican opposition is genuine or a knee-jerk reaction to the President’s statements remains to be seen. In the next year, we will keep the pressure on policymakers, reminding them of how crucial net neutrality has been to the momentous growth of the Internet economy and how the millions of Americans who have benefitted from the Internet’s prosperity are fully engaged and ready to fight to preserve the neutral Internet they know and love.