Lawmakers lament detriment to startups of Trade Rep’s digital trade reversal
After overcoming childhood shyness in the warmth of his local Caribbean-owned barbershop, Royon Jeffrey knows the power of the beauty industry firsthand. He set out to create ListedB, an online marketplace for beauty industry professionals. We spoke to him about the financial opportunity within the industry, navigating capital access and investors, and his desire to empower small businesses owners.
Foreign nations are saddling U.S. companies — including startups — with discriminatory burdens.
MegaMinds was created out of a need to make learning more creative, fun, and hands-on for students. In our conversation with Co-Founder and CEO Eric Tao, we learned about the growing popularity of immersive learning, the tricky regulatory landscape for a product like MegaMinds, and what it’s like for many first-time entrepreneurs to build businesses.
As strange as it may seem, only a small percentage of Americans can legally invest in most startups today. Under long-standing rules governing who qualifies as a so-called “accredited investor,” only quite wealthy individuals (those make at least $200,000 in annual income or have $1 million in assets, excluding their home) can buy shares in a fast-growing, privately held company.
On Tuesday, President Obama sent his final budget request to Congress and it amounted to a whopping $4.1 trillion. In reality, the President’s budget request is typically little more than legally mandated political theater. It’s an opportunity for Democrats and Republicans to rally their bases and duke it out over fiscal strategy and funding priorities. This year’s budget request will likely go largely unfulfilled by the Republican-led Congress. In fact, it was declared “dead on arrival” by Republican lawmakers, and, in an unprecedented move, House and Senate Budget Committee leadership have elected to forgo hearings on the request entirely.
Still, if nothing more than a wish list, the President’s budget lays the groundwork for future policies and, this year in particular, represents a roadmap for the next Administration to espouse or eschew. There are a number of proposals in the President’s request worth highlighting—policies and programs that, if championed by Congress, would support innovation and entrepreneurship.
Investing in Tomorrow’s Workforce
One of the startup community’s most persistent challenges is accessing a pipeline of skilled talent in order to both help startups grow and create news ones. While the Obama Administration has been an unwavering champion of immigration reform to bolster the country’s pool of high-skilled workers, immigration represents only part of the solution (and unfortunately, neither high-skilled immigration reform nor comprehensive reform appears to be going anywhere for the time being). The other piece is ensuring that we are training tomorrow’s entrepreneurs and tech workers here in America.
The President’s budget request includes $4 billion for improved computer science education through its recently announced Computer Science for All initiative. The funding would support states’ efforts to expand CS programming and focuses largely on training teachers and expanding access to quality instructional materials. The Administration has also called on local leaders, educators, and the tech industry to get involved in expanding CS education.
The budget also proposes creating two new funds: a $75 million American Technical Training Fund, which would provide competitive grants to support evidence-based, tuition-free job training programs in high-demand fields, and a $2 billion Apprenticeship Fund, which would build on the Administration’s successful American Apprenticeship Initiative strategy and aim to spur new innovations in apprenticeship.
Finally, the budget proposes creating more than 50 new “Talent Hot Spots” that would “prioritize a sector and make a commitment to recruit and train the workforce to help local businesses grow and thrive, attract more jobs from overseas, and fuel the talent needs of entrepreneurs.” The Administration estimates that this program could create a pipeline of more than half a million skilled workers in just five years, talent that could feed entrepreneurial growth.
Expanding Broadband Access
Earlier this year, the Federal Communications Commission reported that there are still 34 million Americans (or about 10 percent of the country) who lack access to broadband at sufficient speeds. Startups depend on a healthy and competitive broadband market, and it is essential that federal policies encourage connectivity. The President’s budget request includes continued investments in existing federal programs that support the expansion of high-speed broadband to all Americans. Additionally, the budget request calls for future spectrum auctioning, which will allow for more internet service providers to participate in the mobile broadband market.
Promoting Innovation
Federal investments in research and development can help spur innovation in the private sector and the creation of new companies. The President’s budget includes $152 billion in funding for research and development, an increase over last year’s request. Much of this investment is targeted for innovative technologies such as Big Data services, supercomputing, robotics, and nanotechnology. The budget also includes $4 billion for autonomous vehicle R&D, representing an unprecedented level of investment by the federal government in this new market and a huge win for proponents of this growing technology.
Making the Tax Code Work for Startups
Finally, the budget request includes a number of proposals that would streamline and improve tax benefits for startups and entrepreneurs. The President proposes simplifying the existing Research and Experimentation (R&E) tax credit. Last year, the R&E credit was modified to allow small companies to claim it against payroll taxes, instead of income taxes. This made it available to startups, many of which could not claim the credit previously due to a lack of taxable revenue. Still, the process of applying for the credit remains complex and difficult to navigate for startups. The President’s budget proposes simplifying the credit’s formula, making it easier for startups to take advantage of.
The Administration also proposes quadrupling the amount of startup expenses (things like legal fees, office supplies, or recruiting costs) that entrepreneurs can deduct from their federal income taxes, increasing the deduction from $5,000 to $20,000. This will make it less costly to start a business and allow innovators to put more money back into their startup more quickly.
Looking Forward
The frustrating truth is that most of the President’s budget proposal won’t receive Congressional consideration. However, we hope that future policymakers can coalesce around some of the proposals outlined above, which represent reasonable policies that would encourage the growth of startups that drive our economic success and are responsible for all net new job growth in the United States. Finding common ground in today’s political climate is difficult, but it is essential to ensuring that America remains a place where the ideas of the future can grow and thrive.
Our weekly take on some of the biggest stories in startup and tech policy.
Safe Harbor Agreement Nears Deadline. With a January 31st deadline looming, there is more pressure than ever for the U.S. and EU to wrap up negotiations around a “Safe Harbor 2.0” agreement. In a letter sent to U.S. and EU leaders last Friday, industry stakeholders emphasized that “the consequences could be enormous for the thousands of businesses and millions of users impacted” if a deal is not reached. But another setback came this week when the Senate Judiciary Committee postponed consideration of the Judicial Redress Act. The bill, which would extend rights to judicial redress to citizens of the EU and other designated countries, is seen as essential to advancing an updated safe harbor agreement. This delay makes it even less likely that a deal will be reached in time, the ramifications of which could disproportionately impact startups.
Another Proposal to Weaken Encryption. Another week, another misguided state bill seeking to weaken encryption. The legislation comes from a California Assemblymember whose proposal would prohibit the sale of smartphones in the state with unbreakable encryption. A similar New York bill requiring a “backdoor” for encrypted technologies was covered in last week's digest. In an opinion piece, Christian Dawson of the i2Coalition does a good job breaking down why policies like these would stifle the Internet economy. He writes, “If the U.S. government were to institutionalize backdoors, it would be a heavy burden to businesses, and an operational lift that would likely force a large number of small companies to shut their doors.” We couldn’t agree more.
Verizon Joins the Zero Rating Crowd. Tuesday morning, Verizon announced a new sponsored data program, FreeBee Data, renewing debate around “zero rating” programs and whether they violate net neutrality principles. Under the FreeBee program, content providers have the option to pay Verizon a fee to exempt their content from customers’ monthly data caps. Verizon is the third wireless provider to offer a cap-exempt data program—AT&T has been running a similar sponsored data program since 2014 and T-Mobile has its own video-specific service, BingeOn (which has come under intense fire in recent weeks). The FCC’s Open Internet rules don’t explicitly outlaw “zero rating” programs, but the agency reviews them on a case-by-case basis whether the service harms consumers or businesses. They recently requested meetings with both AT&T and T-Mobile on their programs, and have said that they were notified by Verizon about FreeBee. We’re tracking.
A Grim Outlook for Startup Financing? Recent turbulence in the global stock market may have an impact on 2016 startup financing, the Washington Post reported this week. Volatility in the public markets has many investors considering whether some growing tech startups have been overvalued, a concern that's "likely to trigger a wider pause, denying funds for the innovators that disrupt industries and create new markets." Not good. And while 2015 was a banner year for VC investment, with $72.3 billion going into venture-backed companies in the U.S., (the highest since the dot-com boom), activity slowed by the fourth quarter, suggesting changing investor sentiment. Further, tech IPOs were significantly down in 2015 as companies are treading cautiously into the public markets. 2016 may prove to be an especially important year for policy that promotes greater capital access.
VC Sets New Diversity Standards. Kapor Capital, a longtime leader in its commitment to diversity in the tech industry, announced a new set of standards for its portfolio companies this week. TechCrunch calls it a “a four-part roadmap for startups to foster diverse and inclusive cultures early on.” This commitment will soon become one of the terms in all Kapor’s future investment agreements. Portfolio companies will be required to establish diversity and inclusion goals, invest in tools and resources that assist in mitigating bias, organize volunteer opportunities for employees, and participate in Kapor’s diversity and inclusion workshops. Way to put their money where their mouth is!
Our weekly take on some of the biggest stories in startup and tech policy.
Net Neutrality Has its Day in Court. The net neutrality debate that has dominated tech policy headlines for the past two years finally got its day in court last Friday. A panel of three judges from the DC Circuit heard oral arguments in the lawsuit brought by a consortium of ISPs to invalidate the FCC’s net neutrality rules. Proponents of the FCC’s rules came away from the hearing fairly optimistic. A majority of judges seemed to side with the FCC in the most crucial aspect of the dispute: whether or not the Commission had adequate authority to reclassify Internet access as a “telecommunications service.” The court pushed back more significantly on the FCC’s authority to reclassify mobile broadband and the adequacy of the notice the FCC provided about the final rules it adopted. While we remain optimistic about the Court’s ultimate decision, the net neutrality debate will almost certainly not go away when the Court issues its ruling early next year. It seems likely that the case will ultimately end up before the Supreme Court, and Congress continues to ponder whether it should pass anti-net neutrality legislation.
Feinstein Wants Tech to Report Terrorist Activity. As terrorists attempt to use Internet platforms to mobilize followers, disseminate propaganda, and coordinate attacks, working to diminish militants’ capacity to organize through social media is critical. But the Requiring Reporting of Online Terrorist Activity Act, introduced by Senator Dianne Feinstein (D-CA) earlier this week, is not the answer. The bill would require tech companies to report “any terrorist activity” that they have knowledge of to law enforcement. This obligation seems innocuous on its face, but as often happens, difficulties arise in determining how to actually apply this standard. Emma elaborates on all of the reasons the bill’s controversial (and previously rejected) framework could potentially do more harm than good here.
Computer Science in Classrooms. An education bill signed into law on Thursday acknowledges computer science as a foundational academic subject. By doing so, the bill puts computer science “on equal footing with other subjects when state and local policymakers decide how to dole out federal funds.” This new designation could potentially accelerate computer science's introduction into classrooms across the U.S. and ultimately help address the country's growing tech talent shortage.
Bill Would Cut Back H-1Bs. Senators Bill Nelson (D-FL) and Jeff Sessions (R-AL) introduced a bill this week that would reduce the number of H-1B visas available by 15,000 and also modify the way those visas are allocated—requiring they go to workers who will earn the highest wages. The H-1B program allows companies to hire foreign high-skilled employees, including those with expertise in science, engineering, and computer programming. While these visas are highly coveted within the tech industry, accounts of program abuse have galvanized members of Congress to restructure the program. “This bill directly targets outsourcing companies that rely on lower-wage foreign workers to replace equally-qualified U.S. workers,” Sen. Nelson said in a statement. While attempting to prevent bad practices by specific outsourcing companies, this bill would unduly harm the wider tech industry by further limiting global talent from contributing to U.S. companies, big and small. 2015 saw a record number of H-1B applications: 233,000 for the current 85,000 spots.
Investment Crowdfunding for Tech? Not So Fast. An article in this week’s Wall Street Journal highlighted a few of the shortcomings of investment crowdfunding, a new fundraising tool for startups made legal last month with the release of SEC rules. Those rules contain numerous burdensome requirements for companies raising equity from the crowd, potentially deterring high-growth technology startups. For instance, once a company takes on over 500 investors or grows to a certain size, it must file regular disclosures with the SEC: “It is all the pain of an IPO without the benefits of the IPO.” We’ve previously detailed some of the other issues with those rules, concluding that policymakers must continue to work to lower the cost of raising seed capital through crowdfunding or the impact of investment crowdfunding for startups will be modest.
What We Heard in Iowa: Earlier this week, Engine teamed up with the Technology Association of Iowa to discuss technology policy with Iowa entrepreneurs, caucus goers and two of the 2016 presidential candidates in Cedar Rapids. As the Cedar Rapids Gazette reported, the candidates agreed that education is “vital to innovation” but, not surprisingly, disagreed on the federal government’s role. O’Malley’s address focused on his track record as governor of Maryland. While Fiorina took a different approach, focusing on national security and technology “as a tool and a weapon” in those efforts. The forum offered a glimpse on where at least two candidates stand on a handful of important tech issues and as we look to 2016, we hope to hear a lot more.
Patent Suits Cost Universities. Universities have been getting more involved in patent reform policy and a recent Brookings article explains why. Its author also emphasizes that universities are turning observers off by engaging in offensive litigious actions, which is seen as contrary to the public mission of a university. Furthermore, it doesn’t make sense for universities to be involved in patent reform conversations since universities as a group do not have a financial interest in patenting: 87 percent of tech transfer offices operate in the red. Since there is a false belief among some that without patents there would be no innovation, it is important that the public voice of universities acknowledge “that the debate on the impact of patents on innovation is not settled and that this impact cannot be observed in the aggregate, but must be considered in the context of each specific economic sector, industry, or even market.”
Where are the Women in Tech? A new list was published on the “Best Cities for Women in Tech” and Washington, DC topped it, with women making up about 37 percent of the tech workforce (New York, NY comes in at number five and San Francisco, CA at 23). Kansas City, Missouri (at number two) was one of the only two cities in the study where women in tech don’t face a gender pay gap. Recruitment of women and underrepresented groups in the tech community remains a large part of the diversity conversation: language used in outreach and job descriptions could be turning well-qualified applicants off from even applying. One startup, Textio, is trying to address this problem with their product that “applies a form of artificial intelligence (AI) called natural language processing (NLP) to study the verbiage in documents” and can help highlight words with certain negative connotations.
Last week, Engine participated in the Securities and Exchange Commission’s (SEC) 34th annual Government Business Forum on Small Business Capital Formation, where industry and government experts shared their perspectives and made recommendations on capital access issues for small and emerging companies.
A lot has happened since the last forum in 2014. In March, the Commission adopted rules to implement Title IV of the JOBS Act, also known as Reg A+, which allows private companies to raise a limited amount of capital without having to meet many of the onerous disclosure and reporting conditions required of publicly-traded companies. And just last month, the Commission finalized crowdfunding rules that will allow startups to raise capital from everyday investors over the Internet, marking the completion of the Jumpstart Our Business Startups Act (JOBS Act) rulemaking process.
While it will take time to assess the impacts of these newer rulemakings, the SEC and other stakeholders have been closely monitoring other developments in small business capital markets to help glean lessons to guide future Commission policy. In 2013, the SEC lifted the ban on general solicitation, allowing companies to publicly advertise that they’re raising money. AngelList, a leading equity crowdfunding portal for accredited investors, allows issuers on its site to use general solicitation. However, AngelList’s COO Kevin Laws noted that in the past six months, only two percent of deals on the platform took the public, general solicitation route. The other 98 percent were limited to a private list of investors.
This data from AngelList affirmed what SEC Chairwoman Mary Jo White’s noted in her welcome remarks (and something we have lamented): compared to traditional private capital-raising options, general solicitation still makes up an extremely small portion of the offering market. So why the poor showing? Startups are wary of this funding path because of the unclear definition of what exactly constitutes “general solicitation,” as well as onerous requirements for verifying accredited investor status. The good news, though, is that the Commission has “not observed widespread fraud, as some had feared would occur.”
The use of Reg A+ has also been tepid since becoming effective in June. While the SEC has not yet compiled comprehensive data on the impact of these rules, Sara Hanks, CEO of Crowdcheck, reported that she has seen only around 25 filings of variable quality. She attributed this lackluster showing to a number of factors (it takes a long time to do a Reg A+ filing and the rules are still relatively young), but emphasized that state-level registration requirements for companies seeking less than $20 million are a huge deterrent. We have expressed concerns about this and echo Sara’s wish list for improvements to the coordinated review process, a single filing form, and a single payment process. Each of these changes would simplify the Reg A+ process and incentivize participation by small and emerging companies.
Finally, participants were eager to discuss the Commission’s most recent rulemaking: investment crowdfunding for non-accredited investors. While the rules will not be effective until May 2016, stakeholders (including Engine) are already advocating for modifications to ensure the crowdfunding market achieves its full potential.
One improvement recommended by Kevin Laws was to allow non-accredited crowdfunding investors to participate in alternative investment vehicles like the syndicates common on AngelList. Syndicates, which have been enormously successful in the accredited crowdfunding market, allow for known investors to create funds in which other investors can participate, allowing less experienced investors to benefit from an insider’s expertise (for a more detailed explanation of how they work, see AngelList’s FAQs). Under Title III of the JOBS Act, syndicates, funds, or other special purpose vehicles (“SPVs”) are not eligible for the crowdfunding exemption due to limits on which entities can raise capital through non-accredited crowdfunding. But as we’ve argued, syndicates and other SPVs allow for additional investor protections and portfolio diversification while simplifying the fundraising process for issuers. Congressional action on this piece would make investment crowdfunding in the U.S. safer and more profitable for non-accredited investors.
As the impacts of the JOBS Act are realized, we will see both successes and failures. And importantly, modifications will need to be made. The early, meager response to both general solicitation and Reg A+ should not discount the enormous potential they represent. Instead, it should incent policymakers to pursue solutions that will improve upon the statute and regulatory framework. It is important that constructive conversations like those that took place at last week’s forum continue. A dialogue between those on the ground and those in government is essential to realizing the the original intent of the JOBS Act: facilitating access to capital for innovative entrepreneurs to launch tomorrow’s startups, create jobs, and drive economic growth.
Our weekly take on some of the biggest stories in startup and tech policy.
More Eyes on EU Data Laws. Congress examined international data issues at two separate hearings this week, covering everything from cross-border data flows to U.S. surveillance reform. But the main focus was the recent EU safe harbor decision. Negotiators have until the end of January 2016 to find a replacement for safe harbor. However, businesses of all sizes are already beginning to weigh whether they should simply move their data to European servers over concerns that alternative compliance mechanisms may not be valid. We’ve noted on our blog (and others agree), forced data localization would be incredibly costly - especially for smaller companies - and would have a chilling effect on internet innovation. We’re tracking.
Pros and Cons in SEC’s Crowdfunding Rules. The release of the SEC’s long-awaited investment crowdfunding rules is a huge victory in itself: it facilitates an entirely new form of fundraising for cash-strapped startups. But, are the rules themselves any good? We’ve written previously about changes we wanted to see to the proposed crowdfunding framework, and the SEC’s rules incorporate a few of the items on our wishlist. Specifically, funding portals are now allowed to subjectively decide whether or not to list certain companies on their platforms and may take an equity stake in issuers, too. But, while the new rules ease some of the high disclosure burdens of the proposed framework, they do not go far enough to make investment crowdfunding affordable for small companies. A more detailed look here.
Comprehensive Immigration Reform: Not Happening. Earlier this week, newly elected Speaker of the House Paul Ryan confirmed a suspicion most immigration reform advocates have sensed for years now: that the House will once again refuse to consider comprehensive immigration reform legislation. “I do not believe we should advance comprehensive immigration legislation with a president who’s proven himself untrustworthy on this issue,” Speaker Ryan announced emphatically on “Meet the Press” and repeated in an op-ed Tuesday. But while we won’t expect to see immigration reform on the legislative agenda, we at least expect to hear about it in the 2016 election cycle.
Anti-Airbnb Measures Fails in SF. On Tuesday, San Francisco voters struck down a measure that aimed to curb Airbnb rentals (and those offered by other homesharing services) in their city, where the convoluted conflict between tech and housing is alive and well. Winning the the vote 55-45, Airbnb far outspent its opposition with an $8 million television, billboard, and canvassing campaign against the measure. Among the lessons learned from its victory? Airbnb representatives have said its user base of hosts and guests is willing and ready to mobilize on the company’s behalf, a movement we could see in more cities as Airbnb and other companies come up against new regulatory challenges.
Internet for Everyone in Arkansas. The Arkansas legislature has promised it will have a plan to deliver high speed broadband access to every home, business, and institution in the state by October 2016. The “call to action” was inspired by similar broadband expansion efforts in nearby states like Kentucky and Tennessee. Arkansas’ House speaker noted that broadband “has become the 4th rail of economic development. It is just as important as your transportation infrastructure, your educational and workforce infrastructure, your tax structure.” We couldn’t agree more and are pleased to see states acting to ensure all of their citizens have access this essential resource.
Former Twitter Engineer: Diversity is Difficult. An essay by a former lead engineer at Twitter is gaining momentum and attention, highlighting the challenges the tech industry continues to confront in making its workforce more inclusive. Leslie Miley recounts his efforts to increase employee diversity at the company, describing frustrating conversations with senior engineers who referred to diversity efforts as “lowering the bar.” The tipping point for Miley was when he pitched his proposal for hiring a ”Diversity Engineering Manager” and was met with suggestions from higher-ups that underscored “the unconscious tendency to ignore the complex forces of history, colonization, slavery and identity.” It was the culmination of these conversations and the refusal by leadership to acknowledge their own “blind spots” that drove Miley to leave.
Podcasting Tech Policy on a16z. Engine Executive Director, Julie Samuels, spoke with Techdirt’s Mike Masnick and the host of the Andreessen Horowitz podcast earlier this week. Together, they covered a “whirlwind tour of current policy issues in tech - from patents and IP in China to cybersecurity, privacy, and Safe Harbor in Europe…And the gig economy, talent, and immigration.” That’s a lot of tech policy, and all in under 60 minutes. Listen here!
#VetsWhoTech. In anticipation of veterans day, Engine is highlighting the success stories of veterans who’ve made strides as developers and founders in the tech industry. These stories showcase the great potential of this community to become leaders in the industry, as well as the ways in which government support for their efforts is falling short. Follow the series on Medium.
It’s been almost a week since the SEC released its long-awaited rules implementing the investment crowdfunding framework established under the JOBS Act more than three years ago. Now that everyone has had a chance to digest the nearly 700 page document, we can begin to evaluate the merits of the SEC’s rulemaking. While the mere fact that investment crowdfunding is legal in the U.S. is an historic accomplishment that startups everywhere should take time to celebrate, there is more work to be done to ensure the crowdfunding market achieves its full potential.
At a high level, the rules the SEC released last Friday are a definite improvement on the proposed rules from 2013. The final rulemaking clarifies a number of the proposed rules’ ambiguities and inconsistencies and corrects a few important deficiencies. The most important change is probably the SEC’s decision to permit funding portals—the sites that host crowdfunding campaigns—to selectively curate which issuers may list on their sites. Because funding portals are barred from providing “investment advice,” the SEC originally planned on barring portals from applying subjective criteria to decide which issuers to list, as this curation could have been perceived as an implicit recommendation that the listed issuers were better investments than those the portal rejected. As we’ve written previously, so long as portals provide clear disclaimers about the inherent risk in investing in any startup, weeding out obviously bad companies would only serve to improve investor safety. Failing to permit funding portals to take on this important investor protection function could have spelled disaster for the nascent crowdfunding industry.
The SEC also made the wise decision to permit crowdfunding portals to take equity stakes as compensation from the issuers they list. For cash-strapped startups, awarding stock in lieu of cash is a common practice for employee retention and even third party vendor compensation. Allowing portals to take equity helps lower upfront costs for startups seeking funds through the crowd and helps align portals’ incentives with those of issuers and investors. Similarly, the SEC made incremental steps to help lower certain reporting costs for crowdfunding issuers. The Commission removed the requirement for issuers to file audited financials in annual reports and permitted first-time issuers seeking higher crowdfunded raises to submit reviewed—rather than fully audited—financial statements prior to launching a campaign.
Any rule change that lowers the cost of raising capital for crowdfunding issuers will help make crowdfunding more attractive to startups. This in turn, will make crowdfunding safer for investors, as an unduly high cost of capital will mean that only the riskiest of companies will use crowdfunding to satisfy capital needs. However, the SEC failed to go far enough in addressing the high cost of capital, particularly for deals at the lower end of the market. Despite small changes to the disclosure requirements, the cost of submitting pre-campaign financial statements and filing annual reports in perpetuity will likely make crowdfunding too expensive for issuers seeking less than $100,000. Considering the small startups that would most benefit from using crowdfunding as a source of initial seed capital will not have any financial history to report in formal financial statements, requiring such companies to expend scarce resources preparing such useless documents seems foolhardy. The cost to small issuers is compounded by the SEC’s failure to include a “testing the waters” provision that would allow startups to informally gauge investor interest before committing the time and money to launching a campaign. Considering around two-thirds of crowdfunding campaigns fail, incurring high upfront disclosure costs is an even riskier proposition for young companies.
The startup community should be thrilled that the SEC finally acted to make investment crowdfunding a reality and that in doing so, it addressed some of the concerns that entrepreneurs and investors raised with the original proposed rules. But, unless and until policymakers take steps to lower the cost of raising seed capital through crowdfunding, the impact of investment crowdfunding on the startup market will likely be modest. Nonetheless, a slow start to investment crowdfunding in the U.S. shouldn’t be taken as a sign that the promise of crowdfunding was overstated; rather, it should serve as a reminder that more work needs to be done to realize crowdfunding’s full potential. We’ll be watching closely.
Our weekly take on some of the biggest stories in startup and tech policy.
SEC Finalizes Crowdfunding Rules. At today’s SEC open meeting, the Commission voted to adopt Title III crowdfunding rules, finalizing the last and most highly-anticipated provision of the 2012 JOBS Act. Once the rules go into effect, (180 days after they’re enter in the Federal Register,) any investor can buy equity shares from companies raising capital online, marking a new era of financing for startups and investors alike. As Engine and industry experts have commented, the rules aren’t perfect, but their long-delayed release is the first critical phase in working with policymakers to improving and expanding the crowdfunding ecosystem.
Cybersecurity Bill Passes Senate. On Tuesday, lawmakers voted 74-21 to pass the Cybersecurity Information Sharing Act (CISA). The bill has been largely opposed by the tech community over concerns that the bill’s core information-sharing mechanism would compromise user privacy. Amendments aimed at providing additional privacy protections didn't garner sufficient support, leaving industry stakeholders and civil liberties advocates frustrated. But the debate will not end here—there is a chance these issues will come up again as the Senate’s bill goes to conference with the House. We’re tracking.
EU Passes (Bad) Net Neutrality Rules: The tech world's focus shifted to the EU this week, as the European Parliament voted on net neutrality rules that have caused consternation amongst open Internet advocates worldwide. Though the new European-wide rules look similar to rules the FCC passed earlier this year, the EU's regime contains many vague definitions that will allow ISPs to create and exploit loopholes that could render the EU's nominal ban on so-called "fast lanes" ineffective. For example, the rules create an exception allowing ISPs to prioritize "specialized services," but define that exception so broadly that ISPs could effectively create the types of fast lanes that the rules nominally ban. Similarly, while the U.S. rules allow the FCC to evaluate the legitimacy of zero-rating plans on a case-by-case basis, the new EU protocols allow zero-rating. While there may still be opportunities to correct these loopholes going forward, the future of an open Internet in Europe looks uncertain.
EU and US Close on New Safe Harbor: After the European Court of Justice’s rejection of the “safe harbor” that allowed U.S. companies to easily import EU customer data to the U.S., the tech world was left in a state of confusion as to what exactly was supposed to happen next. While the EU and U.S. had been hammering out a new safe harbor framework even before the old one was rejected, news this week that negotiators agreed in principle upon a new frameworks came as a pleasant surprise. Whether the new framework satisfies the ECJ’s concerns and what companies should do in the meantime remain open questions.
New Copyright Exemptions. In what has become a triennial reminder that it's impossible for the law to properly keep up to date with changing technology, the Librarian of Congress this week granted a number of exemptions to a rule in the DMCA that outlaws "circumventing" certain digital locks. This year's exemptions include rules allowing the public to tinker with car software and to jailbreak devices in order to run third party software. Of course, the exemption for security research on cars came way too late to prevent the VW emissions scandal, and the jailbreaking rule was perhaps most notable for fixing an absurd distinction between jailbreaking phones (already legal) and tablets (now legal). It's great that there is a mechanism for updating the law to reflect technological realities, but a system in which you have to wait three years before finding out whether it's legal to install third party software on your tablet needs an overhaul rather than a triennial tweak.
Can Tech Help Copyright? In an op-ed this week, Mike Masnick explores the potential for technology to solve the entertainment industry’s copyright woes. Take Sweden, for instance, where not long ago, piracy was rampant. But with the rise of forward-looking services like Spotify, which calls Sweden home, piracy rates have steadily declined. Policy lessons from other countries, detailed in a recent report, demonstrate that “attempts to reduce piracy by passing strict anti-piracy laws...had little long-term impact on piracy rates.” Instead, policymakers should embrace and support innovative ways to support the creative industry through new technologies.
Amazon Faces Worker Classification Suit. Four former Amazon Prime Now delivery drivers have sued the company, arguing that they were misclassified as contract workers instead of employees with full benefits. The suit is the latest in a long list of ongoing legal battles between on-demand workers and their employers (see Uber & Lyft, Grubhub & others, Postmates & others). As the debate continues around how to best support this growing class of workers, these cases have the potential to completely reshape the 1099 economy and the companies that operate within it.
Campaigns to Talk Tech in Iowa. Engine joins the Cedar Rapids Gazette and the Technology Association of Iowa in inviting Democrat and Republican Presidential contenders to the Iowa Presidential Tech Town Hall in Cedar Rapids this December. Candidates will share their agendas for supporting the innovation economy and take questions from a panel of tech policy leaders and local entrepreneurs. Potential topics include technology innovation, STEM education, broadband access, and entrepreneurship. More information and tickets to this event at PresTechTownHall.org.
Startups on the Hill for Patent Reform. Engine and the Consumer Electronics Association hosted a Capitol Hill fly-in Thursday where we were joined by four startups that have battled patent trolls first-hand. Together, we spoke with eleven Senate offices, including directly with Senators Heinrich (R- NM) and Peters (D-MI), about our support for the Senate’s PATENT Act. We also delivered the letter signed by nearly 200 startups in support of the Innovation Act (House bill) and PATENT Act (Senate bill). These bills would help disincentivize bad actors in the patent system and give startups tools to defend themselves against frivolous patent litigation.
Better Broadband Competition. Startups depend on internet connectivity and benefit from greater competition among providers. Over the next few weeks, we will be highlighting a number of policies that would improve competition in the broadband market and better encourage entrepreneurial activity. Read our first post outlining the series here and stay tuned for more.
After more than three years of delay, the SEC has finally passed rules making investment crowdfunding a reality. Considering it’s been so long since Congress passed the legislation authorizing investment crowdfunding, it’s easy to forget how significant of an achievement today’s news represents. For the first time, entrepreneurs can raise capital from everyday investors over the Internet, opening up a vast new pool of funding for startups throughout the country. For the 20% of entrepreneurs who have identified a lack of adequate capital as one of the three biggest challenges they face, the SEC’s passage of final rules couldn’t have come at a better time.
Grand pronouncements about investment crowdfunding’s potential shouldn’t be dismissed as mere hyperbole. Simply put, investment crowdfunding has the potential to revolutionize startup financing and enable new groups of entrepreneurs to participate in the startup ecosystem. The success of rewards-based crowdfunding platforms like Kickstarter and Indiegogo suggests that investment crowdfunding will make it far easier for startups outside of traditional tech hubs in New York and California to raise funds. Consider this: the average venture capital investor resides within 70 miles of his or her portfolio companies, while the average crowdfunding backer resides, on average, 3,000 miles away from the companies they support. With traditional venture funding concentrated on the coasts (75% of all VC funds go to companies based in California, New York, or Massachusetts), investment crowdfunding will enable more capital to flow to emerging startup hubs throughout the country. Similarly, investment crowdfunding has the potential to help fix the tech sector’s troubling lack of diversity. While women entrepreneurs have been excluded from traditional venture funding (female-owned companies are 18.7 percent less likely to raise a successful venture round than male peers), they have found far greater success through rewards-based crowdfunding platforms.
While investment crowdfunding has great promise, much work remains to be done for crowdfunding to reach its full potential. As outlined more fully in the white paper we released earlier this month, a few key changes to the investment crowdfunding regime could go a long way towards making crowdfunding a viable option for smaller companies and the investors supporting them. For example, the current rules impose significant disclosure obligations on issuing companies that may increase the cost of raising crowdfunded capital to a point where all but the riskiest companies will turn to other forms of financing for low-volume raises. As demonstrated by the success of the investment crowdfunding market that developed in the U.K. as the U.S. market waited on the SEC to pass final rules, these additional requirements are unnecessary for investor protection and may unduly inhibit the growth of the crowdfunding sector. Though the SEC’s final rules improve on the disclosure rules in earlier drafts, there’s still more work to be done.
Hopefully, today’s announcement is just the first step towards perfecting the U.S. investment crowdfunding market. For cash-starved entrepreneurs and everyday investors eager to join in the innovation economy, today is a seminal moment. For advocates and policymakers working to ensure that investment crowdfunding fulfills the ultimate promise of the JOBS Act, today is just the beginning. We look forward to working with Congress and the SEC in the future on this important issue.
Our weekly take on some of the biggest stories in startup and tech policy.
Judicial Redress Act Heads to Senate. On Tuesday, the House passed the Judicial Redress Act, which would extend rights to judicial redress to citizens of the EU and other designated countries. The bill has broad support within the tech community, where it is seen as both a sensible next step in surveillance reform and essential to advancing an updated safe harbor agreement between the U.S. and the EU. The bill was slated for Senate consideration as an amendment to the Cyber Information Sharing Act (CISA), but was pulled on Thursday for procedural reasons. The bill’s sponsors are working with Senate leadership to schedule a vote and we will continue to track. Meanwhile, the White House chose to endorse CISA, but also criticized it for allowing companies to share data with any agency, rather than having a centralized clearinghouse.
A National Drone Registry: Recreational drone users will soon be required to register their unmanned aircrafts, federal agencies announced this week. The decision comes amidst national airspace safety concerns from the Federal Aviation Administration and the Transportation Security Administration as reports from piloted aircrafts of drone sightings of or close calls with rogue drones have mounted in the past year. The details of the registration system are still being worked out and the FAA is currently seeking input from the public. Hobbyists and drone users can submit their comments here until November 20.
Bitcoin Teams up with the Feds. A new technology-government alliance is bringing together Bitcoin experts and advocates with government officials. The Block Chain Alliance was established to help federal authorities better understand the complexities of bitcoin transactions, and to change the perception of bitcoin as a "currency for criminals". The alliance will also offer digital currency companies an opportunity to demonstrate power and potential of these new technologies, especially for law enforcement agencies. The Justice Department and Secret Service and are already exploring how to use Bitcoin to more securely track the flow of digital currency across borders.
‘Dig Once’ Bill Introduced in House. On Thursday, Reps. Walden and Eshoo introduced the Broadband Conduit Deployment Act of 2015, which would mandate installing broadband conduit pipes during federal road construction. This would allow service providers to easily install fiber lines years down the road without having to excavate the road to re-dig a channel. The Federal Highway Administration has reported that ‘dig once’ policies like these can reduce broadband deployment costs by as much as 90%.
Code.org letter on CS education. Code.org and several major tech industry players sent a letter to the legislators leading education reform efforts this week. The letter urges lawmakers to include provisions that promote computer science education in any revision of the Elementary and Secondary Education Act (ESEA). Among their requests: maintain computer science as a “core academic subject” and retain resources that would improve teaching and learning in STEM subjects. You can read the full letter here.
Coding Behind Bars. This week Vice reported on the first and only coding bootcamp behind bars. Non-profit The Last Mile, runs Code.3730, a six-month coding course for inmates at San Quentin prison. The curriculum - Java Script, HTML, CSS, and Python - is similar to other code academies, but it’s taught on on dry-erase boards, without Internet. In January, students in the program will be eligible to get paid for entry-level front-end coding work for companies on the outside.
Data Security for Startups. As startups generate, collect, and use data at an increasing rate, state and federal regulators expect them to have security protocols in place. On Tuesday, Engine co-hosted a data security panel at the Nasdaq Entrepreneurial Center in downtown San Francisco to dig into these security issues. Read our blog post recapping the event and unpacking existing resources, including the FTC’s “Startup with Security” guide, to help startups navigate data security regulation and ensure they are adequately prepared for a breach.
Our weekly take on some of the biggest stories in startup and tech policy.
Federal Aid for Coding Bootcamps. On Wednesday, the U.S. Department of Education announced a new pilot program that will make it easier for a more diverse range of people to attend alternative education programs like coding bootcamps. Until now, students enrolled in “nontraditional” educational programs have not been eligible for federal financial aid. The new EQUIP (Educational Quality Through Innovative Partnerships) program will waive existing restrictions to allow federal aid dollars to be used towards approved alternative programs. While the scope of the pilot will be relatively small, this initiative is a great move by the Dept. of Ed towards making these popular and essential programs more accessible to all.
White House Opts Against Legislating Back Door for Encryption. At the end of last week, the White House made a long awaited decision: they would not push for legislation that would mandate companies be able to decode messages at the request of law enforcement. At least, that’s what they’ve decided for now. Even if the White House’s decision maintains status quo, advocacy groups worry about the White House’s definition of “strong encryption” and whether the Administration will “weaken security through other methods.”
EU Safe Harbor Ruling. Ars technica takes a deeper look at the far-reaching consequences of the EU’s safe harbor ruling in an article published on Thursday. Evan covered the impact this ruling will have on startups in a blog post last week, noting that “while larger companies have quickly moved to establish new legal pathways for importing EU data or have secured data centers in the EU, smaller companies face a more daunting task in trying to comply with now unclear data protection rules.” Ars goes even further, arguing that this ruling will have a dramatic effect beyond short-term global commerce—it will likely impact future trade agreements between the U.S. and EU, as well as the UK’s surveillance practices.
Evidence of “Over-Removal” by Intermediaries. When intermediaries receive a take-down request, the easiest, least risky response is to take down the cited material - especially for small companies that don’t have the resources to hire a legal team to thoroughly evaluate each request. A literature review by Stanford revealed growing amounts of empirical evidence of “over-removal” by intermediaries (e.g. Google, Twitter, Facebook), further defining a problem that puts free-expression at risk.
Wyden Calls for Greater DMCA Exemptions. As the U.S. Copyright conducts its periodic review of requests for exemptions under the Digital Millennium Copyright Act (DMCA), the agency should consider the importance of these exemptions to the continued expansion and improvement of American technologies, Sen. Ron Wyden explained in this week’s Wall Street Journal. Wyden expressed his concerns about the EPA and FDA’s pleas to limit exemptions for new software in cars and medical devices, thereby prohibiting such new technologies from being legally tinkered with under the DMCA. Sen. Wyden and Rep. Jared Polis (D-CO) have introduced the Breaking Down Barriers to Innovation Act, a bill that aims to streamline “the process to obtain exemptions to the DMCA to promote scientific research, innovation and the fair use of copyrighted works.”
Better Crowdfunding Policy. In anticipation of the SEC’s impending release of the Title III crowdfunding rules, Engine published a white paper this week, “Financing the New Innovation Economy: Making Investment Crowdfunding Work Better for Startups and Investors.” The paper analyzes trends in U.S. and U.K. crowdfunding markets, which offer important lessons for U.S. regulators and lawmakers as we move closer to launching investment crowdfunding for retail investors.
In Celebration of Ada Lovelace. On Tuesday we commemorated Ada Lovelace Day and celebrated the achievements of the first programmer and women in science and technology everywhere. News from Stanford emphasized progress: 214 women have enrolled as computer science majors, 30% of all enrolled computer science students.
The Jumpstart Our Business Startups Act (JOBS Act) was signed in law over three years ago and in that time, it’s had a notable impact on the startup economy. The IPO “on-ramp” has made it easier for private companies to go public, general solicitation has allowed startups to openly solicit investment from high net-worth investors, and the new Reg A+ has revamped another channel for capital formation for expanding companies. But the JOBS Act’s most exciting and promising achievement—investment crowdfunding open to all Americans—has languished at the SEC, held up in the commission’s rulemaking process. This delay has been frustrating to the entrepreneurs, new crowdfunding platforms, and to everyday investors ready to participate in this exciting new market. We even echoed those frustrations ourselves earlier in fall when we gathered over 200 signatures urging the SEC to act. However, since then, we’ve also gathered additional intel on how similar forms of crowdfunding have flourished, and the regulatory frameworks that have facilitated their successes. Evidence from these ancillary markets suggest the proposed policy framework would benefit from a modified approach.
Our latest white paper, “Financing the New Innovation Economy: Making Investment Crowdfunding Work Better for Startups and Investors,” addresses these concerns. In the paper, we analyze activity from similar crowdfunding markets including rewards and donation-based crowdfunding; accredited investor crowdfunding under Title II of the JOBS Act; as well as investment crowdfunding in the United Kingdom, where everyday investors have been able to invest in emerging companies in exchange for equity since 2012. These crowdfunding markets have experienced exponential growth in the past few years, offering important lessons for regulators as we move closer to launching investment crowdfunding for retail investors in the U.S. One of the most salient takeaways is that fraud has been virtually non-existent, even though issuers are subject to few, if any, of the disclosure requirements that typically accompany public capital raises. Conversely, the current policy framework for investment crowdfunding under Title III includes substantial, onerous disclosure requirements that we believe could be detrimental to the long term growth and sustainability of investment crowdfunding.
Identifying lessons for policymakers from similar crowdfunding regimes, we propose several improvements to the current Title III regulatory framework. These changes will help ensure that investment crowdfunding for non-accredited investors is a successful, sustainable, and efficient market and most importantly, that it attracts quality companies without debilitating costs.
Enabling investment crowdfunding for all investors is critical for expanding capital access to emerging entrepreneurs and startups across the country. Raising capital is often the greatest challenge an entrepreneur faces when getting his or her business off the ground, and too many potential business leaders are left behind because they lack adequate personal finances or can’t tap into sources of angel financing or venture capital. Because investment crowdfunding will allow millions of new people to easily provide capital to startups, it has the unique potential to drive much-needed capital to underrepresented groups of entrepreneurs.
It’s with these entrepreneurs in mind that we believe more work remains to be done to perfect the investment crowdfunding regime. With the Securities and Exchange Commission rumored to finalize rules for Title III by the end of the year, we hope this paper spurs a productive dialogue with policymakers about how to continue improving upon the statute and the forthcoming rules, especially as we garner new insights from the impending U.S. crowdfunding market.
Our weekly take on some of the biggest stories in startup and tech policy.
ECJ Invalidates Data Safe Harbor. On Tuesday, the European Court of Justice (ECJ) invalidated the European Commission’s “safe harbor” rules that permitted U.S. companies to self-certify compliance with European data protection rules in order to legally transfer EU customer data to the U.S. The court determined that U.S. legislation permitting the NSA to secretly collect and review consumer data was inconsistent with the EU’s Data Protection Directive. Consequently, the safe harbor framework was itself inconsistent with the Directive, as U.S. companies could not claim to have adequate data security protections in place. While larger companies have quickly moved to establish new legal pathways for importing EU data or have secured data centers in the EU, smaller companies face a more daunting task in trying to comply with now unclear data protection rules.
Governor Brown Signs CalECPA. In a huge victory for startups and digital privacy, Governor Jerry Brown signed the California Electronic Communications Privacy Act (SB178), now the nation’s best digital privacy law, on Thursday. This landmark bill (which we’ve covered in past digests) updates digital privacy laws by requiring law enforcement to obtain a warrant before accessing an individual’s electronic communications. We are hopeful that this action by California will prompt similar movement in other states or at the federal level.
Closing the Gender Gaps. California passed a (another) landmark piece of legislation that would require women to be paid the same as men for doing “substantially similar work.” Though the governor acknowledges that this bill won’t solve the problem, he expects it to “help accelerate [the] progress.” It’s an interesting development in light of the dialogue in Silicon Valley regarding the promotion and retainment of women in the tech industry. Meanwhile, on the federal level, Senators Maria Cantwell (D-WA), David Vitter (R-LA) and Jeanne Shaheen (D-NH) introduced a bill that would reauthorize and increase funding for the Women’s Business Center Program, which improves business training and counseling opportunities for women entrepreneurs.
Capital Formation Bills Pass in House. The House passed two bills earlier this week aimed at making raising capital just slightly easier for startups. H.R. 1525, the Disclosure Modernization and Simplification Act and H.R. 1839, the Reforming Access for Investments in Startup Enterprises Act, contain measures that simplify and codify some of the regulations that govern how growing private companies raise capital. It’s encouraging to see members of Congress seek out ways to support capital formation for our country’s emerging companies and we hope our senators follow suit.
Marco Rubio Addresses Tech in NYC. Civic Hall hosted Senator Marco Rubio this week to talk about the on-demand economy. He spoke to the advantages of working for on-demand services, (flexibility of hours, mobility of work,) and recognized the need for a middle ground status between W-2 employees and independent contractors. He also called out incumbents, such as the taxi and hotel industries, for hindering innovation. It is the role of the government, Rubio said, to help those displaced by the new economy access the new economy through education and other opportunities.
Regulating Drones. As the popularity and pervasiveness of drones, (or unmanned aerial systems, UAS,) increases, lawmakers are grappling with the best way to ensure safety and privacy without needlessly inhibiting innovation in this growing industry. On Wednesday, Representative John Garamendi (D-CA) and Senator Barbara Boxer (D-CA) introduced the SAFE DRONE Act of 2015, which prohibits drone flights within two miles of an airport or active fire. While some argue these sorts of rules should be left to the Federal Aviation Administration to craft, others are growing tired of waiting on the agency to act after it missed a Sep. 30 deadline to implement drone rules.
Yesterday, the House of Representatives passed two bills supporting capital access for startups, H.R. 1525, the Disclosure Modernization and Simplification Act of 2015 and H.R. 1839, the Reforming Access for Investments in Startup Enterprises Act of 2015 or the RAISE Act. These new bills contain small measures that simplify and codify some of the regulations that govern how growing private companies raise capital. While their ultimate impact may be narrow, it’s encouraging to see members of Congress seek out ways to support capital formation for our country’s emerging companies. And we hope they’ll continue to, because there’s more work to be done.
Earlier this year we wrote a letter to House Financial Services Committee leadership, Chairman Joe Hensarling and Ranking Member Maxine Waters to express our support for the RAISE Act. The bill would codify an existing practice that allows startup employees with equity to resell their shares to accredited investors, thus enabling greater liquidity. The illiquidity of startup shares is an especially challenging aspect for startups in both raising capital and in hiring employees. Illiquid shares may discourage potential investors who are unwilling to tie up their capital in a high-risk asset class for an unknown or extended period of time. And for many potential employees, while stock options may be lucrative, they don’t offer the steady income stream that workers often rely on.
As the bills make their way to the other chamber, we hope our Senators will also recognize the value startups provide to our economy and similarly support measures that spur greater capital formation.
Our weekly take on some of the biggest stories in startup and tech policy:
Startups Defend Net Neutrality Order. The FCC is facing ongoing litigation in the DC Circuit Court of Appeals over the net neutrality rules it passed earlier this year, and on Monday, the court received briefs from a variety of companies and organizations supporting the FCC’s rules. Engine filed a brief along with a group of innovative startups that included Dwolla, Fandor, Foursquare, General Assembly, GitHub, Imgur, Keen IO, Mapbox, and Shapeways. We argue that the FCC’s decision to reclassify broadband as a telecommunications service was necessary to preserve the continued growth of the startup sector, which has in turn driven consumer demand for broadband and incentivized companies to invest in their networks. The court will hear oral arguments in the case on December 4 and will likely render its decision sometime next year.
SEC To Finalize Crowdfunding Rules. Sources at the Securities and Exchange Commission have told Politico the agency is likely to finalize long-awaited crowdfunding rules in late October or early November. SEC rulemaking will put Title III of the JOBS Act into effect, which could radically expand capital access for startups—though the statute does contain some burdensome requirements for companies. While the startup community will be excited to see any action from the SEC in light of an extended delay, we need to ensure that whatever regulatory regime the SEC adopts is well-calibrated and accessible to the small, emerging companies that could most benefit from new sources of capital.
Bush Campaigns Against Open Internet. Most of the Republican candidates in the 2016 presidential race have come to realize that an overwhelming majority of the public supports net neutrality rules (including 81% of Republicans) and have refrained from loudly criticising the FCC’s Open Internet Order. But this week, Former Governor Jeb Bush expressed his opposition to net neutrality (a policy he onced called “one of the craziest ideas [he’s] ever heard”), arguing that preventing ISPs from abusing their gatekeeper power does nothing to enhance consumer welfare. Bush’s comments run counter to both the FCC and the conservative DC Circuit Court of Appeals, which have recognized that net neutrality rules and foster the growth of the edge providers and promotes investment in broadband networks, resulting in better and more affordable service for consumers. It’s a reminder that startups, consumers, and everyone else who benefits from the open Internet should keep a close eye on this presidential race.
Administration Taking Steps to Promote High-Speed Broadband Access. On Monday, the Broadband Opportunity Council published its first report, which includes 36 actions that federal agencies will take to encourage broadband deployment. These actions require no new funding, “but existing sources of funding are being opened up and barriers to deployment are being brought down.” Of particular note is that the White House refers to broadband as a “core utility,” like electricity or water. We tend to agree - broadband is no longer a luxury. Connectivity is core to innovation and the ability of startups to reach customers and scale, and we are pleased to see the Administration taking these steps to bring access to underserved populations and areas of the country.
White House Considers Encryption. Thanks to some leaked documents from the White House, it’s rumored that President Obama may come out in opposition to a law that would require firms be able to unlock their customer’s encrypted smartphones and applications. Up to this point, law enforcement has argued the need for backdoors to encryption to ensure national security and safety. This sort of advocacy from the White House would help repair global trust in the US government, countering the narrative in Europe that the US is trying to expand its surveillance activities. Meanwhile, the American Civil Liberties Union (ACLU) and other privacy advocates continue to push the importance of US government’s use of encryption to promote both personal privacy and national security.
“Facebook giveth and Facebook taketh away.” The Wall Street Journal reported this week that dozens of startups have “shut down, been acquired or overhauled their business” as a result of Facebook’s new policies limiting outsider access to some of its users’ date. Facebook’s rules, which went into place in May, restrict what data can be used by third parties like startups, academics, politicians or organizations. Other social media giants like LinkedIn and Twitter have enacted similar policies, signaling to the startup world that if you are building a product or service that relies on data from social media sites, that data may not always be available...
ECJ Advisor Deals Blow to U.S. Tech Companies. In other data related news, a European Court of Justice (ECJ) advisor issued an opinion this week that the “safe harbour” agreement allowing for data transfers between the EU and the U.S. is “invalid” due to growing concerns around U.S. surveillance practices. While the lawyer’s opinion is not legally binding, if cemented by a formal ruling it would create a headache for U.S. tech companies who could face data localization requirements in any EU countries.
Women Tech Leaders. Fortune profiles some of the powerful female talent Google has been able to attract at the executive level, including Ruth Porat, a recent addition who has led the transition from Google to Alphabet. Many of these executives after building their experience at Google have left to grow smaller tech companies. Meanwhile, Mary Lou Jepsen of Facebook has a different take: she sees many senior women leaving because they feel isolated by the tech industry.
Since 2012, entrepreneurs and everyday investors have been eagerly waiting for the Securities and Exchange Commission to finalize rules that will to put Title III of the JOBS Act into effect, allowing all Americans—regardless of their income—to invest in startups. Earlier this week, Politico reported on SEC sources saying final rules will be announced in late October.
Title III is most highly anticipated and most controversial provision of the JOBS Act still awaiting SEC rulemaking. While investment crowdfunding under Title III has the potential to radically expand capital access for startups, the statute contains some burdensome requirements for companies, such as requiring audited financial statements for small companies to raise funds from unaccredited investors (people that make less than $200,000 per year or have less than $1 million in assets).
Many experts in the business community believe these requirements could make crowdfunding unworkable for most businesses. Further, the proposed rules announced by the SEC in October 2013 put forth additional requirements for companies seeking to raise money through crowdfunding, prompting concerns from entrepreneurs, crowdfunding platforms, and investors about the debilitating and largely unnecessary costs these rules create for small issuers.
Meanwhile, the delay in SEC rulemaking has allowed us to watch as other crowdfunding markets have evolved. The UK, for instance, has a robust investment crowdfunding market open to all investors, and it's seen tremendous growth in the last few years under a remarkably sparse regulatory regime. Here in the US, rewards-based crowdfunding and accredited investor crowdfunding also continue to grow as more companies seek alternative, innovative forms of financing. These markets offer valuable lessons for lawmakers and regulators alike as they continue to refine the rules governing investment crowdfunding under Title III—lessons we’ll explore in detail in our forthcoming whitepaper, "Financing the New Innovation Economy: Making Investment Crowdfunding Work Better for Startups and Investors." Look out for its release in the coming weeks.
Though the startup community will be excited to see any action from the SEC in light of what has already been an extended delay, we need to make sure that whatever regulatory regime the SEC adopts is well-calibrated and favors the small, emerging companies that could most benefit from accessing new sources of capital. And regardless of the rules the SEC adopts, we look forward to working in the coming years to improve the US crowdfunding rules to help the startup economy continue to grow.
Our weekly take on some of the biggest stories in startup and tech policy.
Tech and 2016. In case you missed it, check out Julie talking about tech and the 2016 election on KCRW’s Press Play with Madeleine Brand.
FCC Opens Up Business Broadband Data to New Eyes. On Thursday, the Federal Communications Commission (FCC) announced that it will release data on the little-understood special access market. While most consumers have never heard of special access lines, you probably unknowingly use them every day. They are the high capacity business broadband lines that allow ATMs to connect directly to your bank or cell phone towers to connect back to the network. Competition in this industry is sorely lacking, with just two providers covering most of the U.S. and jacking up prices for the startups, universities, hospitals, and other businesses that use them. While the data will only be accessible to analysts approved by the FCC, its release represents a step in the right direction towards more transparency, increased competition, and lower broadband prices.
Senate Committee Considers ECPA Updates. The Senate Judiciary Committee held a hearing on reforming the Electronic Communications Privacy Act (ECPA) on Wednesday morning. As we’ve covered in past digests, it's still legal for law enforcement to access your emails and other digital data without a warrant. Last week, the California legislature passed a bill to modernize these outdated digital privacy laws at the state level. Still, a federal overhaul of ECPA would be an even better fix, bringing these laws out of the digital dark ages. Sens. Lee (R-UT) and Leahy (D-VT) have proposed a bill in the Senate, and there is similar legislation in the House. We’ll be tracking reform efforts.
Dancing Baby Wins Victory For Copyright Fairness. The courts ruled this week in Lenz v. Universal, the famous “dancing baby” case. As Evan writes, “The Lenz ruling is important for a few reasons. First, it should make it much harder for content owners to abuse the takedown process. […] Second, the decision should serve as a loud reminder that the tech world needs to get to work rebalancing our copyright laws to ensure that they’re actually promoting creativity and expression.” Read the whole post here.
$81M for CS in NYC. On Wednesday, New York City Mayor Bill de Blasio announced an $81 million public private partnership to make computer science education available to every student in city public schools by 2025. Substantial contributions have come from the Wilson family foundation, the AOL Charitable Foundation, and the Robin Hood Foundation. New York joins Chicago and San Francisco in terms of large cities that have made similar commitments, and we hope to see other cities, states, and the federal government continue to build on such efforts to prepare students for jobs in the growing innovation economy.
The Fight Is On Over Chicago’s Streaming Tax. A group of Chicago residents have sued the city over its controversial application of the 9% Amusement Tax to online streaming services like Netflix, Hulu, and Spotify. The Amusement Tax, which applies to events like concerts and sporting games, has been in existence for a while, but was only recently expanded to cover streaming services. And Chicagoans’ bills are already increasing. As Ars Technica reports, one reader’s Spotify bill went from $7.99 to $8.71 this month. We’ll be watching, as the outcome of this case could have a national impact on the power of cities and states to tax the internet economy.
“Cool clock, Ahmed”. When a Texas middle-schooler’s homemade invention was mistaken for a bomb this week, prompting an outlandish response by his school and local law enforcement, it caught the tech world’s - and the President’s - attention. As a New Yorker writer points out, “His arrest comes at a moment when some of the world’s most influential people...have argued that there aren’t enough U.S. students gaining the math and science skills that will get them jobs in the tech sector."
A Different Kind of Tech Event. We were impressed and encouraged by the conversation at last week’s Tech Inclusion conference in San Francisco, which brought together leaders in Silicon Valley and the national tech community to discuss the challenge of making the tech industry more diverse. Read our take on why this wasn’t your typical tech event and what we took away.
Our weekly take on some of the biggest stories in startup and tech policy:
Growing Support for CalECPA. Right now it's still legal for law enforcement to access your emails and other digital data without a warrant. SB 178, the California Electronic Communications Privacy Act (“CalECPA”), would change that on the state level by modernizing outdated digital privacy laws. The bill passed the California Senate back in June, but still faces a couple of hurdles, including a vote in the Assembly that should take place in the next couple of weeks. The LA Times just endorsed SB 178, noting that “Californians need the protections offered by SB 178, and the bill deserves the Legislature's support.” A poll published this week found similar support among California voters, with 82% of participants agreeing that law enforcement should get a warrant before accessing an individual’s digital data. Engine echoes this endorsement of SB 178 and hopes to see California take the lead on updating its privacy laws to keep pace with the changing digital landscape.
The Future of Higher Education. Daniel Pianko of University Ventures writing in TechCrunch argues that the lack of innovation in higher education is due to a lack of commitment from Silicon Valley billionaires. “Today’s current generation of entrepreneurs are spending their energy and resources lobbying for band-aid solutions like H-1B visas, when they could be reimagining the current pipeline to address the lack of female and minority engineers in their companies.” Pianko points out that it was investment from 20th century titans of industry like Johns Hopkins and Andrew Carnegie that created the modern research university, and forced schools like Harvard and Yale to evolve in order to compete. He also points to non-traditional education models being pioneered at places like Galvanize. Here’s a look back at a deep dive we did on education policy and its impact on innovation.
New White House Hire. The White House announced that they are hiring their first Director of Product this week. Josh Miller, a startup founder who sold his company to Facebook last year will lead efforts to improve their existing digital products and look to develop new ones. Miller has a history of bringing a tech perspective to civic engagement. This marks yet another move from an administration that seems determined to engage with startups to improve the way government functions.
Diversity in Tech. Troubling new data from the Pew Research Center shows that “businesses owned by women and minorities bring in far less revenue than firms with male or non-minority owners.” The research finds that even when you look at sectors where women tend to fare better, the problem persists. This Fortune article hypothesizes that one big factor may be a lack of investors--a problem that has been documented before. Engine will continue to work on access to capital issues, particularly as it affects founders from underrepresented groups. Stay tuned for more on that in September….
Drones. The National Journal reports that in the absence of federal regulations, 26 states have now passed local legislation to limit the operation of drones. This patchworks of regulation is causing concerns for operators and commercial users. Hopefully the months ahead will see a thoughtful approach to protecting safety and privacy that doesn’t needlessly throttle innovation in this growing industry.
Car Hacking. The debate over how to make Internet-connected vehicles more resistant to cyber attacks is heating up in Washington. Much of the discussion will center around whether these are problems that can be solved within the industry, or if government action will be necessary to spur automakers to act.
Welcome to the Startup News Digest, our weekly take on some of the biggest stories in startup and tech policy. Here's what we've been tracking the week ending August 21st, 2015:
It’s no secret the winters in Chicago are brutal—anyone who has lived through a January in the Windy City can attest to this fact. Long periods of Netflix-aided hibernation are common for Chicagoans in the depths of winter. This is perhaps why the news last month that city residents will begin paying a “cloud tax” on their monthly Netflix bill didn’t go over well. As more business activity migrates online and consequently outside traditional tax protocols, cities and states are being forced to modify their tax regimes to adapt to these changing circumstances. While governments are certainly justified in their concern about dwindling tax receipts, digital commerce is fundamentally different than traditional brick-and-mortar enterprise and requires a thoughtful, unique approach to taxation in order to properly protect public interests without stunting business growth. Unfortunately, Chicago’s approach to digital taxation appears to be precisely the sort of hastily considered, ad hoc policy that could end up doing serious harm to the digital economy.
The ruling from the Chicago Department of Finance imposes a 9% tax on “electronically delivered amusements,” defined as “any exhibition, performance, presentation or show for entertainment purposes.” Essentially, this means that any electronically delivered television shows, movies, or music consumed for rental by customers in the city will be taxed. Technically speaking, the tax itself isn’t “new”—rather, it’s an expansion of Chicago’s existing amusement tax which covers concerts, sporting events and other activities. The ruling requires online digital content distributors to collect amusement taxes for digital amusements. While other cities have similar amusement taxes for brick-and-mortar establishments, Chicago’s application of the tax to digital content distributors is novel.
Chicago realized the tax money it was collecting from brick-and-mortar enterprises like movie theatres and video stores was evaporating as consumers stopped frequenting such establishments in favor of Netflix and other streaming services. So what’s the problem if Chicago is merely taxing digital video rentals in the same way it had traditionally been taxing physical video rentals? For one thing, the ruling took most people by surprise because there was little if any public participation in the decision. Instead of passing a new city ordinance or going to the voters to approve a new tax—both of which would have involved robust opportunity for public comment—the Department of Finance chose to quietly broaden an existing law. It’s hard to imagine a similar tax policy with such a wide impact not being publicly debated. Sidestepping voter approval suggests (not surprisingly) that there may have been public opposition to the new tax.
Beyond the process questions this new regulation raises, it highlights a broader issue around taxation of digital commerce. While a local brick-and-mortar business only has to worry about complying with tax laws of the jurisdiction in which it operates, online businesses may be subject to taxation in any jurisdiction in which its customers reside—that is, anywhere in the US. For larger companies like Netflix, setting up the infrastructure to comply with a variety of tax jurisdiction is possible (though still expensive and onerous). For the small businesses that have historically driven the growth of the Internet economy, such compliance obligations would be insurmountable. According to the US Census, Illinois has 6,994 separate local governments. If each one chose to implement unique taxes on various internet goods and services, compliance would be significantly convoluted. For small businesses operating in an online marketplace with limited margins, such requirements could potentially put them out of business.
It’s no surprise cities struggling with reduced tax revenue are looking for new revenue streams. Indeed, discussion and action needs to take place around fair online tax policy, but it needs to take into account the uniqueness of the online environment. Chicago’s recent action highlights the need to have these conversations soon, and at a national level. Congress has put at least some effort into addressing the problem of e-commerce taxation, introducing the Marketplace Fairness Act three times, and discussing alternate proposals from Reps. Chaffetz, Goodlatte, and Eshoo. However, the current legislative climate—coupled with opposition from large Internet businesses—makes legislative action before the 2016 election unlikely. In the interim, other cities and states may follow Chicago’s lead, attempting to raise tax revenues in the short term, while jeopardizing the long-term health of the Internet economy.
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