States Pave Way to Equity Crowdfunding as SEC Stalls

As the Securities and Exchange Commission continues to stall in finalizing the long-anticipated crowdfunding and investment rules for startups and entrepreneurs, states have steadily been enacting their own laws to spur intrastate economic activity and open new avenues to capital. Maine is the latest state to pass a new crowdfunding law, which went into effect January 1, joining 13 other states that have passed crowdfunding legislation since 2012. These laws enable entrepreneurs building businesses in their state to raise capital in the form of equity or debt in a company, giving investors ownership in the businesses they choose to support.

Jess Knox, president of Olympico Strategies, a startup consulting group in Maine, believes laws like this one support the growth of the state’s budding innovation ecosystem. The new crowdfunding legislation complements Maine’s Seed Capital Tax Credit, a program designed to encourage private equity investments in eligible Maine businesses. Crowdfunding now opens investment opportunities for all of Maine’s 1.3 million citizens. “There are people who invest in their community in a variety of ways,” said Jess, and equity crowdfunding, “reduces barriers to people to become investors in their community and their state.”

Meanwhile, entrepreneurs and small business advocates in Minnesota are working with state officials to pass equity crowdfunding legislation there as well. The grassroots movement has named the legislative proposal, MNvest, which was recently introduced in the Minnesota state legislature. The group of business and community leaders behind MNvest believes their new law will  “allow ordinary Minnesotans to own a stake in emerging Minnesota businesses.” And from our travels to Minneapolis this fall, we saw for ourselves the thriving community of young technology companies there.

Plenty more states are joining the trend too: Virginia’s House of Delegates passed a bill last week, sending the proposed crowdfunding legislation to the state’s senate. Arizona and Colorado lawmakers recently proposed similar bills and Washington D.C. just authorized its first equity crowdfunding offering after finalizing rules in November.

Ultimately, however, many of these new financial tools are limited in their scope, because most state crowdfunding regulations restrict companies and their investors to the states in which they live and do business. Further, as one corporate lawyer and startup adviser explains, utilizing these intrastate funding tools may preclude businesses from pursuing some of the new funding opportunities provided by the JOBS Act such as general solicitation and a new SEC exemption for raising funds, Regulation A+. While Maine’s new law does allow entrepreneurs to raise money from investors outside the state, the SEC exemption the statute relies on can require issuers to provide the state with lengthy disclosure documents. Thus, while companies may be afforded broader reach, that could come with much higher costs.

Despite the inherent limitations of intrastate funding, these laws demonstrate the appetite for expanding capital opportunities for emerging businesses across the nation. Traditional sources of capital investment are often out of reach for burgeoning entrepreneurs outside the coasts or established tech hubs like Austin. While venture capital soared in 2014, the highest amounts of investment are nonetheless concentrated in these areas. These laws also indicate a willingness to allow middle-income Americans to take part in the growth of our startup economy. Without final rules on the JOBS Act from the SEC, startup investing nationwide remains limited to accredited investors, individuals with a networth of at least $200,000.  

We hope officials in Washington are paying attention to the flurry of state-level activity and take the hint. Capital access is critical to sustaining the startup economy. Their lack of action leaves much-needed sources of capital untapped.

Statement on Startups Meeting with FCC and Congress on Net Neutrality

Representatives from several prominent startups joined Engine and New America's Open Technology Institute in Washington DC today in advance of the FCC's upcoming net neutrality vote. They met with FCC members and staff as well as legislative leaders to discuss the importance of an open Internet to the startup community, and the need for strong net neutrality rules and enforcement mechanisms.

Evan Engstrom, Engine Policy Director, and Alan Davidson, Director of the Open Technology Institute, released the following statement:

"Engine and the Open Technology Institute are proud to have organized a group of leading startups to continue championing a truly open Internet. FCC Chairman Wheeler's recent announcement that he intends to reclassify the Internet under Title II was a major victory for the startup community and all advocates for net neutrality. However, the battle is far from over.

"Today's meetings will allow us to push for specific rules that are strong enough to prevent any form of ISP discrimination and flexible enough to allow the FCC to preempt future threats to the open Internet. We have seen the tremendous impact that startups can have on the net neutrality debate. In the weeks ahead, we'll be working with these startups and many others to ensure that the Internet remains open for innovation for generations to come. The Internet has flourished as a space for innovation without permission, and strong net neutrality rules will ensure that remains the case."

Patent Troll Targets Crowdfunding Startups

This post originally appeared in VentureBeat and was written in collaboration with D.J. Paul, a member of the Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies, and the co-chair of the Crowdfund Intermediary Regulatory Advocates (CFIRA).

On Thursday, House Judiciary Chairman Bob Goodlatte (R-VA) re-introduced the Innovation Act, a bipartisan bill targeted at fixing the out-of-control patent troll problem.

This comes not a moment too soon, as patent trolls have begun to target one of the newest areas of innovation and job creation: the crowdfunding industry.

AlphaCap Ventures, an entity that claims to offer “strategic, operations, and financial advisory services in the United States” and whose website resolves to nothing, has so far sued at least 10 companies engaged in some form of crowdfunding. They accuse each company of infringing upon multiple patents (you can see one here) that allegedly cover the very basic workings of managing customer information as it relates to private equity and debt markets.

On its face, the AlphaCap cases look sadly typical. There’s no evidence that AlphaCap has its own crowdfunding platform. Instead it appears to be using its patents as a tool of extortion against those who are actually creating something valuable for our economy.

Crowdfunding platforms have become an important part of the innovation economy, giving entrepreneurs unprecedented access to the capital they need to grow a business or launch a project. They’re also beginning to democratize finance: Women are nearly four times more successful when crowdfunding than when raising funds through traditional means like venture capital.

Unfortunately, many of these platforms are small and young — the most popular targets for patent trolls. In fact, 55 percent of troll suits are filed against companies with revenues of less than $10 million.

Fortunately, the Innovation Act gives the startup community a chance to fight back against trolls. This bill won’t stop patent holders from filing legitimate lawsuits, but it will give those unfairly targeted by trolls important tools to fight back. Among other things, it will require more transparency, shift costs of discovery — one of the most expensive costs of litigation — and shift legal fees when plaintiffs bring particularly baseless suits.

As the Innovation Act makes its way through Congress, it’s sure to meet opposition from some of the same powerful special interests groups, namely trial lawyers and pharmaceutical companies, who thwarted previous attempts at patent reform as recently as last spring. That’s why both startups and individuals who care about innovation need to make our voices heard in the weeks ahead. We need to send a message to members of both parties: Move quickly to support and pass this critical legislation.

Patent Litigation and the Continuing Need for Robust Reform Legislation

Tomorrow, the House Judiciary Committee will hold a hearing to review recent Supreme Court cases in patent law. Do not let the wonky subject matter fool you—this is an important hearing that should help set the groundwork for much-needed legislation that will finally fix the patent troll problem.

To understand what’s at stake, you have to understand a bit about patent reform and why it’s become such a critical issue to the startup community. In the past decade, patent litigation initiated by non-practicing entities—so-called patent trolls—has increased tenfold. This increase has been primarily targeted at tech companies, and the data show that the smallest of those companies—most often, startups—are in fact targeted the most frequently. This led to the recent push for patent reform. And last year, we made some real progress: not only did we come close to passing legislation, but the FTC took up the issue, as did more than 20 states, who introduced or passed legislation, or whose attorney general investigated, and in some instances sued, patent trolls. Even more, the Supreme Court stepped in, deciding six cases unanimously, each of which should help fix a broken patent system.

That’s the good news. The bad news is that opponents of patent reform now claim that because of those victories at the Supreme Court, we no longer need patent reform legislation.

They couldn’t be more wrong.

First, the most important of those cases—Alice v. CLS Bank and Nautilus v. Biosig—deal with patent quality. In other words, tightening the standards around what can and can’t be patented, an update that’s critical to eliminating trolls who thrive on low-quality patents  But it will take years, if not decades, for the impact of these cases to actually be felt. Patents last for 20 years, and the Patent Office has been in the business of granting approximately 40,000 software patents annually, which means at least hundreds of thousands of them currently exist. The vast majority of these patents won’t be reevaluated under Alice and Nautilus unless someone actually challenges that patent, either in court or at the Patent Office. Those challenges can cost tens or hundreds of thousands of dollars. So we don’t expect to see the number of bad patents falling dramatically any time soon.

Second, these cases do not address the patent troll’s other most favored weapon: the outrageous costs of patent litigation. Patent litigation is notoriously expensive, costing each side easily into the millions of dollars in legal fees, not to mention other valuable lost resources, like employee time. Trolls exploit this, often successfully demanding payments to go away instead of going to court. While one important Supreme Court case, Octane Fitness v. Icon, addressed at least some of this problem, it’s so far had limited effect. The Court held that a judge could make a loser pay a winner’s legal fees in “exceptional” cases, but, unfortunately, troll cases are no longer “exceptional.”

Despite help from the Supreme Court, we still need real, robust patent reform that will give judges discretion over when to grant fees, increase transparency in lawsuits and demand letters, even out the burden of litigation on both parties, and help protect technology’s innocent end users.

We’ll be watching tomorrow’s hearing closely to make sure that opponents of patent reform—those who benefit from a broken system—don’t mislead members of Congress and the public by overstating effect of the Supreme Court’s recent docket. We are thankful the Court has stepped in and sent a strong message that the system is broken. But lasting change that repairs the patent system for good will require an act of Congress.

Patent Reform: We’re Ready for Round II

Today, a bipartisan group of House members re-introduced the Innovation Act, an important piece of legislation that would directly address a patent troll problem that has ballooned out of control, costing our economy tens of billions of dollars annually.

You might recall that last year similar efforts got incredibly close to becoming law (In fact, the last time the Innovation Act was introduced, it passed the House with a 325-91 vote!), before stalling out at the eleventh hour in the Senate. We were disappointed at the time, saying then:

"This news is devastating to the welfare of startups who will continue to face the threat of patent trolls. That no agreement could be reached, especially in light of the efforts being made across the committee to find common ground, is also bad news for the economy where annual losses from patent troll litigation are billions of dollars."

More importantly, though, we noted then that the hard work we did transformed the political framework, and said to you, our community: “you changed the conversation from a wonky, back room discussion of legal tenets, to real world examples of harm. With your continued support, and the support of our friends in Congress, we can be on the winning side.”

Well, that time is now.

Despite some important progress in the courts and from the states on patent reform, trolls continue to be a serious threat to the innovation and startup ecosystem. Which is why we need comprehensive legislation to really fix the problem.

The reason why is fairly simple. Patent trolls are “successful” because they are armed with two weapons: low-quality patents, usually covering software-type inventions, that are nearly impossible to understand; and the ballooning costs of patent litigation (it can costs each side easily into the millions of dollars to fight a patent suit in court). Most of last year’s progress, especially an important case called Alice v. CLS Bank, dealt with the first problem, trying to improve patent quality. While that’s good news, it has—at least in the short term—only limited effect.

The Alice ruling can only be helpful in three distinct circumstances: 1) for new patents being issued by the Patent Office; 2) in litigation where a defendant attempts to invalidate the patent at issue; or 3) in one very specific proceeding at the Patent Office called a covered business method review (CBM). Let’s unpack each for a second:

• It’s critically important to have better standards for patentability going forward, but currently, there are approximately 2.24 million active patents in the United States. More than a million of those represent a software-type invention. And each of those patents has a lifespan of 20 years. The potential damage from this existing world of patents alone is enough to warrant legislation.
• As mentioned above, litigation can easily cost each side millions of dollars in legal fees, not to mention years of distraction from a business’ core function. Which makes the barrier to startups essentially impossible to overcome.
• CBM review is a great program, allowing affordable and efficient review of existing patents at the Patent Office. Yet it is currently limited to patents that touch financial products or services and—unless the law changes—the entire program is set to expire in 2020.

What’s more, none of this touches the out-of-control patent litigation system. Which is precisely why we need the Innovation Act. The Innovation Act, and other comprehensive efforts like it, use a combination of provisions to level the playing field, giving defendants more affordable access to make their case in a federal court. These provisions include common-sense reforms like requiring transparency when filing a lawsuit or issuing a demand letter (who are you? what patents do you own? what product do you claim infringes those patents?); shifting fees to winners when a losing party brought a particularly baseless lawsuit; shifting some of the costs of discovery, usually the most expensive part of litigation; and creating a vehicle for suppliers and manufacturers to help protect their customers when those customers become the trolls’ target.

Of all the good work we’ve done so far, the most important piece was earning a seat at the table. For the first time the startup community has a critical voice in this important debate. It is important that we use it and let Congress know the time has come to make the Innovation Act law.

Engine Statement on Proposed Net Neutrality Rules

In response to today's announcement on FCC net neutrality rules, Engine Policy Director Evan Engstrom released the following statement:

Today’s announcement from Chairman Wheeler represents a tremendous victory for the Internet and startup communities in the debate over net neutrality. Just one year ago, nobody imagined the FCC would reclassify broadband under Title II. And then the community mobilized. Engine was proud to work with hundreds of startups and other partners in urging the FCC use all available policy tools—including Title II—to protect the open Internet. Many of those startups spent the past year meeting with policy makers and making a public case for strong protections. The impact they had on the FCC’s rulemaking shows how powerful the technology community’s voice—particularly that of startups—has become in Washington.

 

While reclassification is a big win for startups, it’s only part of the equation. The FCC must now ensure that the rules it creates under Title II authority are strong enough to prevent ISPs from discriminating against startups and flexible enough to allow the FCC to preempt future threats to the open Internet. We at Engine look forward to being part of that process and making sure the voice of the startup community continues to be heard in Washington.

How Code2040 Sets Students up for Success in Tech

You can also read this post on Medium.

If the Census projections are accurate, by the year 2040 people of color will make up the majority of the U.S. population. This statistic inspired the name of the organization Code2040, a summer program to help Hispanic and black engineering students succeed and ultimately, become leaders in technology. According to Code2040’s website, jobs in STEM are the fastest growing category of professions in the United States. Yet, fewer than 4% of Black and Latino students pursue degrees in computer science. That gap is significant, it’s problematic and Code2040 aspires to narrow it, one fellow at a time.

Increasing the talent pool in STEM fields, especially from underrepresented minorities, doesn’t only require more degrees. Education is just one of the steps in a long pipeline to both success and leadership in a technology profession. Code2040 recognizes that many aspiring individuals who start down the path towards a career in technology may drop out due to lack of preparedness or even because they lack of the right connections.

“A lot of African American and Latino students don’t realize Silicon Valley is a place,” Tristan Walker, one of the co-founders of Code2040 told SV411 in an interview last year. “And once they get here, it’s very hard for them to find a way in, to make those connections and get in a room with people who can fund their idea.” That’s where Code2040 steps in.

Code2040 provides internships, mentorship, leadership training, and network development for the fellows admitted to its summer program. Since 2012, the organization has selected a group of students studying computer science and engineering to be placed with some of Silicon Valley’s top technology companies. Their interns have worked at LinkedIn, FourSquare, Tumblr, and a handful of tech startups. And through the course of their summer, the fellows attend workshops, meet with mentors, and tour Silicon Valley companies.

Ben Harvey was admitted into Code2040’s program for the summer of 2014, Code2040’s third class of fellows. Ben grew up in Baltimore County, and while he didn’t know many people who worked in technology, he did know that he enjoyed working with computers. Tinkering with HTML code and trying out new apps came naturally to him. He attended Towson University in Maryland and began pursuing a major in computer science. When he learned about Code2040, he had a feeling the program would offer an unmatched opportunity to jumpstart his career.

For Ben, the summer at Code2040 opened an entirely new realm of job possibilities—even life changes. He interned at a San Francisco edtech startup, Panafold, where he learned what it takes to work in a professional setting, built several Android apps, and ultimately received a job offer from the company. He accepted their offer, extended his stay in the Bay Area and most recently took another offer to work as a mobile developer for Disney. While Ben still has another couple of semesters left to complete his degree back at Towson, he isn’t in a rush to return. He hopes to become a top developer at a big company or a tech entrepreneur himself one day. He’s already built at least one Android app as a side project and is working on another.

“I wasn’t aware of all the potential for me in Silicon Valley until I got there,” Ben said. “People get funding for ideas, because they can build them. It was a culture shock. It’s inspiring.”

Getting more minorities into the tech field is a complicated problem, Ben acknowledges, but he thinks if students like himself were at the very least more aware of the kinds of opportunities that would open up to them, more people would be learning to code.

Code2040 just closed applications for their 4th summer of fellows. They plan to accept up to 40 fellows who will intern at around 20 Silicon Valley companies starting in June. By 2040, hopefully those fellows will serve as the mentors and advisors to a new generation of even more diverse programmers and aspiring entrepreneurs.

FCC Chairman Takes Steps to Undo Anti-Community Broadband Laws

Even though a favorable net neutrality ruling from the FCC appears imminent, the vibrancy of the Internet economy remains at risk so long as it’s tethered to a few, powerful oligopoly Internet Service Providers. These ISPs have tacitly divvied up geographic markets across the country, blocking competition and offering far lower speeds and higher costs to both consumers and businesses than those in peer nations. Due to aggressive ISP lobbying, nearly 20 states have laws on the books that prevent municipalities from providing broadband networks. ISPs sought these rules to prevent competition for broadband customers. Though net neutrality grabbed most of the telecom policy headlines over the past year, the FCC and the White House have both signalled an interest in overruling these anti-competitive bans on community broadband. Today, FCC Chairman Tom Wheeler decided to take action, circulating a draft decision that would preempt such laws in North Carolina and Tennessee.

We’re heartened by the FCC’s recognition that laws like these provide no public benefit and only serve to protect local cable monopolies. A lack of competition in broadband markets is one of the key reasons the U.S. ranks so poorly in global Internet affordability and speed. With the FCC having recently modified its definition of broadband to reflect the changing needs of a globally connected society, it is no surprise that the FCC would use all the tools at its disposal to promote broadband competition in order to bring U.S. speeds up to global standards.

Cities like Chattanooga, TN, Danville, VA, and Lafayette, LA are perfect examples of why communities should be given the option to build networks for their citizens. Unwilling to wait for the incumbent ISPs to upgrade their networks, these cities took it upon themselves to provide fiber infrastructure for their communities, drawing startup activity and growing the local economy, in addition to providing a much needed service to residents.

The FCC’s authority to overturn anti-community broadband laws flows from Section 706 of the Telecommunications Act, which gives the Commission authority to promulgate rules to promote the deployment of advanced broadband. Those closely following the net neutrality debate know that Section 706 is insufficient by itself to protect an open Internet, but giving the FCC the authority to prevent ISPs from using their monopoly power and lobbying might to crush potential competitors is still hugely important. The net neutrality bills discussed in Congress last month would have completely negated the Commission’s Section 706 authority, preventing it from overturning anti-community broadband laws. If the proposed legislation’s loophole-ridden net neutrality “protections” weren’t reason enough to oppose the bill, its attempt to protect ISP monopolies by preventing the FCC from addressing anti-competitive muni broadband laws surely is.

The FCC is scheduled to vote on the order at the end of the month, and while the proposal is targeted to only two states, it sends a clear message that the FCC will do what it takes to promote competition in broadband markets. Working to ensure that broadband markets feature multiple competitive providers is a daunting task, but Chairman Wheeler’s plan to preempt anti-competitive state laws banning municipal broadband is a step in the right direction.

Announcing Engine’s Diversifying Tech Caucus!

Yesterday, we were on Capitol Hill to launch our new Diversifying Tech Caucus. We’re excited to work with our Congressional Co-chairs—Senators Amy Klobuchar (D-MN), Shelley Moore Capito (R-WV) and Tim Scott (R-SC), and Representatives Cathy McMorris Rodgers (R-WA), Barbara Comstock (R-VA), Tulsi Gabbard (D-HI), Robin Kelly (D-IL) and Ruben Gallego (D-AZ)— to increase representation of women, minorities, and veterans in the tech sector, and the ability of these groups to access the good jobs that this industry creates.

Lack of diversity in tech is a well-documented and serious problem. Right now only one in 14 technical employees in Silicon Valley is African-American or Hispanic. Women currently represent fewer than 13 percent of employed engineers and hold fewer than 25 percent of STEM jobs. And just three percent of all startups are founded by women.

Congress can play a unique role in calling attention to these challenges, highlighting existing best practices, driving a public conversation, and designing policy initiatives that support and promote diversity. The Diversifying Tech Caucus will be a true partnership between policy makers, industry, and academia to organize, advocate, and create awareness about underrepresented groups and develop strategies for improving access and engagement. Industry and academic leaders will also work together to undertake extensive new research that legislators can use to elevate the issue and help develop meaningful solutions.

Lack of diversity in the tech industry is a complicated problem, one without a single, easy fix. But we are confident that when you get smart people from different walks of life with different sets of tools around a table, you can take great strides toward making it better. We have lots of work to do and can’t wait to get started.

 

 Engine Executive Director Julie Samuels

Senator Shelley Moore Capito (R-WV)

 

Senator Amy Klobuchar (D-MN)

Congresswomen Cathy McMorris Rodgers (R-WA)

Congressman Ruben Gallego (D-AZ)

Congresswoman Tulsi Gabbard (D-HI)

Congressman Blake Farenthold (R-TX)

The JOBS Act Isn’t Just About Crowdfunding

Entrepreneurs and investors may have to wait until 2016 for the true equity crowdfunding that the JOBS Act was meant to establish. But the SEC will likely soon finalize rules that open another funding avenue for small businesses. Regulation A+, an amended version of a securities registration exemption referred to as Regulation A, could serve as a viable capital source for small, emerging growth companies. Though it hasn’t been as well-publicized as other provisions of the JOBS Act, startups would be wise to pay attention.

The Securities Act, which lays out the laws governing how companies and investors can buy and sell shares, authorizes the Securities and Exchange Commission to decide which types of securities are subject to onerous registration requirements. Recognizing that smaller, private companies may not have the resources to comply with full SEC registration rules, the SEC created an exemption to its registration rules, called Regulation A, that  allows non-publicly traded companies to file a sort of mini-registration with the SEC and avoid the kind of full-blown disclosure and review that publicly-traded companies undergo. Using Regulation A has other advantages, too: for instance, unaccredited investors can participate in Regulation A offerings alongside accredited investors. (You can read our post on the accredited investor definition here.)

Despite its benefits, the previous version of Regulation A has not been widely used. Before the JOBS Act, companies could raise a maximum of $5 million, but relying on this exemption required issuers to navigate the dozens of varying blue sky laws, state laws that regulate the buying and selling of securities. Though such laws play a needed role in protecting consumers from fraud, the resulting complexity and costs of complying with the different filing and review regulations in every state simply wasn’t worth it for most companies. With the JOBS Act, Congress gave Regulation A (now Regulation A+) new life by raising the offering cap to $50 million. What’s still a sticking point, however, is whether the SEC’s final rules will include provisions that preempt state blue sky laws. That could determine whether this underused investment tool becomes a true financial opportunity for small businesses.

As for equity crowdfunding (outlined in Title III of the JOBS Act), while it remains a promising avenue for startup funding, especially in filling the need for pre-seed and seed capital, the SEC may be nowhere near issuing final rules (despite our emphatic pleas). Industry experts also worry that some of the disclosure, compliance, and financial auditing costs required under proposed SEC crowdfunding rules may ultimately deter companies from using Title III, as other, less costly funding options are available. For now though, without final rules from the SEC, both Regulation A+ and Title III crowdfunding remain unavailable to capital-seeking startups. We and thousands of entrepreneurs around the country still eagerly await the agency's long-anticipated action.

It’s not too late to add your name to our letter urging the SEC to finalize the JOBS Act. While the letter has been sent to the SEC, add your name to show support and receive occasional JOBS Act updates from Engine.

Tech in New York - Governor Cuomo’s 2015 Opportunity Agenda

With Engine having recently expanded to New York, we’re paying closer attention than ever to the decisions being made in Albany and their impact on the state’s tech sector. New York is home to one of the largest and most rapidly expanding startup communities in the country, so local and state level policies on investment and regulation have implications for the future of tech in all fifty states. This afternoon, Governor Cuomo laid out his vision for 2015 in a combined State of the State and budget address, along with a 500-page policy book that included additional proposals and details. While the presentation covered a wide range of topics from criminal justice to transportation infrastructure, the Governor did include several initiatives of particular interest to the startup community in both the education and economic development sections of his speech. For example, the Governor discussed his recently announced New NY Broadband Program, which would provide matching funds for internet service providers that invest in high-speed broadband in underserved areas. Access to broadband is essential not just for consumers, but for growing and potential startup communities as well. By using state funds to leverage private investments, this program could go a long way towards supporting innovation around the state. At the same time, the Governor avoided mention of the proposed merger of Comcast and Time Warner Cable, which would do much to undermine efforts to improve broadband access here in New York and around the country. Giving Comcast that kind of monopolistic control over broadband would remove almost any incentive for them to provide the higher internet speeds necessary for startups to thrive, and for us to remain competitive with other countries. Governor Cuomo has previously indicated his concerns about the proposed merger, and the state’s Public Service Commission is currently reviewing the deal to determine if it would benefit or harm New Yorkers. We urge the Governor and the PSC to oppose this deal, and continue to champion high-speed access for all New Yorkers. The Governor also talked about expanding a number of programs that would provide startups with access to capital, technical support, and other incentives. One proposal particularly worth noting is doubling the NY State Innovation Venture Capital Fund from $50 million to $100 million. The Fund is overseen by Empire State Development, and provides two types of investments: small pre-seed stage investments of up to $100,000 to startups associated with universities in state; and investments of up to $5 million in businesses in strategic tech industries. This additional capital, and the private investment it can leverage, could make a big difference for some startups that would otherwise have trouble accessing funding. And the state can do even more to help New York startups access capital. In his campaign policy book released in October, Governor Cuomo declared his support for equity crowdfunding, which provides financing opportunity for businesses that have a hard time attracting traditional venture capital. Crowdfunding has proven to be especially beneficial to women and minority owned startups. And while the real solution is federal authorization of equity crowdfunding, New York could join more than a dozen other states that have already authorizing intrastate crowdfunding. This would not only provide greater opportunities for diverse startups in Queens or Albany or Rochester, it would help build momentum towards federal action. We hope to see more support from the Governor on this subject in the months ahead. The Governor also discussed a package of proposals to improve higher education in ways that would better prepare students for tech jobs and help startups access the talent they need in order to grow. He talked about creating partnerships between community colleges and employers, and rewarding schools who use those partnerships to provide students with real-world job skills. He proposed an Employee Training Incentive Program that would provide tax incentives for companies that provide on-the-job training. And perhaps most exciting, Governor Cuomo proposed changes that would streamline approval of new programs and degrees both at higher education institutions and high-quality proprietary schools. Recognizing that the skills many new employers need change on a yearly or even monthly basis, he said that “it can no longer take two years for a new degree or training program to be approved.” With startups in constant need of new talent, we welcome the Governor’s commitment to providing students in New York relevant skills. And since startups account for all net new job growth in the United States, making sure those jobs go to New Yorkers is good local economic policy. As more decisions around the details and implementation of these proposals get made, we’ll be working to ensure that startups play a meaningful part in the conversation. And we’ll continue looking for other ways policy makers here in New York can support innovation throughout the state.

What Startups Heard in the State of the Union

Tonight’s State of the Union proved to be something of a mixed bag for the startup community. Which was a bit surprising, because over the past few weeks President Obama has previewed a number of new tech-related proposals. This was a natural move for a President seeking to highlight the nation’s economic recovery, as the tech industry—and particularly startups—are driving our economic recovery and are responsible for all net new job growth in the United States.

The President’s speech did touch on some of those proposals, such as improving access to broadband and a highly educated workforce. But other important issues, like net neutrality, received only passing mention. And some topics, like patent reform, were missing from the speech altogether.

Here’s a look at what startups heard—or didn’t hear—in this year’s State of the Union.

Community Broadband

"21st century businesses need 21st century infrastructure — modern ports, stronger bridges, faster trains and the fastest internet.

I intend to protect a free and open internet, extend its reach to every classroom, and every community, and help folks build the fastest networks, so that the next generation of digital innovators and entrepreneurs have the platform to keep reshaping our world."

Last week the President spoke in more detail about his plans to expand high-speed internet access in communities across the country. These plans include calling on the FCC to overturn limitations on community broadband, technical support to municipalities that are interested in creating their own broadband networks, and a package of grants and loans to incentivize rural broadband providers.

This is especially exciting news for burgeoning startup communities in areas where ISPs have so far failed to invest. We’ve already seen the impact that community broadband has made in places like Chattanooga, TN, Wilson, NC, and Danville, VA. Ultra high-speed broadband networks help attract startup activity to take advantage of the fast connections, which in turn drives consumer demand and ultimately, more investment in broadband infrastructure. The better the Internet infrastructure a community has, the more attractive that community is to new startups and the good jobs they create.

Access to Talent

"That’s why I am sending this Congress a bold new plan to lower the cost of community college — to zero.

We’re connecting community colleges with local employers to train workers to fill high-paying jobs like coding, and nursing, and robotics..."

One of the greatest challenges for the startup community is accessing a steady stream of talented people with ideas for new businesses and the skills needed to grow those businesses. Improving STEM education is critical if we’re going have future generations of homegrown talent.

Last week President Obama announced a package of higher education proposals that included making community college free for students across the country, and expanding technical training programs that provide skills tailored to in demand jobs. While many of the details of these proposals are still forthcoming, we’re optimistic that they will expand both access to and quality of STEM education, and we urge the White House to include the startup community in designing the details of implementation.

"Yes, passions still fly on immigration, but surely we can all see something of ourselves in the striving young student, and agree that no one benefits when a hardworking mom is taken from her child, and that it’s possible to shape a law that upholds our tradition as a nation of laws and a nation of immigrants."

The other piece of the puzzle when it comes to accessing talent is reforming our immigration system, so that foreign born entrepreneurs can come here, start a business here, and create jobs here. We’ve heard less about immigration reform from the President in the days leading up to the State of the Union, but the Executive Order he issued in November took a number of key first steps towards reform.

Among other provisions, the 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 executive action did not raise the visa supply, something that’s been a priority for the tech community for years and requires legislative action. We also need to establish a true founder’s visa, so that entrepreneurs can come to the United States to start new ventures, rather than being tied to a job with an existing employer.

Data and Security

"Tonight, I urge this Congress to finally pass the legislation we need to better meet the evolving threat of cyber-attacks, combat identity theft, and protect our children’s information. If we don’t act, we’ll leave our nation and our economy vulnerable. If we do, we can continue to protect the technologies that have unleashed untold opportunities for people around the globe.

While some have moved on from the debates over our surveillance programs, I haven’t. As promised, our intelligence agencies have worked hard, with the recommendations of privacy advocates, to increase transparency and build more safeguards against potential abuse. And next month, we’ll issue a report on how we’re keeping our promise to keep our country safe while strengthening privacy."

The President has announced a package of proposals around data and security, including legislation that would enhance information sharing between the private sector and government agencies, expanded powers for law enforcement to combat data theft, and expanded reporting requirements around data breaches.

As more and more business migrates to the Internet, it is vitally important that consumers have confidence that the information they are sharing with online businesses is secure and private while the regulatory climate also remains ripe for innovation. Revelations about the NSA’s surveillance activity may cost the cloud computing industry billions of dollars as consumers refrain from using services they perceive to be unsecure. There is, of course, a balance that must be achieved between rules that adequately safeguard consumer information and those that impose unduly burdensome obligations on startups without providing any meaningful security or privacy benefit for users.

The startup community looks forward to being part of this ongoing conversation, and working towards smart, manageable regulation that allows for both strong consumer protections and continued business expansion and job growth.

Other Proposals

"My plan will make quality childcare more available, and more affordable, for every middle-class and low-income family with young children in America — by creating more slots and a new tax cut of up to $3,000 per child, per year.

So I’ll be taking new action to help states adopt paid leave laws of their own. And since paid sick leave won where it was on the ballot last November, let’s put it to a vote right here in Washington. Send me a bill that gives every worker in America the opportunity to earn seven days of paid sick leave. It’s the right thing to do."

While access to affordable childcare and parental leave may not sound like tech policies, they are in fact critical to creating an environment where Americans of any age and background have the ability to take a chance on a new idea or a new startup. They’ll also help make sure that a diverse cross section of Americans has the opportunity to go to work, which will in turn help spur much needed diversity within job sectors like tech.

What Was Left Unsaid

Net Neutrality

President Obama has been a vocal supporter of reclassifying broadband Internet under Title II of the Communications Act. However, tonight’s speech featured just a passing hat tip to protecting an open Internet.

Strong net neutrality rules are essential for the future of entrepreneurship in this country. If ISPs are allowed to extract fees from companies that can afford to pay for faster delivery of their content, it would create a nearly insurmountable disadvantage for the new startups that are driving new job growth.

Tonight’s speech comes less than 24 hours before major Congressional hearings on net neutrality, and just a few short weeks before the FCC is set to introduce new rules on the subject. Opponents of an open Internet are mobilizing for a last ditch effort to undermine meaningful net neutrality. That’s why in the days ahead you’ll see the startup community continue to rally against proposed legislation that would provide net neutrality in name only, and work to ensure the FCC takes action that will preserve an open Internet for generations to come. We hope we’ll continue to see more leadership from the President on this issue.

Patent Reform

Patent trolls remain one of the biggest threats to startups, forcing many growing companies to choose between hefty legal fees or baseless settlements. It’s a problem President Obama acknowledged in last year’s State of the Union when he said, “Let’s pass a patent reform bill that allows our businesses to stay focused on innovation, not costly, needless litigation.” That reform legislation came very close to passing last session before ultimately dying in the Senate.

With a change in Senate leadership, many of us in the startup community are optimistic about significant movement on patent reform. So we were disappointed to see the President avoid the topic entirely in this year’s speech. While we’re confident that he remains committed to reform, we hope to see him more aggressively pushing for legislation in the weeks to come.

Looking Ahead

"Some of our bedrock sectors, like our auto industry, are booming. But there are also millions of Americans who work in jobs that didn’t even exist ten or twenty years ago — jobs at companies like Google, and eBay, and Tesla."

Overall, the President clearly acknowledged the growing importance of the tech industry to both our economic recovery and to the daily lives of every American. But while he shouted out some of the biggest success stories in the tech community, he failed to mention that not that many years ago, these companies were all startups. And the startups of today will be the success stories and the job creators of tomorrow.

Overall, compared to some previous years, tonight’s State of the Union was a bit light on tech policy. But considering the President’s recent leadership—along with the leadership from members of both parties on the Hill—on a number of issues critical to the future of the tech industry, it’s easy to remain optimistic about our potential for real victories this year.

With FCC action on the horizon, the startup community will be focused intensely on net neutrality in the weeks ahead. At the same time, we’ll be working to make sure that startup voices are heard on topics ranging from immigration to patent reform. And we’ll maintain pressure on the President and on lawmakers in both parties to support innovation and opportunity for everyone.

Net Neutrality Shake Up: Sprint Endorses Title II, GOP Introduces Legislation

Today marked something of a sea change in the net neutrality debate that has gripped the country for the past year. The reclassification of broadband as a common carrier service under Title II seemed all but dead on arrival just a few short months ago. This cast real doubt on the future of startups in this country, and the jobs and economic opportunities that they create.

Now, groups that once bristled at the mere mention of strong net neutrality rules are publicly embracing the tenets of an open Internet. Perhaps most exciting is Sprint declaring their support for Title II reclassification, making them the first national mobile carrier to do so. Sprint’s announcement is further evidence that reclassification would do nothing to chill investment in the expansion of broadband infrastructure.

The other big news of the day was the release of a net neutrality bill from House Republicans. This bill includes some encouraging provisions, including rules that prevent ISPs from blocking, throttling, or charging edge providers for preferential access to customers—the cornerstones of any strong net neutrality rules—and applies these rules to both wireless and wireline broadband. Of course the devil is in the details, and upon closer examination it is clear that the proposed legislation would do much to undermine the future of an open Internet.

For one thing, the bill appears to apply to only customer-facing prioritization, meaning that the rules will not prevent ISPs from using their gatekeeper power to extort money from edge providers at the peering/interconnection level. Since some of the most notable net neutrality violations in recent history involved interconnection, this loophole may be large enough to swallow the rules altogether. And, since the proposed legislation would prohibit the FCC from addressing any future avenues for discrimination, ISPs would simply have to be more creative in how they extract rents from edge providers.

The bill would also rescind an important tool that allows the FCC and state agencies to ensure broadband competition and deployment—Section 706. While 706 by itself is an insufficient grant of authority to effectively ensure an open Internet, it still has an important role in policing ISP malfeasance. As President Obama discussed earlier this week, the FCC can and should use its 706 authority to overturn laws (passed at the behest of large ISPs) that prevent municipalities from providing broadband for their citizens. Under the proposed House bill, the FCC will lose its ability to vacate these anti-competitive handouts to ISPs. Similarly, invalidating 706 as a grant of authority could diminish the role of the FCC and similar state agencies in reviewing harmful broadband consolidation, like the proposed merger between Comcast and Time Warner.

While it’s encouraging to see those once opposed to net neutrality start talking about rules that would protect an open Internet, it would be naive to think that the proposed legislation is anything other than an attempt by ISPs and their supporters to squeeze whatever benefit they can from what they see as a bad development: the FCC’s impending decision to reclassify broadband under Title II. The proposed legislation fails to offer the same strong net neutrality rules that the FCC can provide under Title II, and instead would make it impossible for the FCC to act in the future to protect a vibrant Internet.

The legislation as drafted seems to be little more than a last ditch effort by the opponents of net neutrality to prevent a reclassification that seems increasingly inevitable. Those of us in the startup community who have been fighting for an open Internet must continue to make a clear case to legislators, the FCC, and members of the public: Title II reclassification is the best way to guarantee net neutrality, not just in the short term, but for generations to come.

Bipartisan Senate Bills Propose Critical Reforms for the Tech Community

We’ve said it before and we’ll say it again: many of the greatest obstacles to attracting and retaining tech talent are the result of our country’s broken immigration system. There’s a pressing need for substantial legislative reforms that reach beyond the President’s recent executive actions. So we’re happy to see the new Congress hit the ground running with two high-skilled immigration bills—the Startup and the Immigration Innovation (“I-Squared”) Act, both bipartisan efforts introduced in the Senate this week. These important pieces of legislation propose a number of critical reforms to our immigration system, including increasing the pool of visas available to the high-skilled talent our technology and startup communities desperately need.

The bills vary in their approach, but cover similar ground. On Tuesday, Senators Orrin Hatch (R-Utah), Amy Klobuchar (D-Minn.), Marco Rubio (R-Fla.), Chris Coons (D-Del.), Jeff Flake (R-Ariz.), and Richard Blumenthal (D-Conn.) re-introduced the Immigration Innovation Act, (also known as the “I-Squared” Act). The bill would increase the H-1B cap from 65,000 to 115,000 visas, expand worker mobility for visa-holders in-between jobs, and create a number of important exemptions from the Green Card cap for professionals in STEM fields.

The Startup Act, originally introduced in February 2013 (you can read what we wrote then here), was re-introduced today by Senators Mark Warner (D-Va.) and Tim Kaine (D-VA) along with Sens. Jerry Moran (R-KS) Chris Coons (D-DE), Roy Blunt (R-MO) and Amy Klobuchar (D-MN). Their bill tackles many of the same issues with visa limitations, and goes farther in establishing an Entrepreneur’s Visa to allow founders of new businesses to remain in the United States, launch businesses, and create jobs.

Providing a pathway for entrepreneurs to create businesses in the U.S. is particularly important. Under current employment-based visa provisions, it is exceedingly difficult for entrepreneurs to venture out on their own and create startups which will in turn create new jobs here in the U.S. Immigrants are twice as likely to start businesses as their native-born peers, and failing to provide an easy way for foreign entrepreneurs to start their businesses here is essentially the same thing as shipping jobs overseas.

While both bills are likely to face some real challenges in Congress, the need to make our immigration system more innovation-friendly has become increasingly clear. We urge leaders on both sides of the aisle to support the kinds of common sense reforms found in these bills. The future of our economy depends on it.

President Obama Outlines Plan for Competitive Networks, Muni Broadband

The President’s speech yesterday in Cedar Rapids, IA called needed attention to the nation’s serious broadband problem—namely, that little to no competition exists when it comes to broadband networks. Even with a favorable net neutrality ruling from the FCC seeming imminent, the vibrancy of the Internet economy remains at risk, tethered to a few oligopoly Internet Service Providers. These ISPs have tacitly divvied up geographic markets across the country, blocking competition and offering lower speeds and higher costs than those in peer nations. Increasing competition in broadband markets won’t be accomplished overnight, but the plan the President has outlined offers some key strategies for getting competitive broadband options to cities throughout the country.

Echoing sentiments from FCC Chairman Tom Wheeler earlier this year, the President called on the FCC to overrule anti-competitive laws on the books in 19 states that prevent municipalities from providing broadband networks for their citizens. These laws—typically enacted at the behest of large ISPs—provide no public benefit, instead merely shielding ISPs from competition at the expense of local choice. As cities like Chattanooga, TN, Danville, VA, and Lafayette, LA have shown, building next-generation networks helps draw startup activity and grow the local economy, in addition to providing a much needed service to residents. Free from competitive pressures, ISPs have shown little interest in building the high-speed networks that will soon be necessary to compete internationally. The President’s plan to free cities from ISP-driven bans on municipal broadband is a long-overdue step towards getting the U.S. back on track with peer nations.

The President outlined other creative measures to prompt broadband infrastructure investment, including grants for rural areas to build high-speed networks, and a program to remove regulatory red tape that slows down broadband investment. All in all, it’s heartening for the startup community to hear concrete policy proposals to fix a broadband competition problem that is getting increasingly hard to ignore. The President’s plan is a strong step towards making the U.S. a leader in broadband innovation and ensuring that entrepreneurs can continue to create good tech jobs in cities and towns across the country.

FCC Chairman Wheeler Signals Support for Title II Reclassification

Big news on net neutrality: FCC Chairman Wheeler all but confirmed today that he plans to propose a rule reclassifying the Internet as a Title II telecommunications service next month. If you’ve been following the debate over net neutrality, you know what this means. And if you haven’t, well, this is huge.

Last year, when a federal court threw out the FCC’s 2010 Open Internet Rules, it essentially told the FCC to go back to the drawing board. The FCC, a federal agency, had a couple of choices: attempt to rewrite rules that would protect an open Internet using the same legal authority the Court already said wouldn’t work, or reclassify the Internet as a telecommunications service under Title II. Only under that second option would the FCC have the legal authority it needs to enforce real net neutrality. Which is, of course, why the cable companies and entrenched interests hate the idea. And why we love it.

Which brings us back to today. Despite months of lobbying by net neutrality opponents, today Chairman Wheeler, in a speech at the annual Consumer Electronics Show in Las Vegas, made his most emphatic statement to-date in favor of Title II reclassification. He told the packed room that his thinking has evolved, and while he originally believed that he could protect an open Internet using a “commercially reasonable” standard without reclassification, he’s changed his mind. Instead, he came to the conclusion—with which we agree— that "commercially reasonably" would really mean "commercially reasonable for ISPs," not the true innovators who depend on an open Internet. Chairman Wheeler also noted that the next wave of innovation would depend even more heavily on open access, particularly for innovations surrounding the Internet of Things. And with that, he signaled his support for what we have long believed is the only path forward: reclassification under Title II.

We are encouraged by the Chairman’s words today and look forward to seeing his proposal in writing early next month. But this fight is far from over. Many in Congress have promised to block any attempts at reclassification, so even with a victory at the FCC, our work here isn’t done. We promise you this, though: we’ll keep fighting on behalf of startups and their users to protect the open Internet and all that it means not just to the economy, but to all who use it. Today we got one step closer to that goal.

2014 Year in Review - Small Steps Towards an Immigration Fix

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

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

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

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.