Nine months ago, Democrats and Republicans came together to announce the Jumpstart Our Business Startups Act or JOBS Act. The legislation was meant to help them get reelected…I mean, make it the easiest that it had been in decades for small and startup businesses to raise capital. Small businesses were going to be able to raise capital via an approach called ‘crowdfunding’. Crowdfunding is a way for businesses to solicit private investors with the promise of potential returns with no consideration as to investor sophistication or financial resources.
In many cases, fundraising would be done over the Internet or via ads with virtually no regulatory oversight. Additionally, government was going make the legislation active within 90 days – an unheard of speed inside of the beltway.
It’s 270 days later and, well, nothing has happened. In fact, many believe that nothing will happen for at least another year.
The holdup is that the Security Exchange Commission (SEC) is doing what legislators failed to take into account – investor safety. As I said last April, the problem with the JOBS Act is that it strips away many of the investor protections created over decades to fraud and other misleading practices. Under the Act, companies would not have to make sure that their accounting is done correctly. Internal checks against fraud would not start for many firms for the first five years of a public company’s life. Audits of financials or internal controls would not be necessary for many companies. A company could raise capital with a PowerPoint presentation with no protections on investors for misrepresentations, disclosures related to the past business failures of their executives, compensation of those executives and other information critical to an informed investment decision. Even worse, investment banks and their analysts could write misleading investor reports that they do not believe in order to win investment banking business with no threat of SEC enforcement action.
In spite of all of this, the Act provides clear benefits to honest startups and small business trying to raise capital. The real worry of the Act is that it is expected to be the equivalent to the full employment act for fraudsters and scammers. Using 2010 as a reference point, there were 3,500 enforcement actions requiring the restitution of $14 billion to investors. With the passage of the JOBS Act, most believe that bad behavior will only increase – but now regulators will have a harder time fighting such activity given the deregulation of so much of the fundraising process.
In an odd twist on the crowdfunding front, people are turning to crowdfunding websites to pay for medical procedures. More accurately stated, people are using these sites to look for donations to help with personal needs.
Normally crowdfunding websites raise debt or equity to help an upstart business. Erick Mott, a business writer in San Francisco, states that Lending Club, On Deck and Prosper are the top crowdfunding sites to raise debt in support your business venture. Many people prefer debt to equity as it allows them to retain all ownership.
AngelList, CircleUp and Crowdfunder appear to be the early leaders at raising equity. The challenge here is that the SEC have not as yet proposed rules. Without these rules, the crowdfunding firms must rely on accredited investors. Accredited investors typically earn in excess of $200,000 annually.
For now, the typical investor is limited to contributions aka donations via RocketHub or Kickstarter on worthy small enterprises. Alternatively, there are many great ideas right here in the Coachella Valley that could use your help – you do not need a website for that.
