JOBS Act

The President is set to sign the JOBS Act today, a bill that has promised to jump start entrepreneurship and investment in startups. Among the many features, this new law would open up a new source of funding for small businesses and entrepreneurs who are looking to raise capital, but have been stonewalled by the large venture capitalists, or otherwise can’t or won’t jump through the regulatory hoops of the SEC. So what exactly does the JOBS Act do?

One of the more interesting features of the bill is the allowing of crowdfunding. Previously, companies or entrepreneurs that wanted to raise capital from a large amount of small dollar investors had to deal with complicated SEC regulations, including having their investors be accredited, and the company having to register with the SEC, depending on certain funding thresholds. Because of the JOBS Act, many of the regulatory hurdles are being are being taken down or loosened. This will allow for crowdfunding by entrepreneurs and small businesses.

So what exactly is crowdfunding? It’s exactly as it sounds. It’s a gathering of a group of small dollar investors to help fund a company, in exchange for stock or issuance of debt. In the digital age, we’re seeing crowdfunding in many different areas—crowdfunding of non-profits, art projects, one-off products—even Groupon’s business model might be considered some form of crowdfunding. But until today, the SEC’s regulations have stopped small business owners from being able to be funded the same way.

Crowdfunding has been enormously successful in these other areas. Kickstarter is a company that was formed to help artists, filmmakers, authors, or other creative professions find funding for their projects. There have been many success stories, even helping some businesses get off the ground by selling their first product on the site, rather than selling stock in the company. In 2010, a designer named Scott Wilson put his concept for a new product on Kickstarter. It was for a wristband that would hold your iPod Nano on your wrist, in effect turning your Nano into a wristwatch. If you pledged $25 or more, you would receive a finished product in the mail. The product exploded, raising over $900,000, allowing Wilson to put his product into production and put his new company on it’s way to designing more products.

Think about the ideas that could be funded or the jobs that could be created using this model. It’s a democratization of the venture capital band banking industry. No longer would an entrepreneur with an idea be forced to find funding through hunting down a millionaire angel investor or pitching a room full of venture capitalists. An entrepreneur could post his idea on a website, put a link to it on his Facebook page, and have 2,000 of his closest friends invest $50 each for a share in his new company. The JOBS Act has the potential to unleash a wave of job creation and innovation.

Because of this democratization, many Wall Street firms may not be happy. This could be viewed as the beginning of taking business away from the large banks and brokerages who usually handle this business. As Tim Carney at the Washington Examiner points out:

“Liberal critics attack the bill as a pro-Wall Street deregulation, but the measure actually helps ordinary Americans bypass big banks, investment brokerages and large investors — which might be why some senators weakened the bill, inserting regulations that protect the big guys from new competition. A top lobbyist for large investors successfully pushed restrictions on how much money entrepreneurs can raise through crowdfunding.”

Criticism of the JOBS Act has come not only from the banks worried about their foothold, but also from some in the financial journalist and political community. Their worry is that the new law may allow for rampant fraud. What’s to stop hucksters and con-artists from setting up fake companies to bilk investors out of their money? Without the accreditation process, these scams could be much easier to deploy on an unsuspecting investor community, excited about new opportunities. Steve Case, the founder of AOL and one of the boosters of the bill, tells Andrew Ross Sorkin that, of course there will be some fraud—there always is. He told Sorkin, “I don’t want to sound flip about this, but you don’t have to be an accredited gambler to go to Las Vegas. Anyone can walk into a casino and lose an unlimited amount of money. I’d rather they invest that money.” And as Darrell Delamaide at Marketwatch points out, could it be any worse than the financial disaster the banks found themselves (and their clients) in during the financial crisis these past few years?

The JOBS Act could unleash the next wave of innovation we see on the Internet. As the democratization of the investment apparatus continues, we could see more and more small businesses opening up shop, and more and more jobs being created in the process.

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