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JOBS Act Crowdfunding: Introducing New Sources of Capital to Low-Wealth Entrepreneurs

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Yesterday, I attended President Obama's signing of the Jumpstart Our Business Startups (JOBS) Act at the White House. The JOBS Act, which passed in Congress at the end of March, is a combination of capital formation proposals to make it easier for firms to raise capital, including and most importantly, crowdfunding. Crowdfunding will allow entrepreneurs and microbusinesses new and innovative ways to access capital over the Internet.

For many small businesses, personal savings and appeals for money from friends and family are the only way for them to turn an idea into a business and to survive their early stages. Blacks and Hispanics have substantially lower levels of wealth and lack the family and friends networks from which to draw capital. Most blacks accumulated their wealth through home equity, but we know that was disproportionately diminished in the recent financial crisis.

With the advent of new Internet technology and social media, crowdfunding will make it possible for entrepreneurs to secure small investments efficiently, cost-effectively, and without being judged based on credit history or score. Given the tremendous demand for credit among microbusinesses and entrepreneurs, crowdfunding offers real promise for underserved business entrepreneurs and may allow the organizations that serve them the ability to reach even deeper into the entrepreneurial community.

It is the behind the scenes knowledge of how these businesses get started that makes me excited about the possibility of crowdfunding. Take Tamara Clarke, client of an AEO member, The Edge Connection, in Georgia. When she couldn't find a hair product she needed, she solved the problem. Tamara's venture, Eco-Exquisite LLC, manufactures sustainable hair accessories, and her first patented offer has the potential to create a new billion-dollar product in personal care. Could this be a ripe deal for investors through crowdfunding? And then there are entrepreneurs like Mike Smith -- another client of Edge Connection. Mike learned of the non-profit while standing in the unemployment line. He attended the information session, enrolled in their Plan for Profit program, and that same year launched his business: Progressive Facilities Maintenance, specializing in commercial maintenance and repairs, as well as residential remodels and restorations. Today Mike has a job running his company, and last year employed more than 60 part-time and seasonal workers.

The JOBS Act will allow small businesses, like Tamara's and Mike's to raise up to $1 million annually through approved, online crowdfunding intermediaries without having to deal with any kind of SEC registration or filing. Investors will be able to invest up to $10,000 annually without any kind of SEC requirements. In the microlending community, $10,000 is approximately the average loan size. According to data from the U. S. Census' Survey of Business Owners in 2007, over 43 percent of women owned businesses were started or acquired with less than $10,000 in capital.

We applaud President Obama and his Administration for taking this step to remove another barrier to achieving individual aspirations of business ownership held by so many. Crowdfunding sounds like it could be great for microbusinesses that need equity. At AEO we believe in the power of one business. In fact, if just one in three Main Street microbusinesses hired just one employee, the U.S. would be at full employment. Soon, we may really see what the power of one investor can really do!

Just how much of an opportunity crowdfunding holds for microbusinesses is a hot topic that will be discussed by a number of investors, practitioners and policy experts at the AEO National Conference being held in Washington, D.C. from April 30 - May 2, 2012.

If you want to know what all the buzz on crowdfunding is about, I encourage you to attend the conference and to meet industry leaders who are on the cutting edge of defining viable crowdfunding business models such as: Premal Shah, President, Kiva.org and Jonathan Moyal, Founder of Lucky Ant. You will also be able to hear from an impressive team of potential investors like Michael Shuman, BALLE and author of Local Dollars, Local Sense, Brian Trelstad, Chief Investment Officer, Acumen Fund and Melissa Bradley, President, Tides.