Today the President will sign the Jumpstart Our Business Startups (JOBS) Act in to law, a complex and by no means perfect bill that contains at least one 'no-brainer' win for both businesses and investors: crowd funding. This bipartisan legislation fulfills the President's call to reduce regulatory burdens that prevent many small and young businesses from raising capital -- specifically by allowing crowd funding and expanding mini-public offerings.
The legislation is remarkable, as it (rightly) reverses more than 90 years of restrictions on raising capital at the grass-roots level. How we got here is historic as well -- it illustrates what power lies in everyday individuals. An impact that will now be felt around the country as small businesses and startups look to crowd funding and other non-traditional means of raising capital.
The movement began in 2009, when author and economist Michael Shuman wrote an article for Community Development Investment Review, a publication of the San Francisco Federal Reserve Bank. In it, he wrote:
"Existing laws place huge restrictions on the investment choices of small, 'unaccredited' investors -- a category in SEC vernacular that includes all but the richest 2 percent of Americans. The regulations prohibit the average American from investing in any small business, unless the firm is willing to spend $50,000 to $100,000 on lawyers to prepare a private placement memorandum or public offering -- thick documents with microscopic, ALL CAPS PRINT that no human being has ever been observed actually reading."
The good news is that local businesses could get a huge investment boost with some modest securities reforms that would cost little or nothing. That simple idea gained momentum in the summer of 2010, when the Sustainable Economies Law Center (SELC), a nonprofit based in Oakland, California, wrote a letter to the Securities and Exchange Commission (SEC) requesting an exemption for crowd funding. The SEC received approximately 150 letters of support for the proposal.
SELC volunteers then talked to staff at the President's Office of Technology about the idea and the President supported the idea of an exemption for small securities offerings, which he announced in his jobs speech in September 2011. Legislation creating an exemption for small "crowd funded" investments passed the U.S. House of Representatives in November by an overwhelming majority -- almost a unanimous vote of approval.
With the final law being signed today, it reverses laws restricting investments that date back to the 1930s. What impact will this have on Main Street? The opportunity for growth, new startups and entrepreneurs whose ideas never make it past the dinner table due to lack of funding is vast. The impact on local business is undoubtedly also going to produce more resilient communities and cities where investors can now invest their money to build real wealth in the communities they care about.
The vast majority of the American public, the 99 percent of us who are "unaccredited" investors, will soon have the opportunity to keep their money local. The half of our economy made up of small, independent businesses will now have access to capital that previously could only go to giant public companies. Americans have $30 trillion dollars invested in securities -- imagine if even 10 percent of that went from Wall Street to Main Street. What could $3 trillion dollars do in our communities?
Of course there is the potential, and frankly the likelihood, for abuse and failure. Investors who don't proceed cautiously can (and some will) lose money on failed investments. There will be a rush of companies offering portals that will potentially fleece customers by charging unnecessary fees. But while some will try to make a quick buck, the broader opportunity gives me cautious optimism. There are some mechanisms in place that protect consumers from losing everything (they cannot invest more than 10 percent of their net worth for example) and there will be opportunities for savvy networks of small businesses to connect and create their own portals thereby owning an even bigger piece of the investment market.
Next month I'll be leading a conversation around how to accelerate community capital for small entrepreneurs at the Business Alliance for Local Living Economies (BALLE) Conference in Grand Rapids, Michigan. The topic of crowd funding will no doubt dominate interest and hopes for many. While crowd funding alone isn't a silver bullet, it does play an important role in revitalizing the entrepreneurial small busines ssector of the economy. Its simplicity and ingenuity is American capitalism in its finest form.
Jeff Jarvis: The Importance of JOBS
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It is impossible for an ordinary person, not a professional investor, to stand up to an experienced con man intent on defrauding him.
And I don't know where people are getting "investments in their communities" from. We're not going to see corner stores and coffee shops looking for investors. When you say "startup," everyone thinks "internet," and the internet is where this will play out.
I know about cons, having some stuff in my past I'm not exactly proud about, and I can tell you that the safest assumption you can make about people in general is that they are stupid, naive, and trusting. It's actually harder to take candy from a baby than it is to con an adult under the influence of greed. The babies make a big fuss and hang on tight to their lollypops, while the adults practically beg you to take their money.
Small business needs an easy way to raise capital that is non-bank.
The reason is simple: banks in the US don't have the ability to make business loans.
Banks have the ability to make car home and credit card loans.
But laws have restricted small businesses ability to raise non-bank capital.
So anyone building a mobile app or facebook fanpage business, looking for medical practice healthcare finance, etc. can benefit.
This is a needed change that shows understanding and vision.
Every freedom comes with potential abuses...that's no argument for sacrificing all freedoms. The purpose of the SEC laws around "accredited investors" is to prevent individual investors from getting fleeced for everything they have. The protections in place in this bill will prevent that from happening. Will there be frauds and abuses? Sure. But nobody's going to lose their life savings...and now I have a choice to invest in my community instead of just handing my savings over to Wall St. Overall a net positive. Very positive.