A bittersweet moment in entrepreneurial history recently occurred, with the Senate passage of the JOBS Act. After passing in the House, this 6-pack of small business modernization reforms cleared the Senate. While most things were left intact from the House bill, the crowdfunding component was tweaked to allow for "more investor protections". In my opinion, crowdfunding was the most economically important part of the bill, so it's no surprise that the special interests have dipped their fingers in the mix. Unfortunately, America will pay a price for this in terms of brain-drain. Sound familiar?
In over four years of operation, leading crowdfunding site Indiegogo reports virtually no fraud. U.K. crowdfunding leader Crowdcube (which does allow equity finance) reports no fraud. As is the case for U.S. based peer-to-peer lending site Prosper or AngelList, the popular site for angel investors searching for deal flow from entrepreneurs. Never let the facts get in the way of a good FUD story. If you commit fraud online, your life is over.
Fraud feeds on opacity and on small groups, because those factors increase the probably of not being "found out". Ironically, that would well describe the environment of the traditional investment paradigm. But in the social networking sphere, the more viral any story gets, the more the chances that fraud will be exposed by the people who would know. Take for example, the recent viral story of the guy who claimed to achieve flight with a bird-like flapping contraption. It was actually a hoax, 8 months in the making, from a Dutch artist. Time for the world to find out it was a hoax and have the artist "fess up" -- measured in hours.
As The Small Business and Entrepreneurship Council CEO Karen Kerrigan said about the recent Senate vote, "We would have preferred that crowdfunding provision to be less onerous and complex for small businesses, and feel the Securities and Exchange Commission has been given too much rein from a regulatory perspective." Apparently the SEC, who recently warned that the JOBS Act may harm investors, has not had the time to learn about the years of crowdfunding and social networking experience that we have already. Perhaps, they are very busy trying to find out where the still-missing $1.6 billion went, that is owed to 35,000 MF Global customers.
But the worst part of the onerous changes is something that few seem to have contemplated. Every extra bit of regulatory complexity is not only costly to American small businesses. It will also create an unfortunate "brain drain." It's very simple. If we make it hard for Americans to invest in crowdfunding, then entrepreneurs will tend to get funded with larger percentages of foreign money. Even worse, limitations on the amounts or percentages that Americans can invest in national crowdfunding, will force Americans to crowdfund invest overseas. Well, duh!
Many countries are watching the crowdfunding legislation intently and will "fast follow" with their own regulatory changes. Thus, we absolutely need to keep regulation clean, lightweight and harmonizable. It may seem counter-intuitive at first, but every extra regulatory hurdle will produce further economic and entrepreneurial brain drain. Why on Earth, would we want to limit the amount that Americans can invest in their own country? Let's please not make this the "Suck America Dry Act." Please contact your Representative and request that they "keep the SEC out of crowdfunding." Send them this article if you like.
Follow Kevin Lawton on Twitter: www.twitter.com/CrowdfundBook
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As I said, how can this bill be an investment in our own country when the people who benefit will be the CEOs and the initial investors? Nobody but the rich get richer. I noticed too that the amount of investment dollars allowed went from 5 million to 50 million. Now what kind of investor has that kind of money? Certainly not the small family investor, unless the family is Koch brothers. It seems clear who this bill will benefit and it's not your normal middle class Americans.
I don't understand how the JIOBS bill would constitute an investment in our country. It is touted as a bill that allows the relaxation of regulations for companies seeking to go public. These are privately held companies that will benefit greatly from the deregulation. They will be receiving investment money from large corporations and wealthy investors. They will ultimately profit by this process, and shareholders will get pennies or nickels in comparison to the millions the companies and CEOs will realize. And it could take years before any profit is realized at all because the investors must be reimbursed first and in the largest chunks of change the business can afford. So, the ones who benefit are the business and the large block investors. I recall a company I worked for going public, and there were stock splits that devalued the shares of employees. The newly created stocks were of no value to the employee who had not yet exercised their options. For instance, I was offered 500 shares, but by the time I was financially able to exercise that option the stock value had been halved twice, and what initially might have been worth a thousand dollars was now worth about $250. I wasn't worth it. And this type of thing happens typically with newly created stocks. This thread continues.