On a sunny day in the Rose Garden last April, the president signed the auspiciously named JOBS Act into law. Surrounded by legislators from both parties, the president heralded the law as a 'game changer' for startups and small businesses.
One year later, the 28 million small businesses that account for nearly one-third of the nation's workforce are still waiting for many of the important aspects of the law to be enforced -- most notably, the ability for entrepreneurs to inform potential investors about a capital raise.
Currently, if an entrepreneur is looking to raise capital, he or she cannot publicly market, advertise or announce in any way that the company is seeking investments. Clearly this makes the fundraising process exorbitantly difficult, and I believe, outdated.
Both small businesses and individual investors are disproportionately harmed by obsolete regulations that prevent free flowing information. Companies like Facebook, with substantial budgets, can afford to pay large fees to investment banks to help raise capital by arranging private road shows to large investors. Unfortunately, the economics don't work for the little guy -- whether you are a small business looking to raise growth capital for the first time, or an individual investor hoping to diversify your portfolio.
In any other industry, technology fills the void. Low cost providers enabled by efficient technology enter the market to serve these 'unprofitable' customers. Think Walmart for retailing, Netflix for video rental, or take a look at what is happening in education with online platforms like Coursera. Currently the law does not allow this type of mass communication for small business fundraising, so there is no Walmart, Netflix or Coursera for the private company investment industry.
The JOBS Act will fix this by allowing the free flow of information for certain private investments, enabling service providers, or the companies themselves, to reach wider audiences of potential investors. The concept is called general solicitation. Once the rulemaking is done, small businesses may be able to share news of an offering to their followers on social networking sites, in their packaging, or in a shop window.
Without a penny more of government spending, new capital from qualified investors will flow to the most productive areas of our economy. What today takes many companies six to 12 months, can be reduced to a few weeks by letting buyers and sellers in an existing market find each other more efficiently.
So, why is there a delay at all? As written, the law instructs the SEC to remove the ban on general advertising not only for small businesses raising growth capital, but also for private investment vehicles such as hedge funds, real estate investment trusts and other complex financial products. Investor protection advocates have raised legitimate concerns about whether even the most sophisticated investors can effectively diligence such investments. Moreover, because of their scale, these investment vehicles will have resources to advertise broadly, potentially opening the floodgates for misleading advertising campaigns targeting unsuspecting investors.
But, small businesses and investors should not be forced to wait further. We at CircleUp propose a new solution. As a first step, lift the general solicitation ban only for direct investments in small businesses that have less than $50 million in revenue.
A staged lifting of the ban on advertising is a positive step forward for all sides. Increased information about offerings will provide individual investors more choice. Small businesses will not be forced to approach only a narrow set of established "Angel Investors." Regulators will be able to study the impact of lifting the ban on advertising for only a small fraction of the market overall.
Regulators can, and should, implement this phased approach to increase the flow of capital for small businesses, which create a disproportionate number of jobs. Without increasing government spending, or changing who can and cannot invest in these small businesses, our proposed solution can improve the functioning of private capital markets - providing more choice for investors, more capital for small businesses and growth for the economy overall.
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