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How the JOBS Act Will Disrupt Funding for Small Businesses

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Early this month, President Obama signed the JOBS Act into law, marking a new era for securities regulations. The law eases restrictions for small businesses to raise capital, most notably through the introduction of equity based crowdfunding, the process of aggregating small individual investments to meet a larger financial goal for a small business.

There are 6 million small businesses in America today -- only one of them sold to Facebook for $1 billion. In fact, the vast majority of businesses operate outside of the Silicon Valley bubble -- where established networks of venture capitalists, angel investors and entrepreneurs all come together to provide the capital and support small businesses need to grow. It is these companies, not the high flying technology startups, that will be the beneficiaries of crowdfunding.

Small businesses are the engine of sustainable economic growth for our economy. Between 1993 and 2009, small businesses created 65 percent of the new jobs in America. However, the "fuel" that small businesses need to power this growth is capital. According to a survey conducted by Dun & Bradstreet and Pepperdine University, "increased access to capital" was cited by small and medium-sized businesses as the best way to spur job creation in 2012.

In today's economic environment, it is extremely difficult for most businesses to raise capital the capital they need. Banks are very reluctant to lend money to small businesses, which prompted the government to create the Small Business Lending Fund as part of TARP. However, instead of using this money to help small businesses, banks used $2.2 of the $4.0 billion of funds disbursed in 2011 to pay off their TARP debt.

Equity financing is the alternative to debt; however, unless a company is in the high tech or life sciences industries -- recipients of over 70 percent of the $28 billion of 2011 venture capital funding -- equity financing is very tough to come by. For example, the consumer products industry, which accounts for 15 percent of U.S. GDP, received only 4 percent of venture financing in 2011. This leaves small businesses with alternatives like using high cost credit card debt or raising money from friends and family, both of which have their pitfalls.

Enter the JOBS Act and crowdfunding. Equity based crowdfunding opens a new pathway for funding these small businesses. The potential pool of investors will shift from the very narrow 1 percent, accredited investors in the eyes of the SEC, to "the American people" in the words of President Obama. The influx of potential new investors brings new capital, but more importantly, new perspectives.

As the diversity of investors increases, small business owners outside of Silicon Valley are more likely to find investors interested in their particular story. Already, we see crowdfunding platforms springing up to connect investors and companies with common interests, such as socially conscious businesses or mobile phone applications. Soon, sites will cater to all sorts of focused investor interests, from businesses in a local community to those with a particular industry focus. For small businesses, the promise of crowdfunding is the opportunity to find these investors more efficiently. It won't guarantee investment, of course, but helping business owners find the right investors at the right time is a critical first step.

The "crowd" also provides benefits beyond capital to small businesses. For example, a pet food company that raises money via crowdfunding now has 150 new passionate consumers as shareholders, who can serve as a great sounding board for new ideas and as brand evangelists -- a critical asset in consumer products. The JOBS Act will also eventually allow companies to actively solicit equity investments, so companies can reach out to their customers and consumers -- the people who believe most in the brand and know it the best -- for capital, something they cannot do today.

By almost every measure, small businesses are the life blood of our economy and our communities, yet since the financial crisis, most small businesses have been cut off from the capital markets at the very time they need the capital most. The JOBS Act, and crowdfunding specifically, will go a long way towards alleviating small businesses' capital access problem, and benefit investors in the process. The capital markets have finally entered the 21st Century and the future looks bright.