Did you hear the collective sigh of relief somewhere in the midst of the hysteria? A glimmer of hope shining through the predictions of gloom and doom?
Considering how easily and quickly the Jumpstart our Business Startups, or JOBS, Act passed through both houses of Congress last week, you may be surprised at the range of vociferous opinions that have surfaced before, during and after its passage.
This pending law is a HUGE game-changer for the biggest risk-takers in American Capitalism: the entrepreneurs who are creating jobs by starting and growing companies and the investors who provide them with the financial resources to do so. The challenging phase of moving from the "proof-of-concept" to the "go-to-market success" is the highest period of danger for a company and requires financial capital.
For the USA to maintain its position as having the world's greatest entrepreneurial innovators, we should be doing everything to help the brave entrepreneurs rather than tie them up in SEC regulations.
Let me state up front: It should be no secret, given my previous HuffPost article on crowdfunding and my frustrations at SEC limitations, that I'm ecstatic about this pending law. Ecstatic -- and prepared. I am moving forward, no holds barred. I've already laid the groundwork for a multi-million dollar Technology Acquisition Fund based upon crowdfunding; and I've made my first company acquisition, which has created new rural USA jobs. Plus, I have spun off a yet separate company from that acquisition. I want to create more jobs, and this JOBS bill is going to help me do it. I first posted here about my National Rural America Jobs Creation Plan -- and this law makes it easier to convince those in the public sector that private monies will be now easier to find.
I'm one of the winners of this bill -- but that doesn't mean I'm not attuned to the losers.
And the Winners Are ...
Winner 1: You, the Individual Non-accredited Investor!
This Act enables the small investor to get in on the ground floor of new companies, territory formerly reserved for high net-worth "accredited" investors. Keep in mind, those definitions come from the government -- not from any sort of objective test or intellectual benchmark. It is simply based on a perception -- a bias, actually -- that individuals with certain size bank accounts are more savvy with their funds than those earning less than $200,000 annually. I interact daily with very financially astute and savvy individuals that make far less than their "accredited" counterparts.
Over the years of raising capital for numerous deals, I have had to tell people who have wanted to invest small amounts such as $5,000, that they could not, simply because the SEC -- the government -- had regulations in place designed to protect them and their $5,000. I'm not implying that protection is a bad thing, but now we have a tool that I think has proved to be far more efficient and effective in many instances than government protection: the communication power of the Internet. Word of mouth is now at the speed of broadband, and will limit the scams. Via the Internet's social media and websites similar to www.ripoffreport.com, the scam artists - the Professor Hill of the Music Man movie or a Bernie Madoff - will be quickly revealed, and squashed.
Empower the small individual investors to get into the equity investment game and invest in early stage deals that were previously denied to them. Let them have those opportunities afforded their wealthier friends. Enable them to have the opportunity to grab that wealth.
Winner 2: Me! And Other Entrepreneurs/Small Companies
Biggest prize for folks like me: easier access to capital. If I want to use my bank, I can use my bank. If I want to use angel investors or venture capitalists, I still can. And now, if I want to use the "general investor public," I can expand my circle of invitees.
The entrepreneur who is just starting out is a big winner, no doubt about it. In addition to having additional sources of capital, the option to not go to an angel investor and accept their "low" valuation and terms can ease their way into growth for the next stage - which can then be from an angel or venture capitalist fund.
Winner 3: The Companies Poised To Grow
Adding a new product line takes capital. Maybe you're a profitable company with a solid product line but still have less than $5 million in assets Maybe you have more cash, but not enough hard assets to qualify with your bank. This new legislation now rewards you for starting a company, keeping it healthy enough to be poised for growth, creating wealth for shareholders, and adding jobs. You now have another source of capital, less government regulations, and an easier path to going public. And isn't that supposed to be what fuels the American entrepreneurial spirit?
Winner 4: The Crowdfunding Industry
A service industry dedicated to matching up entrepreneurs to the general public will emerge. Websites like Kickstarter, IndieGoGo, Peerbackers, RocketHub, ProFounder, and MicroVentures may have their current limitations, but I predict this new legislation will stimulate a proliferation of these sites. They are great tools for pairing individual investors with business opportunities. Perhaps they will change a small matchmaking service fee
Opponents of the JOBS Act pointed to the rather recent advent of these unregulated crowdfunding sites; some that have operated with great success for the small entrepreneur or anyone with a great product idea. How they differentiate themselves should be interesting, but that is an obvious example of new growth coming as a result of this bill (as of this writing, ProFounder announced it was shutting down, citing "the current regulatory environment." It will be interesting to see if they reverse that decision given the passage of JOBS).
And Now for the Losers ...
Losers -- even the Oscars have them. But the good performers will figure out a way to regroup, remake, and stay in the game.
Loser 1: Angel Investors/Venture Capitalists
Traditionally, there has been far, far more entrepreneurs chasing the limited amount of investor capital available via angel groups or venture capital. Given basic supply and demand laws, the old Golden Rule "They with the gold, makes the rules" usually applies. Entrepreneurs usually believe their idea or company is worth more than what the investors are willing to pay. Angel investors use the Golden Rule as leverage to increase their equity ownership of the new company. The greatest percentage of dilution an entrepreneur suffers occurs during the angel investment round.
Angel investors' leverage is weakened by the JOBS Act; Angels now have to compete with crowdfunding investors. The supply and demand ratio has changed. The smart entrepreneur will endeavor to use crowdfunding to keep more equity ownership for themselves or as a hammer to structure a better deal with an Angel investment group.
Angels are used to being there from the "get-go", providing the seed or early stage funding that gets that entrepreneur to his/her next level, when s/he is then ready for the venture capitalists or to be acquired. These legislative changes will change that path somewhat. This JOBS Act means that Angels will now get the good ideas at a later stage in the company's life cycle. The players still play along the entrepreneurial funding path, but now the order in which they play can change, be deferred, or, yes, in some cases, maybe even outright eliminated. They more than likely will invest in later rounds traditionally filled by venture capitalists.
Loser 2: Banks
Banks have historically been a difficult source of capital for entrepreneurs. Their business model of being adverse to risk unless the borrower provides significant hard assets collateral excludes most entrepreneurs. Now, banks will be even less of a "go-to" option for entrepreneurs, small business owners, and growing companies. A small company that doesn't meet the operating or asset requirements of a bank may even be able to put off going to their bank when they do qualify since now they have access to capital via crowdfunding.
Loser 3: The Bad Entrepreneur or Idea
The new system will self-correct. Let's say you have a good entrepreneur with a bad idea. That entrepreneur will hopefully seek advice, make course corrections before the hits become insurmountable, and rise up with a new plan. S/he may need more capital, and now, rather than having to fold up stakes and lose the initial investors' money, s/he has additional capital funding channels to see the corrections executed, get it right, and move forward.
I'm not denying we will see a proliferation of lousy ideas - maybe even companies. This Act enables an entrepreneur to bypass the angel investors' funding - and thus their generally useful refinement process - and raise funds directly through crowdfunding. If s/he takes no advice or the idea is fundamentally flawed, their fall should happen fairly quickly, and hopefully keep losses to within the acceptable risk threshold that most individual investors set for themselves. And if s/he is really a scam artist raising capital fraudulently, word will spread quickly via the aforementioned Internet's social media. Investors will be doing their homework. Matter of fact, I expect a referral and ratings system to evolve ... much like Amazon's e-commerce product ratings methodology.
Loser 4: The Uninformed Investor
The signals and tells were there for the opportunity for people to discover Bernie Madoff's scam; but they did not avail themselves of the information. People will need to actively seek to understand and monitor their investments. Access to more information, better social media, etc. will make the fleecing less likely, but it will still happen. However, the same can be said for the stock market, bonds, penny stocks, and all the other prior forms of investing.
For every Michael Dell starting Dell Computers in a college dorm room type of entrepreneur, there will be more flameouts and failures. The point is that, statistically speaking, the greatly increased volume of new companies will lead to more Facebooks, Intels, Groupons, etc., and thus more jobs will be created. We all win.
Initial Losers who will Adapt to Win ... Attorneys and Accountants
Less professional paperwork to comply with SEC Regulations means less legal and accounting fees. But if there's one thing I know about attorneys ... they mutate and will find a way to live on forever in the Win column. All kidding aside, all of these new businesses will need invaluable professional advice and support. New services will be provided.
Conclusion
If the JOBS Act really is, as some have claimed, "a solution in search of a problem," then search no farther. It's not just about an IPO problem -- it's an entrepreneurial access to capital problem. Not all entrepreneurs want to go public, but virtually all of them need access to cash. And most probably know individual investors, who are not accredited under the old rules, and were excluded from getting in on an entrepreneurial opportunity in which they want to participate. Any way you look at it, that's a company start-up killer; a growth killer; and a jobs killer.
According to the US Census Bureau, new companies create more jobs than big companies. The JOBS Act legislation is the fuel in the pipeline of job creation. Now, I'm going to get busy and create even more jobs in rural America!