My clients often inquire about financing mechanisms available for their small businesses and until recently I didn’t have an option to offer that could be described as an aid in triggering investment or sparking innovation which would lead to a stronger economic recovery.
Enter the Jumpstart Our Business Startups (JOBS) Act signed into law by President Obama earlier this year and designed to ease Securities and Exchange Commission (SEC) rules while permitting the general public to invest in startups; paving the way toward access to capital - ultimately leading to job creation.
The SEC is currently developing measures to ensure investor protection as well as rules that will enact this legislation in the United States in early 2013. The Ontario Securities Commission in Ontario, Canada, the Autorité des marchés financiers in France and Quebec, Canada and the Financial Services Authority in the U.K. are also defining their respective regulations.
In the meantime, let’s take a closer look into what this means for small businesses. The JOBS Act enables an entrepreneur with an idea to acquire equity-based funding via the crowd through an SEC registered website, i.e., funding portal. Though not finalized, here’s a snapshot of what’s expected:
- Every 12 months you can raise up to $1M.
- All-or-nothing financing. You must raise 100 percent of your funding target in order to get any of your money.
- Any investor making under $100K can invest up to 5 percent of income or net worth. If the investor makes over $100K he/she can invest $10K or 10 percent up to $100K.
- You won’t be able to establish a web site for the sake of soliciting investments directly from the general public. You must participate through an SEC funding portal, for example, SeedInvest.
- Funds are raised through your social network.
Leveraging the power of the Internet to help people with ideas get started also has its drawbacks. Once an idea is posted on a crowdfunding site intellectual property is at risk. Better financed competitors could potentially develop the idea long before you have your financing in place. United Innovation Association counsels that ideas can be protected through patent, copyright, trademark and Creative Barcode.
Another challenge that you can expect to face is in managing communications among investors and interested observers who are following your progress or lack thereof. This could prove to be substantial and a potentially diverting task.
The SEC has two primary goals:
1) investor protection in the marketplace and,
2) facilitating capital formation. There are well-founded concerns regarding transparency, conflict of interest, and investor education and some of these concerns are responsible for the delays in implementing the JOBS Act.
I encourage you to get involved by letting the SEC know how this would affect you as an entrepreneur or investor by making public comments here.
Crowdfunding is the new avenue for generating a following. The more people talking about your products and services the better. Crowdfunding makes it possible for your followers, existing customers, and the community your business supports to become your investors. Small investments fund big ideas – and that is the real game changer.