Democratizing Finance: The JOBS Act

| May 22, 2012

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What would democracy in finance look like? These days it would look a lot like “crowdfunding.”

Democracy is America’s primary “religion” and capitalism has somehow been incorporated into that ethos. We cherish our freedom. For Americans, that word takes on almost holy proportions. Economic freedom is our mantra and equal access to fair market policies remains the highest ideal.

Since the creation of the Declaration of Independence, the belief that “All men (and women) are created equal and enjoy inalienable rights to Life, Liberty and the Pursuit of Happiness” are etched on the American psyche. In entrepreneurial America, that promise of equality includes financial equity as well.

One of the biggest challenges since the economic crisis has been the lack of access to capital and credit circulating in the hands of the 99%. Small business comprises 99% of all business in America and accounts for 65% of pre-crisis employment. Despite that fact, this core economic group has been starved for operating and growth capital.

Government programs have done little to support small business these last three years. President Obama promised much and Congress delivered little. Policymakers wax rhapsodic over the importance of Small Business America and then remain inert when it comes time to put money behind accolades.  After all, small business might be “the backbone of America,” but they are not the backbone of campaign finance like their corporate brethren.

There is a common saying that, “When one door closes, another one opens.” With the advent of the JOBS Act and the emerging market of new and improved “Crowdfunding,” a door has opened wide with the potential to revitalize cash-poor American enterprises.

The ability to issue bonds and attract shareholder investment has been a capital-raising tool previously available only to publicly traded corporations. The “Crowdfunding” law opens the floodgates to bond issuers and shareholder ownership to private business. This time next year, we may see small business bond markets opening up, perhaps even securitization of small business bond pools. Small business stock and bond market exchanges may emerge for those with a stomach for economic risk.

While the risks are plenty for both investor and entrepreneur alike, the potential for an economic explosion resembling the 1990s dot-com era is ripe.  The 1990s opened the door for economic expansion wide with the introduction of the World Wide Web in 1995.  Not only did this innovation lead to the first “dot com” businesses of global proportions including corporate giants like America Online, Yahoo!, Google and Ebay, it also led to online share buying and selling on platforms such as Charles Schwab and E-Trade.

Before online trading emerged as a viable investment strategy, anyone who wanted to purchase shares in a company had to go through laborious and antiquated efforts. It required access to a stockbroker and making calls (yes, using a corded land line phone- ugh!) to your broker to place an order. This meant high commissions, slow processing and reliance on advice from well-placed brokers.

Online trading created an entirely new world of opportunity for ordinary people to buy and sell shares of their favorite web start-ups cheaply and quickly. Traditional market exchanges quickly became geared to large institutional investors. While web trading allowed the common folk (retail investors) to buy stock in Microsoft, Apple, America Online, PayPal, Priceline, Ebay, Yahoo! with ease.

We take these innovations for granted now as if investing in the stock market has always been viable for the little guy and gal. Yet less than 20 years ago, it was the seed of an idea in the mind of an entrepreneur.

With the introduction of online investing came the explosion of 401K retirement accounts. Suddenly, every Tom, Dick, Harry and Sue could get into the game. It drove stock prices up, moved markets and birthed a new Wall Street industry and Main Street investor community. All of this was still new only a decade ago.

A New Economic Boom

Within five years of the deregulation of the internet in 1995, the free market promise of the web led to unimaginable innovations and changed the very fabric of American life.  It also minted a few hundred thousand new millionaires and led to the economic prosperity and turbo-charged housing boom in the 2000s. The 2012 deregulation of small business and start-up investment holds that same promise. 

Here is how it works: This fall SEC approved “funding portals” will allow small businesses and start-ups to solicit prospective investors. Companies will be able to raise up to $1million dollars in capital investment annually directly from the public. Different rules will apply for each level of investment sought: Up to $100,000 will require a company to supply an in-house financial statement; over $100k will necessitate professionally prepared financial statements. Over $500,000 will require “audited financial statements.”

Investors will be subject to income and net worth restrictions. If income is under $100,000, an investor is limited to a 5% capital investment. Over $100,000 in annual income will allow investors to contribute up to 10% of their incomes. Investors with net worths over $1million (excluding their primary residence) will have access to the least restrictive investing guidelines. The new laws will attract more angel and venture capital investors to start-ups and early stage growth companies by making it easier to “go public.”

The next couple of years will undoubtedly bring an explosion in IPO offerings and innovative new enterprises. It will also lead to the creation of new capital and credit markets for small business owners and entrepreneurs.

The dot-com era ended with a painful bursting of the bubble in April 2000. The   result was a downturn in the economy and painful losses for many Main Street investors and entrepreneurs. At the end of this new crowdfunding rainbow will inevitably be another bubble. It will be hard to contain the wild enthusiasm that new markets inspire like S&Ls in the 1980s, dot-coms in the 1990s, and the easy credit and housing boom through the 2000s. Each boom ended painfully; yet each new market also yielded enormous economic opportunities for millions of people.

As an entrepreneur myself, I am poised and ready for the Next Big Thing in free market America. Entrepreneurship is the exact quality unique to our nation that has enabled our economy to soar for centuries. Our ability to reinvent ourselves and innovate new businesses and markets is unsurpassed in the modern world.

The promise of equal access to capital, credit and investment that the new crowdfunding laws bring just might be our ticket out of our current economic conundrum. I, for one, am ready to fasten my seatbelt and go for the ride.

(The Securities and Exchange Commission has until September 2012 to regulate the new JOBS Act law.)

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Category: small bidness, Sustainable Small-B

  • http://twitter.com/goodb/status/253168446274142208 Good Business

    TY 4 RT @locavesting: Democratizing Finance: JOBS Act #capital & credit #crowdfunding #dot-com boom #economic equality http://t.co/NOOeqkuY

  • http://twitter.com/carlos_studio/status/253157738555793409 한선 a.k.a carlos

    RT @GoodB: Democratizing Finance: The JOBS Act #capital and credit #crowdfunding #dot-com boom #economic equality http://t.co/wtx9bGv6

  • http://twitter.com/locavesting/status/253152798919766017 Amy Cortese

    RT @GoodB: Democratizing Finance: The JOBS Act #capital and credit #crowdfunding #dot-com boom #economic equality http://t.co/wtx9bGv6