For a little over a decade now, I've been crusading against the Accredited Investor Rule. It's not that it was a bad rule when it was instituted in 1934, and I'm sure it protected countless thousands of folks from being taken advantage of by hucksters over the years. But there's just no place for it in the Internet age. Today it serves only to isolate all but the very wealthy from private stock offerings - one of the most potentially lucrative sectors of the market.
The JOBS Bill, which passed the House by a landslide 407-18 vote, and the Democratizing Access to Capital Act (its sister legislation currently in the Senate) are set to change all of that by opening the private market (specifically start-ups) to crowdfunding.
Unfortunately, though the bill flew through the House, the Senate is dragging their feet a bit. Which is really ironic when you consider that each of them funds their reelection campaigns through crowdfunding and doesn't lose a moment's sleep over it. Be that as it may, if the bill eventually passes in its unadulterated form, here's what it will mean for investors, start-ups, and the economy on the whole:
Start-ups will be able to announce that they're raising money in the public forum of their choosing (Facebook, Twitter, the local paper, etc...) and they'll be able to raise up to $1 million each year. Something similar was tried in the late 90's under Regulation D (it was called SCOR - Small Company Offering Registration ). It never took off because the registration process was still really cumbersome and, once registered, the stock had to be sold through brokerage firms - most of whom wouldn't touch a deal for a $1 million or less.
The other problem with SCOR was that it was limited to accredited investors. So if you started the next Apple in your garage and your college buddies wanted to invest, they couldn't. The JOBS Bill solves both of these problems.
Assuming it passes, this is how it is most likely going to work:
Companies will announce that they're raising money. While they could theoretically raise it on their own, it is far more likely that they'll get listed on an intermediary crowdfunding site that works in much the same way Lending Club works for individual borrowers. Investors will be able to invest up to $1,000 per start-up, up to ten percent of their annual income. And there will be no accreditation required - anyone can invest.
This can be huge for the American economy. Innovative small businesses employ the vast majority of Americans, and with access to capital direct from individual investors these companies can put a lot more people to work. This is a big win for America.
But what about fraud? Don't poor, ignorant individual investors need protection from unscrupulous hucksters?
Here’s how this is going to play out: Intermediaries (the future eBays of this space) will spring forward to handle the paperwork, do background checks on issuers (required), ensure that offerings are well described and enforce balanced investment terms. The House version allows start-ups to do this without an intermediary, but that’s not going to happen in practice (it would be like trying to sell your item on the Web without eBay). And fraud? Crowdfunding is already legal in the U.K. The leader there, Crowdcube, is reporting zero fraud. U.S. crowd-lending site Prosper.com and accredited-investor-only U.S. crowdfunding site AngelList also report zero fraud.
This might be the smartest legislation to come out of DC in the past decade.
How big could it get? As it states in the article, if Americans just diverted one percent of their long term savings to this it would equal ten times the total amount ofinvestments in the US.
If Bernanke wants to flood the economy with dollars, shouldn't we at least see to it they go to the right place? Start-ups are the future blue chips, and this legislation has been too long in coming.