Raising capital has historically been a very complicated process filled with legal landmines. As a result, only large companies go through the red tape and legal costs to bring in investors to help finance their ventures.
A new law aims to change this and make raising capital easier for small businesses. Imagine that you had 20 friends that each wanted to invest $10,000 in a new business that you planned to launch. With $200,000 of working capital there are a lot of options that you could pursue. You might think that all of this could take place at your kitchen table. You could draw up a simple profit sharing or loan agreement and off you go, right? Not so fast. You may end up in jail under current laws. Are these individuals sophisticated enough to qualify to invest in your business? Do you have a prospectus with full disclosure of every potential risk? Are all of these individuals residents of the your state? Does the amount that any individual invests represent too great of a percentage of their overall net worth? Believe it or not, these are all issues that could end up landing you in a great deal of trouble with state and federal securities regulators.
The JOBS Act is part of an overall plan to spur growth in the small business sector. It will allow shoestring entrepreneurs to take advantage of the boom in what is called crowd funding (sometimes called crowd financing). Although we don't have all of the details yet, the House version of the bill would allow someone to raise up to $1 million dollars over the Internet with virtually no disclosure or financial statements). This would essentially provide anyone with just just an idea go to the masses and offer them a piece of the action in exchange for the needed startup capital.
Critics say this is just opening up small investors to con-artists that will use the relaxed regulations as a means of operating investment scams online. One piece of investor protection is that companies must use SEC approved crowd funding platforms to raise money. Other protectons limit the amount that individuals can invest based on annual income.
I really like the concept, but there is no doubt that it puts the burden on the individual investor to do their homework before investing in a small business stock offering. The capital markets should not be limited to just elite Wall Street firms. There is no doubt that scam artists will take advantage of small investors. That is an unfortunate downside, but I truly believe that the benefits will outweigh the disadvantages.
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