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JOBS Act Legalizes Equity Crowdfunding. Thank You, President Obama and Congress! April 6, 2012

Posted by Jim Price in Business, Entrepreneurship.
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Great news: the Jumpstart Our Business Startups (JOBS) Act became the law of the land yesterday.  Thanks go out to President Obama for advancing this important legislation and signing it into law, as well as to both Republicans and Democrats in Congress, who overwhelmingly passed the bill – by a 73-26 margin in the Senate, and 380 to 41 in the House.

Why should we care about the JOBS Act?  It’s a truly meaningful step forward for startup businesses – especially tech-oriented ones – by providing legal legitimacy for crowdfunding on the Internet.

Here’s why this is important:  Until now, raising early-stage capital for your startup was regulated by the SEC and required that individual investors be qualified as “accredited investors” – defined by the SEC as having a minimum of $1 million in net worth or at least $200,000 in income over the past two years (or $300,000 in combined income with her or his spouse over the past two years) and a reasonable expectation of the same income level in the current year.

Raising money from so-called angel investors (high-net-worth individuals) has become increasingly professionalized in the past decade as angels have banded together in investor groups.  As VCs have shifted out to the right on the investment curve, becoming more conservative and insisting on seeing more company milestone achievements – a validated product, paying customers – prior to considering investing, angels have started behaving  more and more like VCs, having professional gate-keepers for their groups and negotiating VC-like terms.

As these trends have settled in since the tech bubble burst in 2000, it’s become inordinately difficult for early-stage startups to raise capital.  VCs say, Come back when you’re grown up (which sounds a lot like, Come back when you don’t need our funding).  Angel groups are as difficult to get an audience with as VCs used to be in the 1990s – and tell early-stage ventures the same thing: Come back when you’re more mature.  All of  which has left entrepreneurs in the 2000’s with the excrutiating dilemma of how to basically self-fund through the proof-of-concept stage (prototype and build the product) and the proof-of-market stage (garner the first few paying customers).  The result?  Failure to launch in many cases.  And, from an economic and public policy perspective, a lot fewer new companies creating a lot fewer new jobs.

As a company-builder, the JOBS Act excites me because so many of those entrepreneurs who’ve been left on the launch pad over the past decade will now be able to look to crowdfunding to seed early-stage growth.  Through Internet crowwdfunding platforms such as Kickstarter, CircleUp, Techmoola, Buzzbnk, Crowdfunder, EarlyShares, RocketHub, Peerbackers, Wefunder, Indiegogo, Microventures, Profounder and Conzortia (to name just a few), startups will soon be able to raise up to a total of $1 million from unaccredited investors in small amounts without registering with the SEC or providing audited financial statements.

Many of these websites are already doing organized crowdfunding now, but it’s a different sort of thing:  the only thing that’s been legal so far has been having “investors” either donate money or pre-purchase copies of your product in exchange for their up-front cash.  The huge difference now is that the JOBS Act will allow equity-based crowd-funding.

Before equity-based crowdfunding is actually legalized, the SEC has 180 days to develop and promulgate rules to implement the Act.  But it’s not too soon for entrepreneurs to start getting their ducks in a row – refining your pitch deck, executive summary, and financial forecasts.  As you can imagine, consumer-oriented businesses will have a greater appeal to smaller investors, and those with slick pitch videos will tend to be more successful.  We’ll take a closer look at the how-to of raising crowd-funding dollars as the rules are set and legalization kicks in.