Last week, the Senate voted in favor of a bill that loosens SEC regulations in order to permit small businesses easier access to capital, thereby creating jobs. The Senate amended the JOBS Act, which passed the House with overwhelming bipartisan support earlier this month, with language that would require SEC oversight of equity-based crowdfunding platforms. The bill now goes back to the House before being signed into law.
Everyone has been long awaiting this legislation to come to fruition. Start-ups are likely more keen on this new passage of law allowing access to a previously inaccessible pool of capital. There are also investors out there that may have been awaiting opportunities to put their capital into more meaningful investments beyond the 401ks and IRA Roth choices that we have been previously stuck with.
However, as the press is not shy to point out, this legislation is not without certain dangers and in order for the markets to efficiently regulate themselves to create a sustainable ecosystem, everyone must be alert and comprehensive in their methods. Start-ups need to be very thorough and thoughtful so as to prevent any image of impropriety and investors need to be highly diligent in their choices.
Below are a few highlights of myths and truths!
Loosening legislation means there is less to do between a company and its investors (MYTH!)
Because the government is permitting small businesses to raise financing without the intervention of a governing body, does not imply that a start-up or small business is free to run around taking money from people without proper documentation and disclosure. Businesses should always remain cognizant that a company / investor relationship is an ongoing on and communication is key in maintaining this relationship! Start-ups be thorough in your documentation (or rely on services such as Return on Change to help you out)!
The SEC isn’t watching, so I can do whatever I want (MYTH!)
First of all, one of the amendments to the bill was to require intermediaries, such as ourselves, to register with the SEC. You should be sure that if that amendment is to stick the diligence process for intermediaries will be much higher and start-ups will most likely be required to provide a much more comprehensive package. Just because Big Brother isn’t watching doesn’t mean you should do whatever you want either! The crowdfunding is completely new and will need the support of all of its users in order to grow into the powerful marketplace we hope it to be!
Crowdfunding will open up additional pools of capital (TRUTH!)
Before the time of this legislation, it was illegal to generally solicit investors for capital. Now (with certain thresholds) companies will be permitted to email, tweet, and facebook post their requests to garner to support of friends family and networks!. That’s the new acronym of the future people for seed investment, FFSN!
Crowdfunding will most likely have lower due diligence requirements (MYTH!)
The common misconception is that because the investment world is now open to the public, there will be rampant fraud as many non-savvy investors will not be able to due diligence the investment opportunities to avoid the fraudsters. However, we are forgetting that this ‘investment’ vehicle is inherently social and relies on the perception of the masses and communities to be successful. This means you’re going to have thousands of people diligencing an opportunity and unlike professional investors who have to protect their trade secrets, will be more than happy to share their opinion. One negative opinion on a con man? That investment ‘opportunity’ will most likely not be funded.
So all in all, the message here should be that we are lowering costs by not having to file cumbersome ‘over’ diligent documentation with the government for small enough equity raises. HOWEVER, the work between the entrepreneur and potential investors still stand!! Do your homework!