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The So-Called "JOBS Act": Crowd-funding Good, Deregulation Bad

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The Senate is considering the House-passed, typically-misnamed "JOBS Act." This act dramatically cuts regulations and disclosure requirements for companies that want to sell stock. As written it opens the door to the usual scammers, fleecers and fraudsters that feast on deregulation. But I think with some core limits and protections this concept -- not this bill, but this concept -- could transform our economy in some very good ways.

The So-Called JOBS Act

The word "jobs" in the name of the bill does not mean the kind of jobs that millions of people are currently desperate for, it means "Jumpstart Our Business Startups." The bill makes it easier for companies to "go public" -- sell stock to the public for the first time. It lets these businesses sidestep certain additional auditing procedures for up to five years. It opens up "crowd-funding" -- letting companies raise up to $2 million from investors online, while cutting out much of the usual disclosure process that companies now have to go through.

Gatekeepers -- Good and Bad

If you are going to start a business you have to raise capital. This can be money you save up or borrow, but a serious business requires a serious investment. Please don't start a business without a careful process of thinking through the first two years of operation and having way more than enough money available to get you through that period! This means that no matter what the business is, you are probably going to need at least a few hundred thousand dollars. Most people don't have that available, which means you are going to have to go out and raise it.

Currently it is very difficult for small businesses to raise capital. The usual path is to go find a wealthy "angel" investor or a group of wealthy investors like a venture capitalist firm. If you have a bigger business and are ready to "go public" you typically have to partner with a Wall Street-style firm to guide you through the process. Selling stock is heavily regulated -- for very, very, very good reasons -- and the regulations make it very, very expensive to go public.

On the one hand, having to raise money usually means your plans will be tested and challenged, which is a good thing. It is a terrible mistake to start a business without going through the planning process and thinking through what you are getting into. A failing business takes a terrible toll on the wealth and health of the participants. On the other hand, because of the way things are currently structured businesses are largely dependent on the already-wealthy to raise capital, and the already-wealthy can demand a lot in return, because the current regulatory structure means they can. And all of this means that the not-already-wealthy do not have the opportunity to participate in these early-stage investments. The way things are today, it takes a whole lot of money to make money. It doesn't have to be this difficult.

Crowd-funding

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"Crowd-funding" is a term used to describe the way the Internet has enabled the raising of large amounts of money quickly from lots and lots of small donors - the crowd. Regular people all across the country can hear from candidates, non-profits, etc., and decide to donate. When lots of people get involved very large amounts can be raised.

Howard Dean's Presidential campaign publicized the concept. The Internet enabled Dean to quickly raise millions of dollars in small amounts from lots and lots of people. During President Obama's campaign he famously raised $1 million in one minute through Internet crowd-funding.

Applying crowd-funding to the process of raising capital for small companies could transform our economy by democratizing the process. It can move the gatekeepers for the already-wealthy out of the way, and open up early-stage investment opportunities to participation by regular people. A small company could raise a million dollars in increments of $100 or even $10, and lots of people can share in the gains if the business is successful.

Online investment pools could examine and rate business plans for small, local businesses, and raise the money they need. Or a tech startup can raise enough "seed money" to get going, and be in a position to negotiate much better deals with venture firms when the time comes to raise much more. The small-amount investors could then be in a position to do quite well as the company grows.

And regular people -- people who don't already have tens of millions in the bank -- can participate in the process and share in the gains -- and, it must always be noted, the losses. But this can only succeed if regular people are protected from the fleecers and fraudsters and scammers.

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Opportunities for Fleecing and Fraud

There is a reason for the burdensome regulations that protect investors. Those regulations were proven necessary because fraudsters would set up scam investments and whip up excitement, causing unsophisticated people to lose their life savings. This has happened again and again. Even with the current regulations how many people lost out during the "Tech Bubble" when a company needed only to add "dot com" to its name and its stock would soar?

SEC Chairman Mary L. Schapiro warns,"Too often, investors are the target of fraudulent schemes disguised as investment opportunities."

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Dave has more than 20 years of technology industry experience. His earlier career included technical positions, including video game design at Atari and Imagic. He was a pioneer in design and development of productivity and educational (more...)
 

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