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President Obama to sign JOBS Act this week

Eases restrictions on crowdfunding, but who will really benefit?

Financial trends and news by Steven Loeb
April 1, 2012 | Comments
Short URL: http://vator.tv/n/259e

The JOBS Act passed the House, was then amended and passed by the Senate, then passed once again by the House last Tuesday. The bill is now being sent to President Obama for final signature this Thursday.

One of the most talked about provisions of the bill is the crowdfunding aspect, which eases restrictions on start-ups to able to raise money from non-accredited investors. But what kind of companies will the new laws  benefit and will it really create jobs?

How crowdfunding changes the way start-ups can raise capital

These days, for an entrepreneur to raise funds for a new idea, he or she needs to have connections to investors. This route of raising funds is called raising capital from friends and family. Entrepreneurs aren't allowed to make any solicitations public.

And, while start-ups can raise funds from an unlimited number of accredited investors, they are only allowed to raise capital from a maximum of 35 non-accredited investors. Examples of accredited investors are banks, insurance companies, and individuals with a net worth of $1 million or more.  

Now with the JOBS Act, that should likely be passed, start-ups can advertise that they're seeking investment, and can also now raise money from as many investors, accredited or non-accredited, as they can.

Craig Montuori, political advocate on behalf of passing the Startup Visa act through Congress and founder of PolitiHacks, told VatorNews that crowdfunding will act as competiton to small business bank loans, a big reason, he said, that the big banks were against the legislation.

There are still some restrictions when it comes to the amount of money that can be raised. The company is allowed to raise up to $1 million in funding, and will not have to make its shares public. If the company raises $2 million then it will need to provide the Securities and Exchange Commission (SEC) with audited statements.  

Mark Hatch, CEO of TechShop, a chain of workshops that allow members to use their tools to build projects, told VatorNews that the JOBS Act is “brilliant” and one of the “most important pieces of legislation in decades.”

TechShop, he said, has seen dozens of its clients get crowdfunding money through Kickstarter, a website designed to allow the general public to invest in local projects. By removing one of the biggest barriers that start-ups face to getting themselves off the ground, he said, it will “potentially create millions and millions of jobs.”

Who will benefit the most from crowdfunding

Hatch believes software companies and hardware startups will see the biggest benefits.

Those two types of start-ups have seen their costs fall sharply in the last decade, he said. To start a software company it used to cost $5 million just for a license. Now, a company needs only around $50,000, which can be raised in a matter of weeks thanks to the crowd funding provision in the JOBS Act.

For hardware companies, the biggest problem that they often run into is lack of money when it comes time to actually making their product. The example that Hatch gave was DODOcase, a handmade iPad case made to look like the outside of a book. The company ran into trouble, and had to raise money. Eventually they went from no sales to one million sold in 90 days. Now, that could possibly take only three weeks, Hatch said.

Michael Woods, CEO at E&M Labs, had a different assessment of who would benefit the most. He believes that the companies that will be helped by crowdfunding will be smaller, niche ideas that would normally be overlooked by venture capitalists. Job creation will come from smaller companies that under normal circumstances would not have the ability to raise enough money to get off the ground.

E&M Labs, a toy making company that started on Kickstarter last year, was able to raise $96,000 in 30 days for its first project, exceeding their goal of $48,000, and $66,000 in 30 days on their second project.

Types of companies like his, Woods said, would not get much interest from the big investors, and can now rely on smaller investors instead.

Potential fraud

While some are worried that the new legislation will open the floodgates to massive fraud due to a lack of regulation and oversight, Hatch thinks the safeguard put into the legislation will do an effective job of limiting this.

The bill requires the business to warn investors about potential risks when it comes to investments, requires that they “takes reasonable measures to reduce the risk of fraud with respect to such transaction” and that the company give the investor their address and website, which must be kept up to date.

While there is definitely going to be some amount of fraud, as always is with any new piece of legislation like this, Hatch said, the net effect will be overwhelmingly positive. While thousands might be hurt, millions of others will be helped.

Besides, Hatch hopes that anyone looking to make money by committing fraud would have bigger fish to fry than start-ups raising less than $1 million.

Montuori believes that fraud will be best detected through the community of investors, rather than by the government. They, as a group, will be able to “smell out scams.”

(Image source: blog.laptopmag.com)


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