A New Wave of Business Start Ups Are Tailor Made for Investors
Sometimes good things actually do happen in an election year.
In a rare regulatory loosening of the federal jackboot, President Obama acquiesced to election-year pressures and signed the Jumpstart Our Business Startups, or “JOBS,” Act (H.R. 3606).
H.R. 3606 essentially peels back the draconian Sarbanes-Oxley bill, which was forcing small upstart employers going public to submit to deal-killing compliance exercises. Enforcement bureaucrats have been so aggressive in micromanaging public startups that the creation of new sectors of the private economy have all but stopped. To the point that even the left-leaning Wired magazine recently wrote a long article titled “For High-Tech Companies, Going Public Sucks.”
So with smaller businesses exempted from the Sarbanes-Oxley economy killing bill, a rush of new startup companies is likely to follow, and you’re invited to invest and share in their massive growth. Until a few weeks ago, salt-of-the-earth Main Street investors were barred from these opportunities; they were forbidden from even taking a peek!
Regulatory Gate Keepers Open the Doors of Opportunity Just a Crack
Until now, regulators had insisted that you must be rich in order to participate – the scam this time taking the form of participants having to be “Accredited Investors” – meaning those with over $1 million in assets excluding their home, or $250,000 ($300,000 for married couples) in income, government nannies wouldn’t let you invest in growth companies before they went public. Regulators don’t believe smaller investors are “sophisticated” enough to understand the risks involved.
The JOBS Act, or Jumpstart Our Business Startups Act (not to be confused with the American Jobs Act from last year) hopes to encourage small business start-ups and expansions, which will lead to private sector jobs.
Rock the Post founder Tanya Prive says in Forbes, “The JOBS Act will make funding more accessible for startups by allowing non-accredited investors to participate in the funding rounds, and this alone, I believe will be the main factor driving the increase in new companies being founded. And with new companies comes the need to hire staff. Without a doubt, this will help the current unemployment rate.” Which could substantially explain Obama’s support; his re-election prospects hinge largely on employment numbers.
CFA and CPA Jim Ferraresays the act eases Sarbanes-Oxley (SOX) auditing and reporting requirements on smaller companies looking to go public. Business start-ups will now be classified as “Emerging Growth Companies,” which allows entrepreneurs greater access to investment capital without the current drag and costs of SEC regulations.
How Do Main Street Investors Capitalize on This?
Make no mistake, this act is still a creature of government. According to internet marketing and online media attorney Travis Crabtree, now that this is law, it’s up to the “SEC to provide more guidance about how this will work. Will licensed brokers have to be involved? Will there be licensed and regulated intermediary… What reporting requirements will there have to be?“
Hopefully, regulators leave it alone and don’t strangle it before it has a chance to thrive.
The relaxation of these laws got a push because the Internet is an efficient tool at allowing individuals to freely associate for mutual benefit without bankers, brokers, or government overlords telling them what to do or not to do. It’s a radical idea you may have heard of before – it’s called the free market!!
A great example of this has been brewing in the online world for the past few years. It’s called crowdfunding (also crowd financing).
In an Executive Bulletin last year, we introduced you to the concept of peer-to-peer lending. Crowdfunding is a sibling.
Peer-to-Peer Lending to Make a Comeback?
In peer-to-peer lending, an individual logs on to a website like Prosper or LendingClub, seeking a loan to buy a car, consolidate credit card debt, or for another similar reason. At the same time, an investor wanting to earn a better rate than the bank offers on savings also logs on. They find each other, and work out a deal. It’s automated, structured, and better organized than how I’ve explained it, but that’s the gist. According to Prosper’s latest report, seasoned loans average 10.46% interest.
Another company, Kiva connects individuals who want to alleviate poverty to Third World entrepreneurs who want to get out of poverty with microloans that fund simple businesses: buying chickens to sell the eggs, owning the only cell phone in a village and renting it, and other more ambitious ideas.
Kickstarter is another crowd or peer-to-peer scheme for creative professionals like artists, musicians, and software developers. Backers fund projects in exchange for unique gifts like free copies of the finished CD, life long access to software, T-shirts, or private backers-only events.
This concept works.
What’s eye opening to those unfamiliar with the format, is it runs almost entirely on small contributions by dozens, hundreds, even thousands of lenders and backers. For instance, microloans at Kiva start at $25. A serious lender at LendingClub could have a $20,000 loan portfolio that spreads the risk over 800, $25-loans. Prosper has funded over $300,000,000 in loans, and LendingClub over $600,000,000 since their inceptions.
At Kickstarter, some creative projects have raised $3,000,000 in thousands of small backings! Software makes all this manageable and practical.
Bottom line is that there will soon be a whole lot of investor money going into smaller companies that go public outside the scope of Sarbanes-Oxley. It is a trend well worth paying attention to.