How the JOBS Act will Change the Way Small Businesses Attract Capital

The JOBS act, enacted into law by President Obama in April will have a profound impact on many investors and small businesses in the US during 2013 and beyond. For years in Europe, small businesses have been able to “tap the crowd” to help raise mon

ey for projects, finance short term opportunities or raise money for social or environmental causes from everyday people. The “crowdfunding” phenomenon is not new; people have come together to pool resources to achieve a common goal many times before. In 1885, Joseph Pulitzer and his newspaper The World raised $102,000 (approximately $2.3 million today) from over 120,000 donors in less than 5 months to help finish the construction of the pedestal for the Statue of Liberty. While France had donated the statue itself, the US government ran out of money to finish the project (sounds familiar), and Pulitzer used his paper to raise the balance of the funding with most of the contributions coming from everyday people contributing one dollar or less.

According to a recent article in Forbes magazine, one of the most important aspect of the JOBS Act will be to lift the ban on how businesses can solicit or advertise for investment capital. Currently, private businesses are prohibited from advertising for investors. In reality, high growth well deserved businesses spend months attempting to raise money to fund growth through a complex, inefficient and costly process in which they can introduce their business only to accredited investors. The JOBS Act changes all that by allowing the free flow of information between small businesses and potential investors. Non-accredited investors will now be able to gain access to company offerings they couldn’t participate in before, and companies will be able to leverage their networks of suppliers and customers to help provide capital for their use. More importantly, the cost and time required to raise capital will be reduced.

The JOBS Act will accelerate the entrepreneur spirit, and small businesses will find innovative ways to unlock new ways to “tap the crowd” to fund small business opportunities and hopefully create more jobs. While the SEC still hasn’t clarified all the rules regarding general solicitation for funds, many new internet portals have launched platforms hoping to become an electronic exchange platform between these small businesses and investors for a fee.

Most small business owners I talk with have heard the term “crowdfunding” but don’t understand how they might benefit from it. We are working with a few clients to improve the odds of getting funded by studying successful crowdfunding business models and developing a methodology to manage the process. We’ve discovered that there is much involved to prepare for success in 2013; it not as simple as filling out forms, gathering information from accountants and engaging attorneys to create the necessary paperwork.

At the end of the day, while crowdfunding isn’t a silver bullet solution to re-start economic growth, some elements of the program may be successfully executed by start-ups, small businesses and even mid-size businesses. After all, I don’t see the banks coming to the rescue of small business anytime soon and the current equity funding process is not meaningfully impacting this segment of the business ecosystem either.

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The JOBS act, enacted into law by President Obama in April will have a profound impact on many investors and small businesses in the US during 2013 and beyond. For years in Europe, small businesses have been able to “tap the crowd” to help raise money for projects, finance short term opportunities or raise money for social or environmental causes from everyday people. The “crowdfunding” phenomenon is not new; people have come together to pool resources to achieve a common goal many times before. In 1885, Joseph Pulitzer and his newspaper The World raised $102,000 (approximately $2.3 million today) from over 120,000 donors in less than 5 months to help finish the construction of the pedestal for the Statue of Liberty. While France had donated the statue itself, the US government ran out of money to finish the project (sounds familiar), and Pulitzer used his paper to raise the balance of the funding with most of the contributions coming from everyday people contributing one dollar or less.
According to a recent article in Forbes magazine, one of the most important aspect of the JOBS Act will be to lift the ban on how businesses can solicit or advertise for investment capital. Currently, private businesses are prohibited from advertising for investors. In reality, high growth well deserved businesses spend months attempting to raise money to fund growth through a complex, inefficient and costly process in which they can introduce their business only to accredited investors. The JOBS Act changes all that by allowing the free flow of information between small businesses and potential investors. Non-accredited investors will now be able to gain access to company offerings they couldn’t participate in before, and companies will be able to leverage their networks of suppliers and customers to help provide capital for their use. More importantly, the cost and time required to raise capital will be reduced.
The JOBS Act will accelerate the entrepreneur spirit, and small businesses will find innovative ways to unlock new ways to “tap the crowd” to fund small business opportunities and hopefully create more jobs. While the SEC still hasn’t clarified all the rules regarding general solicitation for funds, many new internet portals have launched platforms hoping to become an electronic exchange platform between these small businesses and investors for a fee.
Most small business owners I talk with have heard the term “crowdfunding” but don’t understand how they might benefit from it. We are working with a few clients to improve the odds of getting funded by studying successful crowdfunding business models and developing a methodology to manage the process. We’ve discovered that there is much involved to prepare for success in 2013; it not as simple as filling out forms, gathering information from accountants and engaging attorneys to create the necessary paperwork.
At the end of the day, while crowdfunding isn’t a silver bullet solution to re-start economic growth, some elements of the program may be successfully executed by start-ups, small businesses and even mid-size businesses. After all, I don’t see the banks coming to the rescue of small business anytime soon and the current equity funding process is not meaningfully impacting this segment of the business ecosystem either.
What do you think?
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