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The Jumpstart Our Business Startups Act, otherwise known as the JOBS Act, was intended to make it easier for small investors to invest in small businesses. This act comes in reaction to the plethora of crowd funding sites that have become quite popular, as well as in the interest of stimulating economic growth. My initial reaction is, “Wow, entrepreneurs can now exchange the opportunity for free, no-strings attached money in exchange for an administrative nightmare.”

Crowd Funding Today

What is nice about crowd funding is that it allows individuals to evaluate ideas from the vantage point of a potential customer. A potential consumer can look at the project and think, “Hmm…it would be cool if that existed, so I’m going to pitch in a little to help make it happen.” To the individual, it’s the chance to be an early adopter of a cool project, support a favorite band, or contribute to a good cause. For the entrepreneur, crowd funding is great because it allowed them to sell the dream to people who someday might benefit from it. If they can effectively sell the dream, they get their money; if they can’t, they get nothing. Thus, the project may not move forward – which is probably fine because judging by lack of support, it may not be that great of a project anyway. It’s a self-correcting system.

Crowd Funding Tomorrow

What is not nice about crowd-funding in the future is that individuals will soon have to evaluate a potential idea from the vantage point of an investor. This means they’ll have to consider a lot more variables than the coolness factor. This makes the pitch more difficult. Now the entrepreneur must demonstrate the value of the business, including the: market, financials, marketing plan, operations, and all sorts of other things that are important to investors. It’s no longer about cool projects; it’s about good investment opportunities.

If entrepreneurs are successful, they will have to issue actual equity to a bunch of absentee owners in small lots. These shareholders will now have to sign off on shareholders agreements, operating agreements, and a variety of other things that can make life pretty complicated and scare off real investors. To make matters worse, the company will have to attempt to value it’s equity, which can create tax issues and – if the value isn’t actually realized someday – a bunch of unhappy investors.

One possible solution is for crowd funding sites to morph into mini stock exchanges and provide investor management services to customers who will wind up spending $20 to manage a $5 investor. Crowd funding was a great way for an entrepreneur to get a project going. Time will tell how the JOBS Act plays out, but I predict the end of happy-go-lucky crowd funding as we know it.

3 Comments

  1. Can you point us at the part of the bill that would create these hassles? The link above (to the Wikipedia page) simply talks about loosening the restrictions on crowd funding and not the problems it will create. Since I think crowd funding is a really good thing, I’d like to find the exact verbiage on this. Thanks.

    • Hi Matt, I don’t think the bill explicitly creates these hassles. The hassles of managing small absentee shareholders pre-date the bill. My hypothesis is that the JOBS act makes it easy to get small investors, but it’s a wolf in sheep’s clothing. Once you get small investors you have to manage them. I agree that crowd funding is a good thing, but it used to be no strings attached. Now crowd funders are going to expect shares in the company. 

  2. There is no doubt that opportunities will be created for businesses to manage investor relations issues for the thousands of start-ups that will be funded via the act.    As the vast majority of small businesses will eventually fail, unhappy investors are going to become a common experience.   However, the risk/reward should be not much worse than investing in penny stock investments as they exist today.    I second Matt McCormick’s belief that the JOBS ACT will produce some very interesting results.   A quality business plan with a competent Board of Advisors will soon become a unwritten requirement for anyone looking to raise equity capital.   Finally, there is no reason why a firm can’t limit investments to $5K or more thereby weeding out the need to deal with potentially thousands of investors.  

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