The Jumpstart Our Business Startups (or JOBS) Act achieved the near impossible when it received bipartisan support in Congress in March. But since President Obama signed it into law, reactions outside Washington have been mixed. Traditionally, businesses have been able to solicit investments only from friends and wealthy so-called accredited investors. The act changes that, allowing companies to raise small amounts of capital from anyone over the Internet. It also rolls back some auditing and filing requirements in the IPO process. Though some groups are jumping for joy, others worry about rampant fraud. Here's how the changes could affect major players and your company.
All crowdfunded investments must go through portals that are registered with the SEC. A slew of these portals is already popping up, including Wefunder, Crowdfunder, and Motaavi. The founders of these companies were pushing hardest for this legislation.
But...These sites can't accept investments until the SEC finalizes its regulations next year.
The JOBS Act increases from 500 to 2,000 the number of shareholders private companies may have before going public. For SecondMarket, an online platform for trading private stock, that means more people can trade shares, which means more transaction fees for the company.
But...If the JOBS Act makes it easier for companies to go public, some businesses may go straight to an IPO.
Seed-stage tech entrepreneurs will probably be the first to jump on the crowdsourcing bandwagon. There will most likely be lots of success stories.
But...Some entrepreneurs may end up wasting time on well-funded failures they might never have pursued without investors.
Opportunists will inevitably come along and raise money for bogus companies. And when you can reach millions of people with the click of a button, the damage will be done so quickly, crooks will get their money and be long gone before anything can be done about it.
But...The crowdfunding industry has formed a self-regulatory organization in hopes of weeding out fraudulent businesses before they use a crowdfunding portal.
Under the JOBS Act, businesses with less than $1 billion in revenue will be exempt from certain filing and auditing requirements for five years after an IPO. This should help more companies go public, which means more money for investment banks.
But...Less oversight may lead to puffed-up valuations, which could make the market unpredictable.
Experts believe the new law will be good to venture capitalists and angel investors. After all, more IPOs mean more exits. Plus, companies can raise only $1 million every 12 months through crowdfunding portals. So angels and VCs won't have competition for larger deals.
But...The JOBS Act will provide more options for entrepreneurs seeking capital. VCs and angels may never even see some promising deals.
Groups like the Consumer Federation of America predict many inexperienced investors, who have little disposable income, will invest in unreliable businesses, lured by the promise of getting a big return they will never see.
But...A lucky few consumers may actually get the chance to invest in the next Facebook.
Small mom-and-pop stores have never attracted angel and venture funding. Because they usually offer smaller returns than scalable tech companies, they probably won't receive many crowdfunding investments, either.
But...Some small companies with strong local followings may be able to raise small amounts of capital that weren't available to them before.