By Scott Shane
Nearly two years ago, I championed the idea of making it legal for entrepreneurs to raise money by selling equity stakes in their companies online. This kind of crowdfunding came much closer to becoming a reality when President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law in April. It was one of the few bipartisan efforts to support small business that emerged from Washington in recent years.
The businesses that stand to gain the most from the crowdfunding provision in the law are those seeking small sums—less than $100,000. The goal is for the undercapitalized owners of the local car repair shop or restaurant to be able to inexpensively raise money from individuals without getting engulfed in red tape.
These kinds of investments don’t interest angel groups and venture capital firms. In fact, less than 1 percent of all the small companies in the U.S. get venture capital or angel group funding annually. Moreover, the legal costs of private placements under the Securities and Exchange Commission’s existing rules (which date back decades) are too high to be worthwhile for small raises.
The SEC, which was required to write the regulations for the crowdfunding portion of the law by year end, is still hammering them out. Its staffers have a noble goal—to ensure ordinary investors are protected from scammers. But too much investor protection will make crowdfunding unworkable because the businesses won’t be able to afford to comply. Overdo it, and this new source of financing gets crushed under the weight of its own rules.
