The Jump Start our Business Start-ups (JOBS) Act, an entrepreneurship bill signed into law April 5 by President Barack Obama, could help open an entirely new class of investor to a process they largely have been held out of, says an expert at Washington University in St. Louis.
“There’s an interesting cultural shift happening with the passage of this bill,” says Clifford Holekamp, senior lecturer in entrepreneurship at Olin Business School.
“Traditionally, private equity investing was only for the wealthy,” he says. “You had to be an accredited investor to be marketed to for private equity investment in an entrepreneurial firm. As such, an entire investment class was excluded. With this bill, the angel investment community will be opened up to a much broader audience.”
The bi-partisan JOBS Act creates a new category of “emerging growth” companies that can conduct initial public offerings of stock while being exempt from certain financial disclosure and government regulations for up to five years.
Also, the measure will provide a new form of financing to small companies. Through crowd-funding, or the sale of small amounts of stock to many individuals, companies will be albe to solicit equity investments through the Internet or elsewhere, raising up to $1 million annually without being required to register the shares for public trading with the Securities and Exchange Commission.
The bill is not without controversy, however. Detractors say it may cause more investors to lose larger amounts of money.
“Angel investing often comes with more risk than reward,” Holekamp says. “It’s the most risky asset class you can invest in. However, angel investors frequently choose to invest for reasons other than strictly economic ones.”
And, he says, most Americans have been excluded from that process.
“I would argue that the previous protections were excluding the typical person from an entire segment of our business culture, the ability to participate in the investment and ownership of a start-up business,” Holekamp says.
“This bill will enable a major cultural shift in the context of social media and the power of the crowd. The old regulations were structurally blocking the power of the crowd to fund businesses,” he says. “That obstacle is being knocked over and now the ‘average’ person will be able to participate in this investment community, for their own betterment or at their own peril.”
The detractors of the bill, he says, assume that these people are unsophisticated investors and therefore need to be protected from their own decisions.
“But at the same time, in order to provide them that protection we are limiting their options and their freedoms and excluding them from a life experience, let alone from an economic opportunity,” Holekamp says.
“I think this could also enable a whole new generation of entrepreneurs who weren’t even at the table before,” he says. “This is much more democratic for both the entrepreneurs and their investors.
“Now entrepreneurs don’t necessarily have to be socially networked and connected with wealthy investors in order to raise equity funds.”