On Thursday, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law, and with it, he helped make more capital available for smallers businesses as well as removing barriers for young investors.
A key force behind this change was a coterie of young entrepreneurs who started Motaavi, a crowdfunding company based in North Carolina and who have tried to publicize the benefits of the law in the U.S. The co-founders, Melanie Plageman, Nick Bhargava, Alex Zhang, and Kaiting Chen, were invited to D.C. for the signing of the bill by a supportive Barack Obama.
I caught up with Nick for about an hour as he explained to me his involvement with the drafting of the law. Being completely new to this bill and to crowdfunding, I learned three things about it's structure and effects.
1. Accredited versus unaccredited investors. When investments are made in private companies, the law is structured to cater to accredited investors. Angels and VC firms are two examples. Most average people are not accredited though due to their assets and so cannot purchase equity in companies that are in their "seed" or "startup" stage -- meaning the company has or will raise less than 1 million dollars in a twelve month period. This preference for a certain class of investors was originally Congress's way of forcing companies that did not go through the full SEC registration process (which all public companies must complete) to only accept money from savvy investors. The concern was that less than fully registered companies would seek less than fully competent investors. Now those, those rules may be less important given the way that the internet has changed the speed and ease of investment due diligence. Nick told me that for example, "young people would have been almost entirely prohibited from participating in the early funding of Facebook because of their assets and legal status under investment law."
2. Get out your wallets. The current law allows young people to be more active investors. There is no limit to the denominations of crowd-funded "chunks" of equity that can be offered by companies, and for most young people -- who likely have less than $100,000 of income -- they are allowed to invest as much as 5% of their annual income or net assets in crowdfunding.
3. Everything happens through intermediaries. The law does not allow just any old company to put a link on its website and start accepting investment checks from people. Rather, all crowdfunding in the U.S. must happen through a third party designated as an intermediary. These intermediaries occupy a legal category in the law and have obligations that they must meet. For example, some people have worried that crowdfunding rules will expose inexperienced investors to unnecessary financial risks. If they do, complaints and future regulatory efforts will be aimed first at intermediaries, and secondarily at companies issuing the equity. President Obama's signature initiated a 9 month public comment period in which the SEC will hear proposals for rules about investor education and ways to ensure that potential crowdsourcers are in a position to make good use of the disclosures that this law mandates.