Even in the fractured political environment of the moment, most everyone in the federal government nods in agreement when it comes to one critical topic: jobs. For this very reason, the Jumpstart Our Business Startups Act (JOBS Act) passed the House and Senate by wide margins. What's driving all this bipartisanship? Washington knows that small businesses are the lifeblood of American commerce. If you can figure out how to create jobs at small businesses, the knock-on effects will reverberate across the rest of the economy. President Obama noted that the bill was designed "for business owners who want to take their company to the next level." He added that the reforms represent "a potential game-changer for startups."
So now that the most significant change in securities law in years has become the law of the land, it's incumbent on Americans to ask a basic question: how will the JOBS Act actually create jobs? Unfortunately, it seems that the clever title of the JOBS Act maybe be better than what's actually contained in the bill. At its core, the legislation changes how private businesses such as startups raise capital from individuals. Traditionally, private businesses could only seek investment from accredited investors -- basically, affluent people -- who passed certain wealth eligibility tests (there are a number of helpful sites such as Accredited Investor Intelligence that lay out the details). Under the new law, all Americans, regardless of their wealth, will be allowed greater freedom to invest in startups. The idea is that with greater access to financing, startups will flourish and create new jobs as they grow.
How will this play out in the real world? If you think your next-door neighbor's kid is the next Mark Zuckerberg, you will be able to invest in his startup. If the company goes bust, you'll also lose your money. Similarly, you will be able to invest via crowdfunding sites such as Seedrs and Crowdcube in order to get a small piece of some hot tech startup. Joining the ranks of startup investors is exciting, but that doesn't mean that you're always going to get shares of the next Google of Facebook. It's actually far more likely that you'll never see your money again: new companies are risky, and chances are you'll lose more than you'll win.
Given the inherent risks associated with startups, it's not surprising that the Securities & Exchange Commission (SEC) isn't doing backflips at the prospect of millions of Americans buying shares in high-risk private companies. The SEC is determined to prevent the inevitable fraud that could permeate the crowdfunding universe. Remember that "deposed Nigerian Prince" who sends you emails every few weeks asking for help transferring money? Chances are that he will try to set up a crowdfunding site before too long.
Given these risks, the SEC has drafted a series of proposed rules that will temper the objectives of the bill. While the rules remain in "draft" form, they still erect a series of limits on the amount that an individual can invest through crowdfunding. For individuals whose income exceeds $100,000, the proposed regulation caps the total annual investment via crowdfunding to 10% of annual income or net worth. For those whose income is less than $100,000, the cap is the greater of $2,000 or 5% of annual income or net worth. Given these limits, voices in the startup community now doubt that the JOBS Act will in fact be a game-changer.
The JOBS Act shows what happens when you take a great idea -- creating jobs by opening startups to additional sources of financing -- and then try to put it into action. The content of the SEC regulations suggests a concern that while the reforms will produce some success stories, there will be plenty of failures. After all, even venture capitalists, the people who have the training, the networks, and the capital to invest in the finest startups across the globe, see many of their companies fail. That's just the reality of the startup game. Venture capitalists protect themselves from these risks by building portfolios of companies where a few big hits will far outweigh the inevitable failures. They also actively engage with the companies in their portfolios to increase the chances of a positive outcome. In contrast, most individuals will not construct a balanced portfolio. They will also not have any ability to shape the direction of the business. They are simply along for the ride.
The real value of the JOBS Act is that it democratizes investment. By passing the law, the government is sending a simple message: everyone has a chance to be part of the New Economy, even if in a small way. I support that ethos completely. Yet while the JOBS Act will likely create some jobs, it will hardly be a panacea to what ails the American job market. In fact, I can't help wondering if much of the job creation that comes on the heels of the JOBS Act will be at the law firms that one day represent legions of spurned investors who put their money in failed startups. If the government wants to create jobs, additional bold bipartisan action is in order.