Investing in startup companies is always a risk, but hand-in-hand with this risk comes an opportunity for a substantial reward. Venture capital companies pride themselves on this risk management in order to make money. They loan companies money in return for a fractional ownership, looking to make a handsome profit when the company is sold or goes public with an IPO. The firm that invested in Facebook will likely get a return of 5,000 times on their investment. The issue is that unlike the stock market where anyone can play, only the rich are legally allowed to play this game. We can open up this type of investment to everyone if you assist in supporting the Entrepreneur Access to Capital Act (informally known as the “crowdfunding bill”).
Under current legislation, startup companies’ funding options are limited to friends and family, established investment firms (i.e. venture capitalists), and accredited investors (i.e. angels). This means that if you want to launch the next great internet sensation and, for one reason or another, you either don’t want, or can’t get, a bank loan, you have to go to one of these sources for funding. Could you tweet out a message to your Twitter followers or post a message on Facebook saying that you’re looking for funding? No. That would be considered illegal “solicitation.” If a friend of a friend hears about your venture and decides that they want to give you some money, can they? It depends on whether or not they’re an accredited investor. With the economy in its current state, we should be doing everything we can to support the flow of necessary capital to entrepreneurs.
The Securities Act of 1933 is the source of our current guidelines for startup investments. First off, it prohibits “general solicitation,” requiring that the startup and the investor have a pre-existing relationship. In addition, it requires that any investors be “accredited,” meaning that they have a net worth of more than one million dollars or two consecutive years of at least $200,000 of annual income.
The purpose behind these restrictions is to protect naive investors. Unfortunately, the legislation is effectively hindering the economy by limiting entrepreneur’s abilities to raise the capital needed to start new businesses. This, in turn, hinders the US economy because we have fewer small businesses creating jobs. And what about those business-savvy individuals with sufficient business knowledge to invest that, for one reason or another, lack the means to qualify as an accredited investor?
We don’t outlaw individuals from going to the casino and risking their life’s savings, why should we outlaw them from taking a risk on a business that could potentially make them a tidy return on investment? If this bill had passed before Mark Zuckerberg built Facebook and you had given him $10,000 of seed money because you thought it was a good idea, that investment would now be worth $50 million. [1. Based on the same terms that Peter Thiel got when he made the first venture capital investment in Facebook.]
Entrepreneur Access to Capital Act
Luckily, Congress has noticed the err in our current legislation and the House of Representatives passed the Entrepreneur Access to Capital Act in November. The House’s bill would raise the restriction of “general solicitation,” thus allowing anyone to broadcast that their startup is seeking funding. You could post on Twitter, Facebook, or even take out an advertisement in the New York Times declaring that your startup was seeking investors. In addition, it would allow anyone to invest in these companies, up to the lesser of $10,000 or 10% of one’s income per year.
The Senate is reconciling two different versions of this bill, one is called the “Brown bill” [2. So named because it was introduced by Senator Scott Brown of Massachusetts.] which has some slight differences to the House bill – the main one being that the maximum investment made would be limited to $1,000. The second bill is the “Merkley bill” and it limits the amount to the greater of $500 or 1-2% of annual income, depending on income level.
If this bill becomes law, it will be a material step forward for our economy and country. Many businesses across the country will get access to the crucial capital they require. Communities will come together to assist one another. Jobs will be created. Fortunes will be produced by scrappy businessmen and women who still believe in that increasingly faint whisper called the American dream.
The problem with all of this is that the Senate has been “in chambers” on this bill since December with no action. If you agree with the importance of this bill, I humbly ask you to call your senator and urge them to pass this bill quickly and fairly. (You can find their number HERE) In addition, if you’re so inclined, ask them to reconcile the Senate’s cap-limits a bit closer to the House’s $10,000. Americans don’t need an allowance.
Follow me on Twitter @startuprob.