Ever curl up by the fire in your favorite pajamas with a good book on securities law? Though quaint at first, the dense1930s legalese gets old fast in any attempt to comprehend the bewildering statutes that stifle entrepreneurs to this day. The oppression remains, but a glimmer of hope came through the weeds about three years ago with the passing of the JOBS Act.
The “Jumpstart Our Business Startups” law promised to revitalize entrepreneurial investing by easing a few of these archaic securities regulations. Most notably, through the phenomenon of crowdfunding, the JOBS Act was supposed to finally shed the segregationist “accredited investor” requirements that favor high-net-worth individuals who, by virtue of their wealth, are deemed smarter than the unaccredited Larry Lunchbox who would like to become wealthy by putting his hard-earned, already-taxed money to work in a speculative startup company.Banks won’t loan money to emerging businesses at this level. Venture capital firms don’t venture like this anymore, and it’s mostly “who you know” among angel investors. After burning through their own savings, it’s friends and family providing the entrepreneur’s start-up cash – with everyone breaking United States Securities & Exchange laws half the time without even knowing it.
Whether as clients or the ideas and dreams we’ve supported within our incubator and accelerator community over the years, these little engines of ingenuity grub for capital wherever they can find it. The paradox is that it’s illegal for them to publicly solicit funds from the unaccredited masses, the very people best suited for investing at this ragged edge of the Industrial Revolution – if only they were free to participate. The brilliance of American entrepreneurism at the grassroots can drive macro quantities of micro investments, fuel thousands more growing businesses, allocate capital on more personal and local levels, generate better returns and create more opportunities for more people.
Crowdfunding as forwarded in the JOBS Act was simply a technology enabler to this historic piece of bipartisan legislation. And though the law’s implementation is bogged down in bureaucratic quicksand, at least donor-based crowdfunding has established the user experience (thanks, Kickstarter). But the buzz around crowdfunding platforms overshadows the continuing plight of the unaccredited individual investor. They can’t make private equity investments, but can legally lose it all in the public stock market or in Vegas (or Central City, for that matter).
Despite the false start of the JOBS Act, Colorado Gov. John Hickenlooper took a step in the right direction by signing the Colorado Crowdfunding Act into law on April 13th, allowing the non-accredited to invest in private companies. Just as long as the company is based in Colorado, just as long as the investment is no more than $5,000, just as long as the investor is a Colorado resident, and just as long as 80 percent of the funds are spent in Colorado. These caveats may be okay for the shopkeeper, mom & pop or lifestyle business, but real growth companies that stand a chance of delivering a multiple of return on $5k can’t stand to be so limited. Good intentions, but why the restrictions? These necked-down rules aren’t protecting anyone, and are reminiscent of those painful 1930s security laws that overreach in the name of saving some yet-to-be-hoodwinked investor from predators lurking behind every tree. Ironic, since the predators causing the most damage to the Average Joe today are identity thieves, who prey on the public with virtual impunity.
Nevertheless, hat tip to Hick who is a few steps ahead of the federal system. In the meantime, let’s hope the Colorado Securities Commission implements the law faster than the JOBS Act is doing for itself, which is still in SEC rule-writing limbo.
The good news is that we’re entering a new era where regular folk are considered smart enough to take such risks all by themselves. Make no mistake, these risks are very real and should be carefully considered by any individual pursuing such enlightened self-interest. The allure of Shark Tank be damned, failure rules in the real world of emerging new business.
All said, entrepreneurism remains a religious experience. On the grassroots level, it almost always starts with a true believer, an entrepreneur making a leap of faith, willing to sacrifice everything while investing with the most accredited equity of all: sweat.