Tags: Crowdfunding | invest | rules | obama

Small Investors Get Easier Access to Startup Investing With New Crowdfunding Rules

Small Investors Get Easier Access to Startup Investing With New Crowdfunding Rules
(Dollar Photo Club)

By    |   Monday, 16 May 2016 12:35 PM

New rules pushed by President Barack Obama will allow Americans earning less than $100,000 a year to invest in small businesses and startups.

Investors can now risk $2,000 a year or more investing in small companies in exchange for a stake in the business. Companies can raise up to $1 million a year this way in a 12-month period.

But the changes come amid warnings that the new market “will be choked by regulation and an attempt by Republican lawmakers to relax the rules," the Financial Times warned.

“A law change more than four years ago to open up investment in private companies beyond wealthy 'accredited' investors was heralded as a breakthrough to allow anyone to back the next generation of tech start-ups. But a protracted review by the Securities and Exchange Commission delayed the new market, as regulators struggled with how to prevent fraud and money-laundering,” the FT reported.

“The SEC has really created a credibility crisis for crowdfunding,” said Patrick McHenry, the Republican vice-chairman of the House financial services committee, told the Financial Times. “It’s as if regulators don’t have trust and confidence that this marketplace can work. It seems like they have no trust that we can successfully invest in each other.”

The crowdfunding change, years in the making, “represents an enormous shift, one that essentially permits anyone to become a venture capitalist — with all the attendant risks of losing one’s shirt on a company that fails. Until now, only accredited investors, meaning those with an annual income of at least $200,000 or a net worth of at least $1 million, have been permitted to take equity stakes in most private companies,” the New York Times reports.

“For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in,” President Obama said when he signed the bill into law four years ago that set these changes in motion.

“It took a long time to iron out the details, in part because the Securities and Exchange Commission was concerned that ordinary people could lose their life savings because of fraud or naïveté. That remains a fear for many in the financing industry,” the Times reported.

There are also other risks for the investors themselves. Watching “Shark Tank” on TV from the comfort of your couch is a far cry from actually investing real money in a new business venture, experts warn.

Samuel Asher Effron, a lawyer with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo who specializes in securities law, thinks the companies that choose to crowdfund will be leftovers and also-rans: opportunities rejected by professional investors.

“When high-growth companies are looking to raise money, it’s not just for the money,” he told the NYT. “They’re also looking for validation, and they want it from venture funds or well-known angels. They won’t get that from a crowdfunding offer.”

And unfortunately, the data support the gloomy outlook for such new ventures.

“This is a high-risk asset class,” Wayne Mulligan, cofounder of Crowdability, an aggregator of offerings on top crowdfunding sites which offers Crowdability IQ, a nine-point rating of crowdfunding opportunities, told Forbes.

“Most startups, whether they’re VC-funded, bootstrapped or just raised angel money, will go out of business, period. I mean, most VCs lose money on 60% to 70% of their investments, and these guys are supposed to be the best investors in the space," he said.

"Investors that approach these types of investments and think they can cherry pick one, two or three companies and one of them is going to turn it into Uber — that’s just not going to be the case. Those people are likely going to lose their money.”

Other critics of the new law say that many of the companies that need the money the most won’t get it.

So what companies would these be?

“Companies that are providing products and services to their customers. Important, but not that exciting,” Gene Marks, who owns the Marks Group, a Bala Cynwyd, Pa.-based consulting firm that helps clients with customer relationship management, wrote for the Washington Post.

“They are manufacturers of equipment, resellers of parts and fabricators of materials. They are landscapers, roofers, pizza shops, gas stations, healthcare staffing agencies and logistics firms. They are mostly family-owned businesses or partnerships. Their customers are primarily other businesses,” Marks wrote. “And none of them are likely to benefit from the new crowdfunding rules. Why? They are just too boring,” Marks said.

“They are not jazzy tech start-ups based in Silicon Valley.”

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New rules pushed by President Barack Obama will allow Americans earning less than $100,000 a year to invest in small businesses and startups.
Crowdfunding, invest, rules, obama
Monday, 16 May 2016 12:35 PM
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