JOBS Act – Changing the way entrepreneurs raise money!

What is the JOBS Act? It has nothing to do with Steve Jobs, though I would deem it as a honor in his memory!

JOBS Act is the recent federal legislation (applicable in the US only) to become partly effective starting this week. “Jumpstart Our Business Start-ups Act” or JOBS Act (http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups_Act) as it is widely referred, allows start-ups and small businesses to raise equity investments from the public using both online and offline forums with much lesser regulations regarding public listing, etc.,. While on the face of it, this seems like a welcome thing for the start-up ecosystem and small businesses, it provides immense opportunities for misuse.

There are number of checkpoints that the regulators have put in place including who you can raise money from and how much can be invested per year by an individual. Initially only accredited investors are eligible – these are high net-worth individuals with at least a million dollars in net-worth and a minimum of $200,000 in annual income. But this definition is expected to be lowered which will enable a lot more of the public to invest in small enterprises. There are also other major changes in the regulation which can change the financial industry and its approach to market quite a bit.

Is this the same as raising money through crowd-funding sites like ‘kickstarter’ or ‘indiegogo’? I am not sure, because the ventures (ones raising money) don’t normally promise any results back to the investors (which used to be the case with projects on those sites) except equity stake – which could literally become waste paper over time! Will people be ignorantly enticed into playing a part in the high risk environment? Will it actually make a lot more people learn about entrepreneurship and small business before investing in them? Will it provide an opportunity to raise money from customers themselves? Will it lead to another set of ‘little investment bankers’ who act as the middle-men between the small investors and the ventures? Will it increase the ratings business? Or will it result in lots of more focused crowd-funding sites especially focused on equity prior to public listing?

The JOBS Act is in all measures a very bold step by a forward looking nation. After all if we want to be ahead of the crowd even as a nation we have to take risks and live on the edge. It will be interesting to watch how this progresses, since it is a much awaited legislation. It will ease up the start-up process especially that of entrepreneurial ventures.

If it doesn’t turn into something like the ‘Tulip Mania’, we could be in for some serious gains and trends that other nations can learn from. But the big question remains – will rationality reign? Our behavioral economist friends may be laughing especially looking at their research outputs – saying ‘rational thinking’ it’s never happened before! But who knows?

Aren’t we living in interesting times?

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