On November 3rd, in a momentary lapse of unconsciousness, something we’d like to see more of, the US Congress overwhelmingly passed The Entrepreneur Access to Capital Act. The vote was 407-17, about as decisive as it gets. Bravo!
The “Act” will make it easier for start-ups and small businesses to raise capital through “crowdfunding.” That term may be new to some. Simply stated it’s the raising of capital, in small amounts, from a broad base of investors. Usually the investors are non-accredited, and only invest a very small amount, as little as $10.00 in some instances. It’s kind of like microfinance, but using equity instead of a low-interest loan.
The House also voted 421-1 to reform the Securities and Exchange Commission’s Regulation A. This rule currently allows small companies to conduct public offerings of up to $5 million without registering with the SEC. The legislation, “The Small Company Capital Formation Act” raises the limit to $50 million. That’s significant in our view.
The Entrepreneur Access to Capital Act does have a caveat attached; it limits individual investments in crowdfunded securities to $10,000 or 10 percent of the investor’s annual income. Plus, state regulators will still supervise the offerings and keep tabs on crowdfunding activities happening within their jurisdictions.
While I still believe that most regulatory agencies need to be gutted, this is a step in the right direction, at a time when the US economy could use a shot of adrenalin.
If both of these pieces of legislation make it through the Senate, which they should, given the overwhelming support in the House, it will be extremely beneficial for those looking to gain access to average retail investors. It could also level the playing field a bit for those investors that have been excluded from private capital raising, not because of a lack of knowledge, but rather (according to the regulators) insufficient income or net worth.
These pieces of legislation will also remove some of the power and influence of underwriters, who charge exorbitant fees to peddle offerings to their clientèle. Those “fees” can be redirected into revenue producing activities, R&D to further the company’s business plan or to hire employees or make acquisitions.
Of course there are critics, those that say it opens the door to the fleecing of small, unsophisticated investors who don’t have enough common sense to tie their own shoes. I don’t buy that for a second.
In fact, I would argue that getting some retail investor capital OUT of the public markets and into small private placements may not be a bad idea. Given the current “broken” state of the public capital markets, which these days are completely controlled by Algorithmic Trading, a lot of “average” investors could lose more being in “regulated” markets.
Lehman Bros., Bernie Maddoff, MF Global… How many times do the banksters need to sodomize the small retail investor before they’ve had enough? Trusting institutions is so passè.
I certainly don’t recommend that you should get your grandmother into some Social Networking startup; some investors should just stay away from private deals altogether, specifically those that are too lazy to undertake proper due diligence.
Are private placements risky? Are the public capital markets risky? Is holding cash risky? How about life, is that risky? The only “for sure” in this whole game is that we are all going to end up in the same place.
The type of investing that Chris and I do is inherently high-risk. We look for situations where we can multiply our capital 10:1 or better. Those are rare opportunities, but they do exist. We’ve hit a few of those over the years, but we’ve also participated in some complete duds.
Our mission when we started this blog was to expose people to the methodology we use when looking at private placements, angel investing and frontier markets. The idea was to get feedback and start a dialog with others who are either participating in these types of deals themselves, or are interested in learning how to get involved.
We eat our own cooking here. In the coming weeks and months we’ll be sharing more about specific projects we are involved in. We’re working with some truly gifted entrepreneurs and young people that we are backing in ventures that we believe have merit, including one that we believe could transform the start-up process.
Hopefully the legislation we highlighted herein will translate into more capital and resources for entrepreneurs and visionaries like the ones we back.
Post a comment below and let us know what you think.
- Mark
“Too many of us are not living our dreams because we are living our fears.” – Les Brown
Thats great news. Here in the UK, companies can raise up to £2million from private investors, using a tax efficient scheme that gives a 30% tax credit, and allows for no capital gains tax if the investment is held for a minimum of 3 years. Crowdfunding applies to that
Is there a Canadian equivalent to what is offered in the UK and what is being changed in the USA? Crowdfunding is an interesting but potentially dangerous way for the general public to get involved in smaller projects. I know currently in Canada, an investor has to be ‘accredited ‘ if they want to get into anything more complex than a mutual fund. To be accredited you have to have over $1mm in liquid assets and/or earn over $200k per year. The government claims this is to prevent people from being taken advantage of as people with those assets/income are in a better position to judge the validity of more obtuse investments. Personally, I feel that it’s a way for the large Mutual Fund companies to keep a handle on the general public. It forces the general public to keep putting funds into these massive (and corrupt) mutual fund companies in Canada. The only incentive these companies have is to increase the asset base since it leads to higher Management Fee income for portfolio managers (and shareholders down the line).
If crowdfunding could become a viable option in Canada, it would be a huge move to open up the market to smaller entrepreneurs such as myself!
Not sure about the structure in Canada.
Any subscribers who know or care to look into it feel free to let us know.
The concept that one needs to be accredited to earn the right to decide what to do with your own hard earned money is simply disgraceful.
One is allowed to blow as much money as you like at the craps tables yet is not allowed to invest the same money into a business.
A system that keeps people dumb and ensures a funnel of funds flowing to the financial institutions who pay exorbitant amounts of campaign moneys. Coincidence?