Get ready for the JOBS Act

Some people will try anything once.

Some people will try anything once.

BIZMOLOGY — This is the one-year anniversary of the Jumpstart Our Business Startups Act and it has been raising a ruckus across the investment landscape. The JOBS Act will allow people to invest in companies through “crowdfunding” Web sites such as Indiegogo or Kickstarter. Instead of just receiving products, or premiums, or being namechecked in the credits (this is also known as the public radio or indie rock band form of fundraising), the JOBS Act will allow companies to crowdfund shares, among other provisions.

The Securities and Exchange Commission has yet to come up with the rules for this type of trading, which may be why the JOBS Act hasn’t quite hit the public consciousness yet. The best guess for when the SEC expects to deliver its regulations is late 2013 or early 2014.

Needless to say, the folks at Indiegogo are excited about the JOBS Act. Co-founder Danae Ringelmann, who has a background in securities and thus knows whereof she speaks, says at Techcrunch,

“Crowdfunding rose into the mainstream long before the JOBS Act was passed. Since the launch of our perks-based approach to crowdfunding over five years ago — where entrepreneurs, artists and causes raise money in support of their dreams online by offering perks to funders — hundreds of other platforms have followed suit across the world.

When equity crowdfunding is introduced and allows funders actually to own a piece of the new businesses, pro-JOBS Act platforms like perk-based incumbents Indiegogo and Rockethub, or new equity-only players like Crowdfunder, will need to innovate by developing and testing new procedures that are safe, robust and customer-driven.”

The North American Securities Administrators Association (NASAA) and other investors are not quite so gung ho. NASAA identified crowdfunding as one of the top threats to investors of 2012. Granted crowdfunding removes the brokerage from the individual investment process, but of course discount brokerages such as Charles Schwab already did that. It’s not too far-fetched to think that enthusiastic investors, eager to get in on the ground floor of a new company (and knowing that the usual IPO processes lock them out of similar deals), would be all too willing to invest in high-risk businesses.

And more eloquently, New York Times columnist Steve Rattner thinks that crowdfunding is one of the worst things ever to happen to the small investor.

“Its enticing acronym notwithstanding, the JOBS Act has little to do with employment; it’s a hodgepodge of provisions that together constitute the greatest loosening of securities regulation in modern history.”

As someone who has contributed to the various projects of friends and other artists for a range of small perks, I find myself intrigued by the idea of buying shares in a new venture that could potentially pay off quite well. As proponents of crowdfunding note, a successful project shows institutional investors that there’s interest in a product or service. People are paying to stand up and be counted as a potential customer of the company. But as the SEC and Danae Ringelmann are well aware, such an environment, if not adequately regulated, is rife for fraud. It could become a circus, and we all know what circus impresario P. T. Barnum had to say about his customers.

So think about it — would you invest in a new company via a crowdfunding site?

Patrice Sarath

Patrice Sarath is a writer and editor for First Research, covering the health care, insurance, and construction industries.

Read more articles by Patrice Sarath.

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