Crowdfunding revolution will jump-start economic growth as JOBS Act creates new citizen investors
President Obama is set to sign the JOBS Act, a bill designed to help revive the economy and improve America’s stagnant employment situation. The most revolutionary provision of the act allows for companies to raise money via “crowdfunding” from the general public. While crowdfunding is not without risks, it holds the promise of making the American economy not only more competitive, but also more democratic, and should be supported by Tea Partiers and 99 Percenters alike.
Many people are familiar with crowdfunding from sites like Kickstarter.com, which allow users to donate money to support artistic and non-profit ventures (including building a statue of Robocop in Detroit!). People who donate may get a copy of the work, a small token of appreciation, or just the warm fuzzy feeling that they helped. The JOBS Act expands crowdfunding to allow companies to raise funds by offering equity ownership (stock) or a debt obligation (bond) to the general public. This allows people to invest, rather than donate, in the companies they like and hopefully make a profit on their investment.
To appreciate how revolutionary this is you should understand how things work now. If you own a company and you want to raise money you have very limited options. You can go to your friends and family — people who have a very high level of access to information about your company and its fortunes — and ask them to invest. This is legal because the government figures that they will be able to get enough insight into the risk of investing to make an informed decision. But what if you don’t have friends or family who can invest? Your only choices are trying to get a small business loan from a bank or finding a wealthy (in legal terms “accredited”) investor to invest in you. If you are a small business you can’t go to the person on the street, and if you are the person on the street you can’t invest in small businesses unless you befriend the owners. This system prevents many companies from getting the capital they need to thrive and big banks and the “1%” have exclusive access to investing in what might be the next Google or Faceboook before shares are $400 each.
“But Brian” I hear some of you say “I’m not an Occupier and I have no problem with wealthy people investing in companies, I think its great they use their wealth to support good ideas. Why should I be happy about crowdfunding?” I’ll tell you why … it encourages a competitive economy where it is less easy for a handful of companies to become “too big to fail,” aka the Crony Capitalism sweet spot. With crowdfunding new smaller companies can compete with the big boys, lessening the ability for a company to dominate by winning in Washington, rather than the market.
Crowdfunding does pose a few risks, such as fraud. If an “artist” runs off with your Kickstarter donation you are out a few bucks and disappointed that you won’t the art he promised; if a company you invested in was a fraud you may have lost a source of income you were counting on. Fortunately, there are ways to protect people.
The law limits the amount a person can invest based on their income or wealth, to prevent anyone from losing their life savings. The market is also responding with companies trying to screen the legitimate companies from the fraudsters (Full Disclosure: I work for such a company). While the new way poses risks, the old way did too, as the past five years have shown. With crowdfunding, our economy has the potential to become more competitive, vibrant, and democratic than ever, something people across the political spectrum can support.