Will the JOBS Act Ease Access to Capital?

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The year 2014 could be The Year of the Startup. The SEC is poised to enact Title III of the JOBS Act, which would ease equity-based crowdfunding and loosen restrictions on the way businesses may solicit funds from investors.

Arizona attorneys Michael Hool of Hool Law Group and Tom Curzon of Osborn Maledon were quoted as saying in a previous post that they are skeptical that Title III of the federal JOBS Act will result in an influx of newbie investors looking to back high-risk startups.

Yes to Crowdfunding & Increased Private Investment

The National Small Business Association (NSBA) and National Women’s Business Coalition (NWBC) issued reports in 2013 that make good cases for increased support from private investors for small businesses.

NSBA’s “Small Business Access to Capital Survey,” found:

  • 43 percent of small businesses were unable to find needed sources of money, which caused 32 percent to reduce staffing, 20 percent to cut benefits and 17 percent unable to meet customer demand.

  • 53 percent said capital shortages prevented them from expanding operations.

  • More businesses relied on credit cards (37 percent) than business earnings (32 percent) to meet capital needs.

  • 22 percent of the NSBA respondents said they pay 20 percent or more in interest rates on their business credit cards; the average interest rate was 15.6 percent.

  • 19 percent said they will be more likely to seek outside investors because of the JOBS Act, which will reduce restrictions on crowdfunding and investor solicitation.

NWBC presented these findings about women-owned businesses (WOB):

  • 55.5 percent of WOB use personal funds to fund capital expenditures (compared with all businesses at 60.3 percent.

  • In 2007, less than 1 percent (.3 percent) of WOB with full-time employees were backed by venture capitalists.

  • Demand for venture capital has increased. In 2011, 20 percent of women-led startups sought venture capital; 13 percent received it.

Wait-And-See How The Markets React

“There is this popular notion that if we build this, there’s a whole bunch of non-accredited investors that want to invest in high-risk startups,” Curzon says. “I have very serious doubts about that being true.”

Hool is a little more optimistic. He envisions that the market will create platforms that we’ve never seen before, like an investment club, or platforms that have sub-platforms catering to affinity groups with common investment interests like veterans groups, motor enthusiasts, members of trade associations, music or movie buffs, the list of possibilities seems endless.

“These platforms have the potential to organize new communities of people around investment opportunities. Sort of like an expanded ‘friends and family’ seed round for very small investments,” he says. “Many people in years past haven’t been able to invest in cool companies. You’ll see platforms now that will allow people to do that.”

The Year of the Startup

To further spur private investment in startups, in 2011 the White House kicked off its Startup America initiative with $2 billion in matching funds pledged to through NSBA to help fund startups in underserved and emerging sectors, as well as early-stage innovation startups. Arizona residents can find out more information at Startup Arizona; for other states, visit WhiteHouse.gov.

Robert Hoskins of MedCityNews.com predicts venture capitalists will use hobby investors as a way to gauge the viability of investments, thereby reducing the VCs’ risks. After all, those hobbyists are potential future consumers of the products and services they back.

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