Startups and Small Businesses are a critical part of our economy. They provide the majority of new jobs and salaries that are used to purchase goods (food, gas, rent), and stimulate the economy. However, Startups and Small Businesses need cash to fund their businesses and hire Americans. With the financial meltdown, the traditional means of financing (bank loans, credit cards and venture capital) are no longer available to 98% of businesses because banks are holding on to their cash, credit card interest rates are insane and private capital is only available to a select few. Without access to cash, thousands of businesses in 2011 will not start or grow and that means fewer jobs and a weaker US economy.
There is a solution. It is called crowdfunding – regular Americans, choosing to invest small amounts of money in small businesses in their communities. However the SEC doesn’t allow the average American to invest at all because of regulations written almost 80 years ago. Sign our petition (click "The Petition" to the right to read the full petition) to voice your agreement that the SEC should make our commonsense modifications to these regulations to provide a reasonable level of investor protection (anti-fraud & transparency) while easing the restrictions so that capital can flow to startups and small businesses from individuals who want to invest small amounts of money in them.
According to the Small Business and Entrepreneurship Council, Small businesses represent over 99% of the employer firms in the U.S., and employ half of the private sector employees. Between 1993 and 2009, small businesses accounted for 65 percent of the 15 million net new jobs created. Bureau of Statistics data shows that since the 1970s small businesses hire two out of every three job seekers and the Ewing Kauffman Foundation has noted that in the last 30 years, all net job creation in the U.S. took place in firms less than five years old.
According to the Department of Labor, prior to the financial meltdown, 76% of small businesses received traditional funding (ie: bank loans, credit card advances, finance companies, etc). Any entrepreneur will tell you that cash is king. Without it you cannot grow or hire employees. Part of this comes from working capital (cash on hand) and the other part from financing (traditional funding just mentioned). With the financial meltdown, our economy stalled, over 8 millions jobs were lost and unemployment rose to its highest level in recent history.
Economists and politicians are in agreement. Jobs create prosperity. With the launch of Startup America last week, the White House stated that, “Startups bring a wealth of transformative innovations to market, and they also play a critical role in job creation in the United States. Those entrepreneurs who are intent on growing their businesses create the lion’s share of these new jobs.” Jobs create taxable wages and spending which stimulate the economy and replenish the government coiffeurs.
Since the financial meltdown all traditional financing has virtually disappeared (banks are holding on to their cash, credit card companies are charging exorbitant interest rates and according to the private financing group Angelsoft, only 2.3% of startups receive Private (VC, PE or Angel) financing.
Since money isn’t available to the other 97.7% of startups today, they need to find other avenues to raise capital; namely their friends, family and community. However, if that startup offers any kind of financial return, it just might be breaking the law. That is, unless they hire a lawyer, spend tens of thousands of dollars and countless hours completing forms and filing them.
According to the Sustainable Economies of Law Center, “the current registration requirements under Section 5 of the Securities Act of 1933, as well as existing exemptions from registration, impose considerable hurdles on small businesses.” The securities laws were written to address the abuses of large corporations. However today, they require a large corporation seeking to raise millions of dollars to follow the same costly, time-consuming and bureaucratic measures as a startup/small business seeking to raise $50,000.
Even if a startup were to go this route, the current regulations written before broadcast television was widely available, still inhibit this because they:
Limit startups from seeking capital outside of their immediate state
Require the same costly, burdensome state filing
Restrict the amount of “unsophisticated” investors to 35 and/or
Require audited financials and filings as costly as a full registration.
In 1933 when these laws were written, 4% of Americans invested in the markets. Today that number is over 50%, clearly showing that the majority of individuals understand the basics of investing.
As is always the case, when things aren’t working, people invent their own solutions. These solutions many times enter the grey area of the law.
NEW IDEAS FOR FUNDING BUSINESSES:
Crowdfunding, where groups of people invest in startups and provide the capital where it otherwise isn’t available, is one such solution. Over the past 5 years, users to websites like Kiva & Kickstarter have “donated” over $350M to crowdfund projects from films and software development to books and taco trucks. “The success of these crowdfunding sites demonstrates the desire of the public to support projects that they believe in. Enabling the additional motivation of possible financial return would only reinforce this economically healthy impulse,” says the Sustainable Economies of Law Center.
Update the Security and Exchange Commission (SEC) rules that were written 78 years ago that impact how entrepreneurs can raise capital. These rules — originally targeted at “big business” offenders — require tedious, costly and time-consuming filings. (Please Note: Proposals to update the rules have been recommended to Congress every year for the past 18 years … “Hello Washington, are you listening?”)
We are in favor of modifying the ways that small businesses can borrow or raise investments. The reforms are simple and follow the spirit of the 1933 and ‘34 Security Acts: strong anti-fraud provisions; limited risk and exposure for unaccredited investors; transparency; standards-based reporting and a limit to the amount of seed capital a company can raise in this type of offering. It should:
a) Create an exemption for small business offerings (debt or equity) of less than $1,000,000.
b) Limit the maximum contribution by any one individual “unaccredited investor” to no more than 10% of their prior year’s Adjusted Gross Income or up to $10,000/individual, whichever is less. ($10,000 is also in line with banking, foreign exchange, and other established financial limits).
c) Require a set of standardized and automated procedures for these financing offerings to reduce time and expense for all parties while maintaining transparency.
d) Have investors complete an online form/test on the risks involved in private offerings before being allowed to invest.
e) Allow the creation of channels or sites where ideas, individuals, companies and investors can meet, be vetted by the organizations hosting those channels and entrepreneurial funding can take place. (The SEC could even go so far as to require the registration of these channels/sites for transparency purposes).
CHANGE CAN HAPPEN:
According to Section 3(b) of the Securities Act, the SEC grants the commission the power to:
Add any class of securities to the securities exempted as provided in this section, if it finds that the enforcement of this title with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering …
However getting the ear of the SEC, especially from a fragmented, non-wealthy, non-lobby group like startups isn’t easy.
It is time our Government eased the restrictions on capital formation for startups/small businesses or else we will never create the jobs our country needs to rebuild itself.