Apr 13 2012

Why the New JOBS Act Is a Step in the Right Direction for SMBs

New bill makes it easier for startup companies to raise capital.

Startup companies are the lifeblood of entrepreneurial innovation. While they make up roughly 1 percent of companies, startups create roughly 10 percent of new jobs each year, according to research by the Kauffman Foundation.

Facebook, Google, Netflix and Zynga all got their start in business as scrappy, small, startup companies, and it’s this kind of ingenuity that the recently passed Jumpstart Our Business Startups (JOBS) Act is intended to stimulate.

A key part of the legislation that has gotten significant attention is the crowdfunding amendment, which was introduced to the bill by Rep. Patrick McHenry of North Carolina. Access to capital is tough to come by for many startup companies, especially for young entrepreneurs who often lack personal assets, such as homes, to trade for capital. The other option is to court venture capital, which can be a daunting and undemocratic means of sourcing investment for unproven ideas.

Crowdfunding flips this problem on its head and uses the hands of many to lift the heavy burden of raising startup capital. If you’re a fan of sites like Kickstarter and Indiegogo, the model should be familiar: Users pitch in varying amounts — anywhere from a dollar to thousands of dollars — to help make someone’s dream project a reality. For Kickstarter, the benefit in investing usually comes in the form of early access to the product or red-carpet treatment for a special unveiling.

But with the JOBS Act, small businesses will be allowed to raise up to $1 million through crowdsourcing, and crowdsourcers will actually get to own a small stake in the company. Before the JOBS Act, this model was illegal due to federal regulations, which have now been struck down.

Scott Gerber, founder of the Young Entrepreneur Council, couldn’t be more pleased with the passing of the JOBS Act. He wrote about his satisfaction with the legislation in a piece for TIME.com.

I think this show of bipartisanship sends a crystal-clear message to Americans, and to young entrepreneurs in particular: The U.S. government believes in our power to fundamentally change the economic course of this country. And our elected officials are finally allowing us the freedom to do so more easily, in part by using the crowdfunding platforms that have already made sweeping changes in the lives of many young inventors, fundraisers, artists and entrepreneurs who wish to make a difference.

That even our legislators can see through the barrage of well-intended criticism and understand that making it easier for small business owners to raise investment capital is a clear win for logic — and for long-term change. Around this same time last year, the Obama Administration hosted a conference called “Access to Capital: Fostering Growth and Innovation for Small Companies.”

The key takeaway? Capital investment fuels business growth in general, and it’s especially critical to sustain young, high-growth companies.

Would your small business turn to crowdsourcing to raise capital?


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