What if I told you, hereâ€™s $1,000.Â Consider it yours.Â Assume like most of your hard earned dollars it took you a good bit of time and energy to earn it.Â (Feel the emotional attachment you have to it and like all your hard earned dollars not so easy to part with).
Assume that you have seen at least some of the news over the last 3 years; the financial meltdown, the government bailouts, the recession, massive unemployment, the Madoff ponzie scheme, insurmountable national debt and the roller coaster ride on Wall Street.Â Consider how this makes you feel about your investments, our economy, and our future prospects as a nation from both a business and political standpoint.
Now assume someone you know for one reason or another is one of those â€œoptimistic entrepreneursâ€ we read about and is interested in starting a business venture for which you are interested in backing for a few reasons; a) It solves a need for which you see value.Â b) It has a business model that looks like it can make money (after all youâ€™d probably buy his product or service). c) It has the potential to create jobs (not only for your peer but for all the other people he is going to need to hire to grow the business.Â Those jobs can also provide income that is re-infused into the economy to help dig us out of the recession). d) It has the ability to provide taxable income to the government from wages, income and property tax (which will be useful to paying down our national debt).Â And e) it has the potential to provide a return to investors.
Sounds good, right?Â It should because this is how our economy works for highly capitalized businesses.
So your peer heads out looking for $50,000; the average amount a startup needs today to kickstart an idea.
However, the traditional means of financing have disappeared since 2008.Â The availability of bank loans is sparse.Â (Try applying for a loan in todayâ€™s environment.Â And please donâ€™t consider the tax dollars we used to bail out the banks.Â Apparently that was just for them to hold as deposits).Â Credit cards.Â Well you can use your credit cards as long as your credit limit was not dramatically reduced after the financial meltdown and you donâ€™t mind paying around 21% APR on any balance you hold.Â Private money.Â Not all ideas are the next Facebook.Â Actually only 2% of all deals qualify for private money. Â Â Dismal yes, but true.
So rather than give up, your peer decides to hit up his network of friends and family. He put together a pitch to educate you about his idea, himself, how his idea will generate cash, how much money he needs, how much equity heâ€™s willing to part with in exchange for the $50,000 investment and what milestones heâ€™s set for that $50,000.Â This new form of fundraising is called crowdfunding, where groups of people pool small dollar amounts to help kickstart ideas.Â So hopes to raise money from up to 500 peers.Â (Given the experience on other crowdfunding sites, he expects the average amount to be around $100).
Now letâ€™s circle back to the top.Â Youâ€™ve got $1,000.Â It isnâ€™t invested in the volatile markets.Â You believe in the US, the entrepreneurial nature of our country and think that entrepreneurs like your peer can help save our economy by giving the chance to build an enterprise.Â On top of that, you or someone directly related to him, actually knows and believes in him and his idea.Â You also know how to reach him for updates and can provide knowledge, experience, marketing and purchasing power to help him succeed.Â So you decide to invest $100 of the 1,000 in his idea.
And after all, why not?Â It isnâ€™t your savings.Â It isnâ€™t your retirement.Â It isnâ€™t money you have invested in the markets.Â You can easily spend $100 on a fancy dinner, although you canâ€™t really buy many electronics, car or house for that amount. Â You need to use your personal savings for that.
However it is ILLEGAL!
According to the security laws written 80 years ago.Â Thereâ€™s a chance your good intentioned peer could end up in jail because:
a)Â Â Â You arenâ€™t a millionaire (aka â€œaccredited investorâ€).Â Did you know you have to have a net worth of over $1M or make an average of $200,000 for the past 2 years to invest $100 into your peer? or
b)Â Â He asked more than 35 people.Â Sometime back in the 1980â€™s the SEC arbitrarily set the bar at 35 unaccredited investor.Â Our friend above would have gone over that limit by 465 people. or
c)Â Â Â He solicited these investments from friends online.Â Yes an Internet request for funds from a â€œpersonal social networkâ€ is considered a â€œpublic offeringâ€ and hence requires the full registration requirements of the SEC.Â This can cost from $75,000 to several million in legal and compliance fees.Â So he needs to raise money, just to raise money.Â Makes sense, no?
Are you beginning to get the idea?Â Weâ€™ve cut off the spigot to funding our future entrepreneurs.Â If traditional capital isnâ€™t out there and we canâ€™t turn to our friends and family, then what is the trade-off?Â We fail to fund the next generation of entrepreneurs.Â We fail to provide the jobs that will provide the income to stimulate our economy and tax revenues to our government.Â And we fail to stand for that which is the basis of our country â€“ life, liberty and the pursuit of happiness.Â (Drama purposely put in for Hollywood effects).
There is a solution.Â And it lies not in deregulation but in reframing how startups and small businesses can access a limited amount of capital under the current rules.Â It requires entrepreneurs to complete certain disclosures and submit to background checks.Â It requires that investors acknowledge that there might not be a return on their investment.Â And it also requires the full vetting power of the crowd and the Internet to determine the veracity of the entrepreneur and his idea prior to funding.
Remember that emotional attachment you had to your money above? Â Our point is everyone has an emotional attachment to their money and parting with it is no easy task. Â Try being an entrepreneur raising $50,000 from an interconnected group of people who are questioning him all the way until he reaches his $50,000 target.Â It wonâ€™t be easy. The crowd will weed thru what they think is worthy and what they donâ€™t.Â Those that donâ€™t pass the muster of the crowd wonâ€™t get funded and no one will lose a dime (although there might be a sour entrepreneur).Â Those that do â€¦ well they just might be the future job creators of America. Â Â Isnâ€™t it time that we made some zero-cost government changes to help our nationâ€™s entrepreneurs?Â Tell Washington you think so.Â Sign our petition: https://startupexemption.com/?page_id=36#axzz1V5Sw1Des.
Ps â€“ The above story can also be told from the perspective of a small business that has been around but doesnâ€™t have the access to working capital but can offer dividends, discounts, or rebates in exchange for equity.