Michael Mayernick, co-founder of the D.C. Web optimization company Spinnakr, has had several friends offer him small investments in exchange for a stake in his company. But because of regulations that make it unlawful to raise funds from unaccredited investors, so far, he’s turned them all down.
With the passage of the JOBS Act, however, Mayernick would likely be able to take on such investors in the future.
“It always helps to have the first money in when you’re raising money from professional investors,” he said.
In fact, it may soon be much easier for start-ups to raise money and go public in a number of ways. The Senate version of the Jumpstart Our Business Startup Act cleared the House of Representatives last week in a 380-41 vote, and the bill now heads to the president, who has said he will sign it.
For entrepreneurs, one of the bill’s most anticipated provisions is the establishment of a framework for crowdfunding — enabling small companies to solicit equity capital from myriad small-dollar investors over the Internet.
AOL co-founder and Startup America chairman Steve Case, who was a vocal advocate for the bill, said the crowdfunding provision would help entrepreneurs who don’t live in venture hot spots like Silicon Valley or New York City, or whose business models don’t appeal to venture capitalists.
“Capital is not adequately deployed across the nation, and this will be another tool that will help provide capital to underserved regions,” Case said. “Overall, that will be a good thing for innovation and for job creation.”
To gin up support for the issue, more than 5,000 entrepreneurs and venture capitalists sent a letter to Senate leaders last week. One of the petition’s main organizers was Naval Ravikant, who runs AngelList, a type of social network for investors. Ravikant said he feels the bill rolls back outdated regulations such as the rule prohibiting businesses from advertising that they’re seeking investors. That made it technically illegal for entrepreneurs to announce that they’re fundraising at pitch competitions and other public forums, even though entrepreneurs routinely do so.
The act’s backers also include more established companies, such as Jess3, an interactive agency in the District. The company added their voice to Ravikant’s petition as a way of expressing solidarity with the entrepreneur community.
“While it may not be a direct impact on a company like ours, we want the ecosystem for start-ups to be as healthy as possible,” Jess3 President Leslie Bradshaw said.
The act includes other measures that would loosen regulatory requirements for smaller companies seeking to go public by creating a new classification called “emerging growth companies.”
It also provides for “mini” public offerings, under which companies raising $50 million or less would not be held to some of the financial disclosure requirements that most publicly held companies are subject to.
Critics of the loosened regulations include some labor unions, regulatory groups and a handful of Senate Democrats, who warned that the bill may undo necessary financial protections under the guise of boosting jobs.
Jeffrey Stibel, CEO of Malibu, Calif.-based Dun and Bradstreet Credibility Corp., said there are some potential pitfalls to having more investors participating in the financing of small companies.
“Under this bill, you can now go to my grandmother and say, ‘I want you to invest in a company,’ but the whole thing can be effectively a scam,” he said. “Previously, you had to go to a qualified investor, who has enough sophistication to sniff out fraud.”
As a measure of protection for investors, companies seeking crowdfunding investment would still file with the Securities and Exchange Commission under the act, and one amendment would limit individuals with an annual income or net worth of less than $100,000 to investing 5 percent of their income in crowdfunding.