Friday, May 13, 2011
What if more people could buy into startups easily and inexpensively?
One of the key hurdles for any kind of startup or growing business is access to capital. The web is proving out many new ways to make small loans available (I'm a Kiva member) but there is no legal way to use these same tools to sell equity ownership in an organization.
Startups and small businesses can not solicit investments directly from most people without going through a costly Securities and Exchange Commission (SEC) registration.
When my friend and recent business partner Dave and I started our manufacturing business we initially invested our own money and then small amounts from friends.
When our business started winning awards and growing quickly, we needed to raise outside money from a larger circle. Because we could not afford the SEC registration, we were limited to soliciting investments only from accredited investors, which is a legally defined term roughly meaning 'wealthy enough'.
We could not offer a chance to invest in our growing business through a general offering to peers in our industry, to our enthusiastic customers or to the significant audience of individuals who were looking to support green manufacturing and sustainable jobs.
Offering a wide range of people a chance to invest small amounts of money with innovative new businesses would launch millions of new enterprises. Importantly it would grow a valuable new culture of entrepreneurship and ownership throughout our society.
What if we could utilize social media and crowdsourcing to quickly and inexpensively assemble small, enabling funding streams to launch and grow new businesses and new jobs?
I think our country needs to experiment with this starting yesterday. But we can't do it because of current SEC rules which are now about 80 years old.
This may be changing.
Bloomberg BusinessWeek just published an excellent article by Professor Scott Shane, award winning author and entrepreneurship researcher at Case Western University.
My takeaway is the high value in making a change in SEC regulations that will allow small investments ($100 max) with a maximum investment to the enterprise of $100,000. This is a game changer:
Let the Crowd Buy Equity in Private Companies
Bloomberg BusinessWeek. May 3, 2011. By Scott Shane.
"The SEC should change its rules to permit entrepreneurs to use crowdfunding to sell equity. The risk would be no greater to investors than that posed by accepted online lending models."
"Every year venture capitalists and accredited business angels invest in only about 15,000 of the 27.5 million businesses in operation in the U.S., according to my analysis. Many new businesses being started in the U.S. every year could use small amounts of external equity. Analysis by sociologist Paul Reynolds in the Entrepreneurship in the United States Assessment, a survey of American adults undertaken in 2004, shows that a typical new business has only about $15,000 in initial funding, of which $6,000 comes from the entrepreneur."
Why Not Exempt $100 Contributions?
"Allowing entrepreneurs to raise equity online will impose no more risk on funders than they currently face lending money to entrepreneurs online. Last year the Sustainable Economies Law Center asked the SEC to exempt equity crowdfunding efforts of $100,000 or less, with no more than $100 to come from any individual. Allowing investors to purchase such tiny amounts of equity in other people's companies doesn't seem to impose a significant risk of financial loss on individuals."
I'm very impressed by the logic of this argument and I'm excited about the possibilities for entrepreneurship, new businesses and new jobs this effort represents.
Bloomberg Business Week article, 'Let the Crowd Buy Equity in Private Companies'
Professor Scott Shane, Professor of Entrepreneurial Studies at Case Western Reserve University. Author of 'Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by.' 2009 winner of the Global Award for Entrepreneurship Research.
Blog post. Case Western Graduate School of Business. Business as an Agent of World Benefit. About our work at the Wisconsin Innovation Kitchen.
"What's important is getting the whole community more entrepreneurial." MIT program for entrepreneurship.
Kiva.org Online lending for global entrepreneurs.
IRS LLC page