Montag, 15. April 2013

Moving To Prime Time

A year ago this month, the Obama administration passed its Jobs Act, which changed and created new funding opportunities for new ventures. Included are components that would allow for crowd funding for startup companies. Want to start a coffee company? Sell 1 million private shares for $5 a share and now there is $5 million to buy all the packaging and green coffee beans needed.

Except for the fact that it is still illegal. The government agency that regulates investments is the U.S. Security and Exchange Commission. It was created in the midst of the Great Depression to protect the so-called “widows and orphans” from unscrupulous investment banks — and even from themselves.

SEC was created,” said Jim White, another panelist and CEO of JL White International. White has bought, sold or expanded 22 companies. “The change won’t likely happen this year and not likely in 2014 — the two sides are too far apart in the language of the rule change.”

It also has the potential to turn the venture capital industry on its ear. Today, nearly all the venture capital is in the hands of relatively few investors — the big venture firms in Silicon Valley such as Kleiner Perkins Caufield & Byers and the Mayfield Fund.

But with crowd funding the opposite would be true — instead of a few big investors, there would be thousands or tens of thousands of small investors.

“It would be an entirely different funding model,” Barbeau said.

Traditionally, pension funds such as CalPERS or insurance companies — institutions with the financial wherewithal — are the partners investing money in the venture capital firms. Venture capitalists are more than investors. They are technologists, C-level managers from large corporations. Some even have advanced degrees in biotechnology or other disciplines. They have the expertise to evaluate a company seeking funding before the first greenback finds its way into the startup’s checking account. In short, they determine how much the company is worth.

As White said, “The value of a business is directly tied to its size, its predictability and sustainability, and its actual and potential growth rate of earnings.” Because something is a good idea doesn’t mean it will make a good company. Yet the proposed rule change will place those decisions, in one form or another, in the hands of regular investors. The only certainty right now is the SEC has its work cut out figuring out how to loosen the rules while still protecting widows and orphans. View The Full Story At The Californian