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
