On Thursday, President Obama passed the JOBS (Jumpstart Our Business Startups) Act, a collection of laws intended to stimulate the growth and number of startups in the US this year. Obama’s mastery of internet crowdfunding was critical to his own electoral victory in 2008. Now he’s expanding its potential. By relaxing regulations on capital raising (allowing small business to crowdfund as well as to bypass the stringent SOX Act of 2002 for five years of operation), he’s granting companies flexibility in how and when they go public.
How is this relevant to Europe and what do you need to know?
Now that startups can raise money from anyone, there’s going to be greater competition coming from the US in terms of sheer number. This means for every 10 startups currently vying for money from the US, you should prepare for hundreds. Every last popsicle stand and save-the-monkeys app are going to be soliciting for funding your team is already vying for, and, given the American public still has money left, there will be a lot of fresh cash to access.
1. For every US company competing in your market, expect 10 more.
“For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in,” said Obama on Thursday. The new legislation will bring on a lot of American hopefuls (Isn’t that in our DNA?) What about accredited investors? In the short term, the democratized landscape will increase their involvement rather than exclude them. (One investor in the Valley told us that a crowdfunded startup would be more attractive to him than a bootstrapped one.)
2. This doesn’t mean they’re going to be any good.
Unless the SEC (or an empowered self-regulatory organization overseen by the SEC) sets clear, enforceable standards, it is unlikely that credential funding portals will both responsibly and intelligently manage the impending onslaught of equity offerings. There’s currently a 270-day brainstorm (“regulation-writing period”) taking place to prevent crowdfund investors from getting swindled, but the solution has not yet been heard. Got any ideas? Tweet @BarackObama.
3. Remember your stinky SOX.
In 2002, Congress enacted the Sarbanes-Oxley (“SOX”) Act in reaction a number of major corporate and accounting scandals like Enron, Tyco International, and WorldCom. The law required tighter corporate governance and internal controls at public companies. It also enhanced financial disclosure requirements, requiring “principle offices” (CEOs) to certify and approve the financial integrity of their company quarterly. This onerous act prevented small companies from gaining access to the public market.
4. Consider creating a joint venture with a US-based startup.
Obama witnessed that SOX limited small businesses. The new IPO on-ramp part of the legislation allows companies permission not to comply fully SOX until five years into their initial public offering (less if the company reaches $1 billion in gross revenue, $700 million in public float, or issues more than $1 billion in non-convertible debt in the previous three years.) For the most part, this will allow startups to access public capital much earlier. If you’re a European-based business, either consider opening a subsidiary and bank account in the US, or partnering. Either way, get involved.
4. Where the SEC isn’t watching, you need to. This isn’t the lottery.
Before the JOBS Act, a company had to register with the SEC once 500 distinct entities owned shares. Now it’s been moved up to 2,000, excluding employees. This means that companies can stay private for longer, in the meantime building up the revenue stream that public markets reward. This 2,000 shareholders number may be intended to allow community banks to issue banks to their employees, for instance, but it can also lead to manipulation. (Facebook has one investor called Goldman Sachs that then has shareholders behind it.) When a company “goes dark,” illegality and corruption are likely. Without the SEC, quality will be harder to detect.
5. If possible, build an effective startup assessment platform.
Crowdfunding directories and portals are forbidden from making recommendations on investments, and so there’s a chance the system will prove incomprehensible to amateur investors. Without rankings, scoring, or editorial advice, the value of particular startups could prove difficult to discern. The SEC will have trouble taking this on itself. To try and address the need companies like CrowdCheck and EquityNet are scrambling to build tools that will effectively help investors. You could build the solution from Europe. If you have some time, I’d suggest working on it.
6. Learn how to market yourself early.
The lifting of the “general solicitation” ban for investments will allow companies to promote themselves before they even have a product on the table. Companies in early stages can raise awareness, create buzz, and secure funding at a very early stage. So make sure you reach out to international press early on (and English-speaking press here) to get your message out broadly.
7. If you want funding, be a niche-cause.
This Act will likely produce a lot of hot air. Its most productive, long-term effect will be its ability to shine light (and get funding to) companies who traditional VCs may neglect out of social disinterest. This is the time for the environmentally-conscious to wave your hands high. You will get the attention from the community sooner than B2B companies looking to make a dime for their personal bank accounts. It’s time for community startups. Get on it.
8. Be the next Steve Jobs. Not the next Bernie Madoff.
If you’re planning to make use of crowdfunding in the future, the most important thing to keep in mind is your integrity. The ability to create a scaleable business on the Internet is an incredible responsibility. At the end of the day, whether there’s the SEC or anyone else overseeing what you do, management teams have fiduciary obligations to their investors. If you’re lucky enough to attract money from the masses, treat them wisely. (And, crowdfunding leaves startup officers vulnerable to personal liability in the event of a lawsuit by investors.)
9. Consider looking into what your government is doing.
Whether we agree or not, the JOBS Act marks a significant moment in startup history. It’s time to ask: What is your country doing to promote or inhibit your access to investment cash? To equity? Is there a value to a political system which regulates businesses tightly, or can businesses around you use a little less restrictors? Will the United States pioneer crowdfunding options or is Europe preparing an innovative internationally applicable platform that will blow all American options out of the water? In an international startup climate where everyone’s a potential investor, it’s important to know who’s leading.
10. Try to get Ralph Nader to invest in you.
The Act has spurred a lot of criticism from concerned administrators- ranging from SEC Chairman Mary Schapiro to our favorite political activist and sixth-time presidential candidate Ralph Nader – who believe that reducing transparency will leave investors vulnerable to any huckster on the Internet gutsy enough to ask for your money. Nader hated the Act so much he even wrote an open letter to Obama calling it a “ravenous beast in sheep’s clothing.” Maybe now’s the time to write him a letter about why you really hate it/want him to fund your startup?
Anyone else think it’s a little wierd he doesn’t write this part in first person?
For Obama’s full LinkedIn resume, click here. For relevant reading, check out:
The Future of Crowdfunding, fresh from the Valley
Upcload goes live in Germany, prepares for US launch
Five Ways to Get One Major European VC to fund your startup