The United States has adopted a financial culture where banks are too big to fail and individuals are too small to succeed.
The financial crisis and the consolidation of banking titans made it increasingly difficult for small business owners and hopeful entrepreneurs to obtain the crucial capital for enterprise.
Small businesses need a new line of credit, and the solution is crowdfunding.
Crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet,” as defined by Forbes.
This is a golden opportunity for potential entrepreneurs that might have difficulty putting together the necessary collateral that banks demand to back loans.
An individual or a group with a new innovation can go to one of the several prominent crowdfunding websites, each tailored to a specific market, and pitch their idea. Frequenters of the website can read the pitch and decide if the idea is worth investing in. Some sites offer equity stakes in the new startup. Some offer the product itself either for free or at a discounted price and others just monetary rewards.
For example, if a group wanted to attract investors to produce a film or videogame, or if an unsigned band wanted to produce their own album, then they could pitch their product on a website like kickstarter.com.
More traditional businesses can find potential investors on fundable.com. Media artists should look to rockethub.com and humanitarians can start a charity at indiegogo.com.
Under the “Jumpstart our Business Startups,” or JOBS Act, government regulations were eased to encourage individual investment in startup businesses, according to whitehouse.gov. The bill mandated that the Securities and Exchange Commission define regulations for crowdfunding.
The only problem is that the SEC missed its Dec. 31 deadline. According to the National Small Business Association, crowdfunding is now technically unavailable to small firms.
Good job, government. The SEC presumably has yet to determine the regulations required to protect investors from potential fraud and intellectual property theft. That is a legitimate concern since only a few of the websites contractually require that funds be returned to investors if the startup fails to get off the ground.
But the JOBS Act was passed with bi-partisan support, one of the few last year, in April of 2012. It’s going on 11 months and the SEC has made no real progress.
The aforementioned websites still operate and people can still invest, but without the protection of the JOBS Act, the scope of the operation is severely weakened.
President Obama is set to appoint a new head of the SEC, Mary Jo White, an attorney that New York Times financial columnist Andrew Ross Sorkin predicts has her sights set on punishing Wall Street. She has yet to comment on whether or not she will address the crowdfunding issue.
The crowdfunding backers have already established a private self-regulatory organization called the Crowd Fund Intermediary Regulatory Advocates. They seek to self-regulate and create safeguards to protect investors and innovators alike in this rapidly evolving industry.
The SEC needs to get its act together on this. There are not many other avenues for risky businesses to acquire capital.
Regulations encourage banks to keep high capital reserves in order to cover leverage. Rock-bottom interest rates and the fear of default limit the level of available venture capital. Meanwhile, corporations fearing problems like those in Europe hold large sums of cash in reserve to act as a safety-net.
Small businesses comprise 99.7 percent of United States employer firms and 49.2 percent of private sector employment, according to the Small Business Administration Office of Advocacy. The SBA also reports that among high patenting firms, small businesses produced 16 times more patents per employee than large firms.
Considering that the SBA report indicates small businesses accounted for 64 percent of the net new jobs created between 1993 and 2011, the government should be concerning itself with making it easier to operate a small business.
The SEC’s failure in this matter is reprehensible. Go out and invest, innovate and urge the SEC to act.
Economic decline is not the ‘new normal.’