One of the biggest changes wrought by the JOBS Act was the expansion of the potential pool of investors to include people of all different incomes and wealth. Previously, one had to make at least $200,000 a year (or have assets in excess of $1 million) to get a crack at acting as a venture capitalist and providing seed money to budding young companies before they went public. Now, that’s all going to change. Smaller investors will be limited in the size of their investments (individuals making $100,000 a year or less will only be able to invest $2,000 or 5 percent of their income, whichever is more), but they will have a chance to use their cash to purchase equity in private companies.
Crowdfunding Creates a New Investment Landscape
Also interesting is the lifting of restrictions against soliciting investors for capital. Companies looking for investors no longer need to carefully court them through controlled interactions with a broker as an intermediary; they can advertise online and try to reel in the people who can help their company grow. This solicitation is only available to those companies that exclusively court accredited investors (and subsequently eschew the first-mentioned change in regulations), but it still changes the way companies can pursue funding.
But how might these things change the face of investing? In both cases, selling the idea that’s driving your company is potentially becoming more important. Having a core business plan that captures the imagination of the general public could help open a company up to a whole new strata of capital, either by helping companies with an imaginative driving idea access previously unavailable investors or by allowing a company to take their business plan to accredited investors more aggressively than was previously legal.
Some Sectors Benefit More Than Others?
But this could mean a shift in what industries and segments see the most seed capital. For instance, your micro-cap oil & gas company may be sitting on a lease with monster shale reserves that just require an initial investment of capital to tap into, but are you going to be able to explain the reason why your property is so valuable to someone who’s not a PhD geologist or industry expert with a decade of experience? If so, your situation probably hasn’t changed much. However, have a promising new idea for solar technology? Odds are the fact that your business operates in a promising new segment that can capture the imagination of a potential investor could mean these new rules are going to change your situation a great deal.
Only time will tell which sectors and industries are going to get the biggest boost, but it’s not hard to imagine the direction things could take early on. Here’s a few industries that may see an extra pop because of their ability to pitch their business ideas more effectively:
Much of the recent buzz about crowdfunding has its sources in the early forms it took on sites like IndieGoGo or KickStarter. Here, people could raise money for their projects and charities from the crowd in exchange for token prizes. In this case, though, there was no equity involved. People were effectively giving away their money. And, in some cases, to people who stood a real chance of profiting from the enterprise. So, Zack Braff, who was a successful TV actor for years, made $350,000 an episode on Scrubs, and has an estimated net worth north of $20 million, managed to convinced his fans to donate over $3 million to his indie film Wish I Was Here (which had a budget of just $2 million) despite the fact that Braff would, not only have zero obligation to share any profits with his backers, be legally obliged not to share any money the film might make. Hmm.
Given that fans appear more than willing to offer up financing without any promise of returns (aside from, you know, a T-shirt or something), there doesn’t appear to be much motivation to shift to an equity based model. However, it stands to reason that if fans were willing to pony up millions for this or the Veronica Mars movie for naught but a T-shirt, offering up a chance at sharing in a project’s potential profits should only make it easier. And the potential here, for an industry with the entire nation’s attention, is enormous.
It probably isn’t a stretch to say that the sector that should greatly benefit from crowdfunding is the tech sector. Tech has long been the “sexiest” of the sectors, offering up plenty of stories of insane returns on early capital. And with new social networking platforms springing up left and right, investors ready to make several high risk/high reward investments will have their chance to throw up some Hail Marys as they seek out the next Twitter (TWTR) or Facebook (FB) . And get used to that pitch. “It’s the next Twitter!” looks to be a popular one for the foreseeable future.
Two words tend to incite excitement whether reasonable or not: miracle cure. Could these new crowdfunding rules mean we’re headed towards a new era where the traditional traveling snake oil salesman is replaced by the micro-cap biotech company? Perhaps. Could we also be headed towards a world where medical innovations have an ample supply of cash to invest in research and development of life-saving new drugs? Indeed. Either way, while the physiology and science behind these efforts may be difficult, the potential of curing disease could be enough to keep the average investor’s interest piqued.
Retail investors are probably more likely to try and make a statement with their money, and early crowdfunding efforts (of the non-equity variety) leaned heavily on progressive charities. Well, now there’s a way for a nation of solar and wind power believers to put their money where their mouths are. Energy companies looking to remake the landscape of American utilities are likely to find plenty of able and willing investors happy to plop down cash to help get projects off the ground. It’s a new way to vote with one’s pocketbook, only with a potential for returns that your local environmental charity could never provide.
Or course, the assumption that all the new capital opened up by the JOBS Act will be dumb money is probably a flawed one. Like any market, one should expect consumers to gravitate towards decisions that best serve their interests. What’s more, as start-ups start failing (and lets not forget that the vast majority do), there should be some clear tightening of the purse strings. In the end, oil exploration companies could be looking at just as generous a supply of seed capital as solar companies. However, at least in the near future, the fact that there’s money to be raised by selling one’s company to the public should benefit those companies that are easily sellable the most.