Previously I wrote an article about Locavesting, an investing term used to describe investing in small businesses.
As a small business owner, I have a vested interest in the capital markets for small businesses. As an investor, I have a (potentially) larger stake in the rules, regulations, and tax laws that government small business development. I apologize in advance for talking so much about small business, but…
I’m going to keep talking about it. Today, I wanted to cover new changes to the regulatory environment that could change the financing game for businesses forever.
Believe it or not, Congress and the President are backing the idea of deregulation. Yeah, it’s crazy, right?
Deregulating finance! Finally – you’d think finance were some kind of hard drug or something.
Anyway, the goal is to loosen the restrictions on crowdfunding to essentially allow anyone the opportunity to sell shares of stock in their business to investors over the internet. It sounds insanely crazy, but also really cool. As a small cap investor, I totally dig the idea of having a new marketplace with hundreds of thousands of tiny little companies trading like pieces on a Monopoly board.
Here’s how the bill would change so-called crowdfunding:
- Allow small businesses to advertise the sale of securities to raise capital.
- Offer for sale equity in a business—shares of ownership in a company. Currently, raising capital from the sale of stock is illegal without going for an IPO on the public markets, registering with the SEC, or seeking capital only from accredited investors.
- Have as many shareholders as needed (there might be a cap of 2,000 shareholders) for up to $2 million of funding. The current law allows less than 499 shareholders.
- Allow investors to invest as much as $10,000 or 10% of their income in a growing business. Currently, only accredited investors (investors with annual income of greater than $200,000 or $1 million in net worth) can legally invest in the equity of a small business.
This is by-far one of the best pieces of legislation to come from Congress in a very long time. Allowing business owners to raise capital directly with the sale of equity to individual investors would do plenty to free up the capital markets for small businesses. As it stands, banks have a virtual monopoly on small business loans, but have not been active in funding small companies.
Crowd Funding Potential
The potential for crowd funding a business is huge. Here are a few businesses that could flourish from crowd funding:
- Real estate – Think about how easy it would be to make available broad real estate investments in single-family homes. One could finance a real estate transaction by seeking crowd funding for rental homes. Several different people–or even several hundred–could buy into a new company formed to purchase an apartment complex, for example.
- Business development companies – Serial entrepreneurs could raise capital to create their own flavor of “private equity” funds. A businessperson could crowd fund the purchase of an existing restaurant, coin-op laundromat, gas station, or any of the many businesses available for sale at any one time.
- Ordinary small businesses – Perhaps least “game changing,” one could easily finance their own small business with an equity sale. New tech firms would find it far easier to raise capital for a startup. Existing businesses could sell equity to crowd funding investors to “buy out” a partner in the business. The list goes on and on here.
”But What about the Children!”
Any time any government turns to freedom to solve a very serious problem, there are dissenters, most of whom fear that deregulation will empower the crooks. This may be very true—it will be easier for scammers to raise funds for sham businesses. As a side effect, legitimate businesses will also find it easier to raise capital!
The cynic in me says that even regulation can’t get rid of crooks—the educated-cynic in my head knows that there are far more “scams” today despite more regulation. Anyone who understands basic accounting can find more than enough “untruths” in corporate income and cash flow statements.
I don’t think we need some kind of Surgeon General’s warning on investments, anyway. I can’t exactly see a new public market for small companies replacing Las Vegas, but I can see where thousands of small businesses would have funding opportunity like never before.
Now we need only wait for the Senate to make this bill law!
Photo by: HowardLake