To the surprise and delight of entrepreneurs everywhere, the U.S. Securities & Exchange Commission (SEC) last week accelerated their proposal on Title III of the Jumpstart Our Business Startups (JOBS) Act under chairman Mary Jo White.
What’s the JOBS Act? It’s a U.S. law passed in 2012 that removes restrictions that previously made investing in small, high-growth businesses exclusive to individuals with net worths in excess of $1 million (also referred to as “angel investors” or “accredited investors”). When Title III is finally made law, which will happen soon, your aunt, who earns $200,000, will be able to buy up to $20,000 worth of ownership in your business — in addition to whatever else she might be investing in. (As per the proposed law, which for incomes of less than $100,000, you can invest $2,000, or up to 5 percent of your income or net worth; for incomes of more than $100,000, you can invest up to 10 percent of your income or net worth.)
Need an example?
Meet Alexandra Jordan, a 9-year-old coder who had a cool idea: to combat summertime boredom by scheduling play dates online, based on a kid’s school, grade and teacher. So let’s say, hypothetically, that after she launches her SuperFunKidTime, 1,000 families sign up, paying $9.99 a month, which investors commonly refer to as “traction.” She calculates that, with some investment in marketing and technology, she could grow to that membership to 200,000. Alexandra decides she needs capital.
When Title III becomes law, Alexandra will be able to crowdfund this capital from almost anyone. Today, entrepreneurs are restricted to raising money from a very elite, hard-to-access group of wealthy people. And breaking into the community of venture funding is almost impossible for most entrepreneurs. I was able to do it because I had every check mark in my favor — from the right college to a background in engineering and Web development. That’s worse than unfair; it’s anti-capitalist and anti-democracy. It’s stifling our economy and keeping bright entrepreneurs down.
Why is Title III a big deal? It removes the long-standing law that only “accredited investors” could take equity stakes in startup businesses — and benefit from the incomparable financial windfalls that startup acquisitions can reap on founders and their investors. My friend Eric invested his own $100,000 in a food company four years ago, only to receive a $700,000 check this year. Investors call this a “7x” (or 700 percent returns) over four years — unbelievable returns to any investor.
This law could dramatically level the playing field for entrepreneurs who've dreamed of raising money to rapidly scale what they believe is a mass-market product, but didn't have connections to a community of angel investors. Many refer to the JOBS Act as the next step in democratizing wealth.
When I was first raising capital for DailyWorth, I spent hours cataloging names I found on TechCrunch and AngelList, most of which seemed to revolve around the same cast of angel investor characters — mostly men, many of whom have built enormous wealth (in the millions and billions), most of whom are inundated by startup founders shopping ideas. Just getting a meeting, if you’re lucky enough and connected enough, can take months and months. If I was raising capital today, I'd start by checking out Plum Alley, a new crowdfunding website created by financier Deborah Jackson specifically for women entrepreneurs.
While I’m not advising you to run out and crowdfund your seed round, if you know you’re a mogul in the making, you should be paying very close attention to Title III. The JOBS Act is a giant experiment that could go up in flames. Most new businesses fail, so most new angel investors will lose a lot of money as the market learns how to balance the real risk — the BIG risk — and losses that come with angel investing.
But in the long run, I believe this enormous change to security laws will help ignite incredible growth in innovation among entrepreneurs, especially women who’ve historically struggled to find investors for this business. Stay tuned to CreateWorth — we’ll keep you informed as the JOBS ACT becomes real and we see this exciting new era in entrepreneurship materialize.