After Some Initial Doubts, I'm Sold On The JOBS Act

By Sarah Lacy , written on March 17, 2012

From The News Desk

Finding common ground between Silicon Valley and Washington DC on the laws around immigration and piracy was a huge challenge.

Likewise, you might expect passing legislation to make it easier for startups to crowd-source angel funding to be an equally large pain in the ass. Unless of course you call the new law "the JOBS Act", in which case it'll surely right through.

It doesn't hurt that H.R. 3606 is something that helps small businesses in a number of ways. Helping small business is bragging right gold on the campaign trail. After all, almost all net new job creation comes from companies less than five years old, and a vast chunk of the US economy is driven by small businesses.

But still the Silicon Valley brain trust doesn't want to assume such common sense will prevail. This is politics after all. Earlier today, AngelList launched an online petition pushing notes to all the entrepreneurs and investors in its network to sign up. Meanwhile SV Angel was urging its companies to Tweet their support.

There are two reasons for the get-out-the-Tweets-and-signatures campaign. The first is the bill would ease restrictions around one of the Valley's biggest pain points: The 500 shareholder rule that essentially forces private companies to have to disclose all sorts of information once they pass 500 shareholders. By taking away the main advantage to being a private company-- namely that you don't have to work under the restrictions of Regulation FD-- it essentially pushes companies to go public sooner than they'd like.

Most entrepreneurs believe private companies can move quicker and innovate faster, so forcing someone to go public because of an arbitrary rule that pre-dated modern practices like granting stock options seems absurd.

To most people in the startup ecosystem, that one is a no brainer. As is the easing of other restrictions like general solicitation. At last week's Launch conference startup after startup stood on stage and said they were raising a round. That's completely illegal right now. The legality around even a basic demo day is fuzzy, thanks to rules against general solicitation. As is an incubator or a site like AngelList posting boilerplate fundraising documents, because it's considered providing services of a broker/dealer, according to Naval Ravikant of AngelList. That's why ProFounder was shut down earlier this year.

Most of these things aren't enforced-- it's just the way business is done in the Valley and it's hard to prove it's hurting anyone. But a pioneering attorney general looking to make a name for himself could cause huge amounts of trouble for entrepreneurs if he wanted to.

The second reason to get behind the new law is simply because it looks so likely to pass. That may seem counterintuitive but the Valley is riding high after its Stop SOPA victory, which really caused a lot of legislators to stand up and take notice. This bill is an easy lay-up to rack up another win, and push next for much harder to pass bills like the Startup Visa.

The part of the JOBS Act that has given me-- and some investors I've spoken with-- pause is that it would make crowd funding of small businesses legal for people who aren't accredited investors. Two things will definitely happen: There will be fraud by someone and people will lose money. You can guarantee that with almost any free market.

Furthermore, when it comes to tech startups you are likely to have adverse selection when it comes to crowd funding. The startups that need it most are the ones who can't get funding from more strategic investors like VCs and angels who can help mentor and coach startups through their life-cycle. That leaves the scraps for the everyday mom and pops hoping to invest in the next Twitter.

I'm not hugely swayed by the argument that people can go to Vegas and gamble with $1,000 so why can't they invest it? I don't think we should model any securities laws around gambling.

But I am swayed by a few other arguments I've heard in the last few days. The first is that saying startups should raise money from the likes of Marc Andreessen and Peter Thiel [Pando investors, both] instead of the general public is a bit like Marie Antoinette saying "Let them eat cake." For most small businesses in the world it is just not an option. And does that mean they should have no option other than traditional banks and small business loans?

The second thing to note is that the crowd funding rules are really tailored more for small businesses than tech startups. If my coffee shop I go to everyday and love wants to raise money to expand its operations, the community may very well want to pony up $100 here or there after scouring their financials and understanding their business plans. That's not strictly legal now if you aren't wealthy. Part of this is motivated by civic pride.

Part of this isn't about a return, it's about letting fans of a company be the owners. On a public company level, wanting to own a piece of something you love was what made the Netscape IPO such a retail investor phenomenon. It's why people own Disney and hang the stock certificates in their kids' rooms. And it's a big reason Apple is one of the most valuable companies on the planet. Disseminating that on a neighborhood level is a cool idea.

It's like the Green Bay Packers, or to pick a media example, Public Radio. We even give out "I'm an Investor in PandoDaily" T-shirts to people who come to our monthly events, because we believe the community is what will make us a valuable company. Without an audience, we're nothing. Indeed, a lot of the people who've bought $1,000 annual passes to our event series have told me they're doing it to support us. That pays reporters' salaries along with the money we raised from investors. Are the two so different?

A huge detail is that the bill limits the amount of money that can be invested $10,000 or 10% of your annual income, whichever is lower. No one will be "gambling" away his whole paycheck

The concern with crowd funding is the same one I've long had with secondary markets. Ultimately, both are potentially very positive, and if you are a fan of free markets, you should trust that they'll both be more good than bad. But both are ripe for abuse and excess.

As with the secondary markets, if the start up community wants to push for this bill, it's incumbent on the startup community to set up exchanges that don't allow fraudsters to bilk mom and pops. Otherwise the SEC will rapidly ruin a good thing with bad regulation.

After weighing the pros and cons and talking to a lot of people on both sides, I decided the bill was indeed a no brainer for an entrepreneur like me to support and I signed the petition. I urge you to do the same.