The passage of the Jumpstart Our Business Startups (JOBS) Act into law by President Barack Obama on April 5 had many wide-ranging implications for small businesses, but a bigger impact might be made on investors. That's because, this new law has opened the traditionally private world of investing to the masses.
The JOBS Act aims to help small businesses go public by giving a reprieve from Securities and Exchange Commission regulations. The new law will also help small businesses to raise money and gain investors through crowdfunding, which allows more people to invest less money into companies.
"There’s an interesting cultural shift happening with the passage of this bill," Clifford Holekamp, senior lecturer in entrepreneurship at Olin Business School at Washington University in St. Louis said. "Traditionally, private equity investing was only for the wealthy. You had to be an accredited investor to be marketed to for private equity investment in an entrepreneurial firm. As such, an entire investment class was excluded. With this bill, the angel investment community will be opened up to a much broader audience."
While securing investments may now be easier, there may also be problems with the quality and experience of new investors.
"Angel investing often comes with more risk than reward," Holekamp said. "It’s the most risky asset class you can invest in. However, angel investors frequently choose to invest for reasons other than strictly economic ones. I would argue that the previous protections were excluding the typical person from an entire segment of our business culture, the ability to participate in the investment and ownership of a startup business."
Overall, Holekamp believes that the benefits of crowd-funding and the new law greatly outweigh the potential negatives.
"This bill will enable a major cultural shift in the context of social media and the power of the crowd," Holekamp said. "The old regulations were structurally blocking the power of the crowd to fund businesses. That obstacle is being knocked over and now the 'average' person will be able to participate in this investment community, for their own betterment or at their own peril. I think this could also enable a whole new generation of entrepreneurs who weren’t even at the table before. This is much more democratic for both the entrepreneurs and their investors."
Reach BusinessNewsDaily staff writer David Mielach at Dmielach@techmedianetwork.com. Follow him on Twitter @D_M89.