Entrepreneurs win half a loaf with the JOBS Act

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President Obama this week plans to sign the JOBS Act, loosening regulations that have slowed the economy by preventing entrepreneurs from connecting with investors.

Liberal critics attack the bill as a pro-Wall Street deregulation, but the measure actually helps ordinary Americans bypass big banks, investment brokerages and large investors -- which might be why some senators weakened the bill, inserting regulations that protect the big guys from new competition.

A top lobbyist for large investors successfully pushed restrictions on how much money entrepreneurs can raise through "crowdfunding."

Crowdfunding is a way of financing a business venture without a financial intermediary or a stock exchange. Currently, if a small-businessman is seeking investors but is not ready to go public and comply with the Security and Exchange Commission's burdensome regulations, he likely sells portions of his company to large investors, partly because a few large investors are easier to round up than hundreds of small investors.

Small investors, meanwhile, currently turn to financial planners or investment firms to help them place their money.

But the Internet and social networks can change these relationships. "It's the natural evolution of Internet commerce," finance expert John Berlau of the Competitive Enterprise Institute argues. Ask travel agents, auctioneers or the classified-ad departments of newspapers about what the Internet has meant for them.

But there's also a regulatory barrier keeping startups and small investors apart: Under current law, only "accredited investors" -- people with more than $1 million in assets (excluding home value) or $300,000 in income -- are allowed to buy shares of companies sold outside the SEC's burdensome regulatory structure. These are known as "angel investors."

These SEC regulations have some perverse effects. Online auctioneer eBay, for instance, cannot allow you to sell "any portion of an ongoing business." But as I write, a small-businessman in North Carolina is legally selling -- on eBay -- his gas station and convenience store for $1.2 million or best offer. So you don't need SEC approval to sell 100 percent of a business, but you're a felon if you try selling a 99 percent stake, or 1 percent, without jumping through Uncle Sam's hoops.

You can see why crowdsourcing would be a godsend for both small investors and entrepreneurs, but you could also imagine why many established industries don't like crowdsourcing. What if investors didn't need to go through Charles Schwab or Fidelity, but they could go straight to the businesses they found most promising? And what if an entrepreneur could raise $100,000 from 2,000 Facebook friends? She wouldn't need to turn to some wealthy angel investor for a single six-figure check.

That's why angel investors fought for restrictions on crowdfunding. Catherine Mott, chairwoman of the Board of Directors for the Angel Capital Association, sits on an SEC advisory committee. From that perch, she argued that if crowdsourcing is to be legalized, Congress should "provide a maximum amount of funding the issuers [startups] can raise via crowdfunding ($1 million, or if possible a smaller amount like $500K)," along with other restrictions, she wrote in an email later published on the SEC website.

Incumbent businesses in other industries don't like crowdfunding either. The CFA Institute, lobbying on behalf of Chartered Financial Analysts, found in a poll that only 29 percent of its members favored the JOBS Act in its early, pro-crowdfunding form. The institute advocated some regulations on the crowdfunding the bill would legalize.

If investors are free to go straight to entrepreneurs, with only a website as a middleman, financial advisers may find their services in lower demand.

These industries disliked the House bill, which was sympathetic to crowdfunding, and they scored in the Senate when Jeff Merkley, D-Ore., inserted an amendment barring businesses from raising more than $500,000 in equity from crowdfunding. Merkley's amendment also bans any crowdfunding not done through intermediary platforms. Berlau says this provision "basically kills crowdfunding by subjecting it to much of the red tape and legal liability of public companies."

Merkley's Republican co-sponsor was Scott Brown, whose top donor, Fidelity Investments, would be hurt by crowdfunding.

The JOBS Act is good legislation, but the constraints the Senate imposed on crowdfunding are another demonstration of how big business uses "consumer protection" regulation to keep out competitors.

Timothy P.Carney, The Examiner's senior political columnist, can be contacted at His column appears Monday and Thursday, and his stories and blog posts appear on

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