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Supporters of Crowd Funding For Startups Must Await SEC-Rule Making Process

Bill Payne, Angel Investor Now that the so-called crowd-funding measure has whipped through Congress with a speed and level of bipartisan support unheard of in recent years, the effort to make it fulfill its promise of creating new companies and jobs begins. And that may prove more challenging than its passage.

Before any entrepreneur with a can't-fail idea rushes to the Internet in hope of attracting a crowd of investors, the Securities and Exchange Commission must first set the rules on how provisions of the law will be permitted to play out. The agency has 180 days to fulfill those duties.

The legislation, called the Jumpstart Our Business Startups Act (JOBS) will dramatically expand the way new companies can raise money and the reduce the oversight for smaller companies doing initial public offerings.

After quick congressional approval last week, President Obama, who admits he first learned about the proposal in early March, will be signing the bill Thursday.

Supporters view it as a major breakthrough for funding entrepreneurial startups and thus eventually creating jobs. Critics are convinced it is a funding disaster in the making. Both will have to wait to see what the SEC comes up with.

That process that will draw its own critics as it unfolds and the fact it's now in the SEC's hands will likely create some apprehension for friends and opponents alike.

More than a few cynics have suggested that the bill's acronym, JOBS, is a key reason few in Congress dared oppose it despite a lot of whispered reservations.

What the bill seeks to achieve is the opportunity for people (crowds) to organize via internet websites to fund companies. Using the internet to raise money is a process that's long been utilized for charitable and entertainment purposes.

The crowd funding approach would open the way for people to invest as little as $500 and up to $10,000 in startups, eliminating the long-time steep financial requirement for investors, other than what's known as "friends and family" investors.

The kind of hype that has marked the rapid progress of this legislation through Congress is nowhere better displayed than on the website of Crowdfunding Offerings, which pitches its ability to provide an investment platform for "the crowd."

So here's the firm's pitch: "Crowdfunding investing will allow start-ups and existing businesses to raise funds for their companies directly from the public who will invest small amounts of money in return for shares in the company. Americans will finally have the opportunity to invest in ways that have historically been reserved only for the wealthy. Together, America's entrepreneurs and investors will launch the next great ideas of our time!"

When I write occasionally about angel-investing issues, I turn to friends from Montana to California who are leaders among angel investors, with an occasional venture capitalist thrown in. Their collective insights inevitably create a better understanding of the issues, but disagreements among them frequently abound. And so it was with the crowd-funding measure.

The most vocal and opinionated among my angel friends on this issue is Bill Payne, who summers in the Flathead Valley of Montana and winters in the Las Vegas area. Payne, who gets to a conviction about his views because of the respect he receives from angel investors across the West and beyond, describes the bill as "a train wreck waiting to happen."

"Lots of investors will get scammed," Payne suggests. "Just give it a couple of years and Congress will be asking the SEC how they ever let this happen!".

Mike Elconin, San Diego-based leader of the major Southern California angel-investor organization Tech Coast Angels, sums up a concern that even some proponents share.

"The danger is that this new law will engender an expansion of boiler rooms in which slick sales people convince unsophisticated investors to put money into companies at highly inflated valuations," says Elconin. "Whether you think this is a problem for government to prevent, or a matter of buyer beware, depends on your political philosophy."

Dan Rosen, a respected Seattle attorney-investor and a policy director for the Angel Capital Association (ACA), is among those who supported the legislation and helped author an ACA internet post to help inform angels on the bill

Rosen, at the invitation of the White House, will be on hand at the bill signing Thursday.

Liz Marchi, who presides over the Kalispell-based Frontier Angel Network, frames why many supporters have looked beyond those concerns at what many perceive as the underlying importance of the legislation.

"While there will inevitably be some hiccups in the execution of crowd-funding, I think it's a major breakthrough for early stage seed capital," she said. "Congress has certainly allowed some risk with this bill, but it drives private capital down the food chain where it is desperately needed to seed innovation."

Tom Simpson, former venture-capital leader who now heads the Spokane Angel Alliance, sees the new law as "not perfect, but a step in the right direction."

"But I agree with Payne that the more investors a new company has, the more the likelihood for problems," he added.

Republican Sen. Scott Brown of Massachusetts, who conceived the measure, offers perhaps the most compelling argument in favor of it.

He explained that the long-time practice of people funding their new businesses by mortgaging their homes is basically no longer possible. So a new source of start-up capital was necessary, particularly in the face of the disappearing hope of bank financing.

My own sense is that the typical congressional supporters of the bill went through the following conversation with themselves:

"Job creation is so politically important today that if it costs investors a few thousand dollars each down the road, it's worth it. Somebody has to pick up the tab for creating jobs and we certainly can't. Poor people buy lottery tickets all the time taking risk far greater than investing in a start-up company. So let's get on with it."

----------------------- Mike Flynn is retired publisher of Puget Sound Business Journal who now has a consulting firm, Mike Flynn & Associates LLC, and writes a weekly column called Flynn’s Harp. Contact him at Mike@emikeflynn.com if you would like to be added to the list of those receiving it via email, or to see previous Flynn’s Harp columns, go to emikeflynn.com and click on blogs.

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