Today marks a new era in entrepreneurial finance as the measure in the 2012 JOBS Act (Jumpstart Our Business Start-ups Act) allowing “emerging growth” companies to ask accredited investors for equity investments publicly (e.g., through social media) without having to register the shares for public trading goes into effect.
This means entrepreneurs will now be able to raise up to $1 million a year through crowdfunding, which has been praised for democratizing entrepreneurial finance by allowing a larger pool of investors to take part in helping emerging startups grow. This method does away with the need for personal connections to investors that has been necessary in most VC circles. As the New York Times explained this past weekend, this JOBS act legislation marks a significant departure from previous regulation that said equity investments had to be done privately until a business was ready to enter the public markets.
As the article points out, there are critics who worry about the luring of investors to what may be unviable business ventures. Others question whether it will really help entrepreneurs because audited financial records are still a requirement after raising more than $500,000 and this is a costly and time-consuming task for young businesses. Yet others think the effects depend on the how the definition of accredited investors will vary. Currently, accredited investors are only people with a personal net worth of more than $1 million or who make more than $200,000 in annual income.
We look forward to monitoring and reporting on the effects of this government measure.
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