People in the US are great believers in the value of entrepreneurs and small business. That faith underlies the Jumpstart Our Business Startups (JOBS) Act, a new law that will make it easier for small companies to raise money and bypass the regulatory “friction” that firms encounter when they go public. The law assumes that people who cannot find jobs might be able to find investors instead, and that small companies will be able to get the financing they need to grow bigger and hire more people. Angel investors, friends and family will boldly go where banks might fear to tread.
The JOBS Act is an extreme example of Americans’ belief in people’s essential goodness and everyone’s right to self-fulfillment. Every entrepreneur should be entitled to raise funding from willing investors.
It is a uniquely US approach, and capitalistic in the best sense of the word, for it encourages (and democratizes) investment, rather than fueling consumption.
Small (under US$1 billion) companies can raise money directly from small investors in a formalization of the “crowdfunding” approach, whereby a project’s principals post their plans on a Web site and ask for money, essentially opening up the initial public offering market.
The theory underlying the law is that a new set of accredited third-party marketplaces, rather than the overburdened Securities and Exchange Commission (which missed Bernie Madoff’s monster Ponzi scheme), will ensure that entrepreneurs tell the truth and that investors know what they are buying. (Of course, that begs the question of how thoroughly vetted and reliable those third-party marketplaces and their vetting systems will be.)
While this initiative was born in the US, many countries are wondering how to jumpstart their own entrepreneurial sectors and might be tempted to follow the US’ lead. So why do I hope that they resist that temptation?
Unfortunately, the JOBS Act is as likely to be successful as the US government’s earlier attempts to ensure that US families could buy their own homes. Low down payments, deferred interest and other enticements made it attractive for people to buy their own homes (or to speculate with second homes), whether they could afford to or not.
Mortgage brokers were happy to get in on the act. Some were driven by an honest mission to expand property ownership; others were driven by greed. Some knew that the people to whom they were selling houses could not afford it; others simply did not want to know. Some played by the rules; others forged documents. The banks that originated mortgage loans sold their portfolios to investors who did not really understand what they were buying.
In the same way, the JOBS Act will ease life for some deserving people — and most likely attract many more who are less deserving. The new system will attract scam artists and promoters, who will encourage unsuitable companies to seek investment and oversell the companies to individuals who cannot afford to lose the money that they invest.
I wish I had more faith in the system, but the problem is not a lack of good people, good investors or good entrepreneurs. The problem is that, without regulation, bad people take advantage of the good ones. While regulation and restrictions might hamper small business, not all regulation and restrictions are useless.