Austin entrepreneurs are hoping that the JOBS Act, expected to be signed by President Obama today, will make it easier for startups to raise money and go public.
The legislation, which was backed by Silicon Valley and the high-tech industry, opens up more opportunities for crowdfunding, in which the Internet is used to solicit a large number of smaller investors.
In addition, it exempts young companies from Securities and Exchange Commission reporting rules in order to reduce the costs and red tape of raising capital, and will eventually allow smaller companies to carry out initial public offerings sooner.
“It really democratizes the fundraising process by opening crowdfunding opportunities to everybody, not just accredited investors,” said Matt Chasen, founder and CEO of Austin-based uShip.com. “At the same time, by reducing expensive regulatory paperwork and processes, it will free up more money for companies to direct toward growth and production, in areas such as engineering and sales.”
Chasen will be Austin’s sole representative at the signing ceremony with Obama at the White House. Other attendees include partners from Silicon Valley venture capital firms and CEOs from Internet companies.
Uship, founded in 2004, hosts online auctions for shipping services and has raised $9 million in venture capital.
Chasen said both companies and venture backers will benefit if companies can go public sooner.
“It’s going to spur earlier stage investing by venture capitalists and angel investors because companies can go public and get liquidity much sooner,” said Chasen, who was invited to the signing ceremony because of his support of Startup America, the Obama administration’s initiative to boost small, fast-growing companies.
Some consumer advocacy groups have criticized the bill, saying it goes too far in removing SEC oversight, and could put inexperienced investors at risk by luring them into investments over crowdfunding sites.
Popularized by online platforms such as Kickstarter and Rockethub, crowdfunding is becoming a first stop for a growing number of startups soliciting funds. Currently, investors don’t get equity as a result of their investments, but the JOBS Act changes that to allow small-scale investors to own a piece of the companies they back.
Under the legislation, companies will be able to raise up to $1 million a year through crowdfunding without being required to register the shares for public trading with the SEC. With some restrictions, anyone, not just accredited investors will be able to participate.
“You’re taking money that’s sitting on the sidelines and putting it to work, and that’s going to get more companies funded in Austin,” said Bill Clark, founder of Austin-based MicroVentures, which runs a crowdfunding website. “Now an average investor can write a $1,000 check and take a chance on a promising company.”
But investors new to the game need to know that they’ll most likely lose their money, he said. “Most will fail,” he said. “Companies need to make it clear in disclosure filings that by investing this money, you’ll probably lose it. Of course, there’s always the outside chance that you’ll make money, and that is what will attract investors.”