While the intent of the JOBS Act seems laudatory—to make it easier for startups and small businesses to raise capital from a wider range of potential investors—it is not without its detractors. Critics charge that unless Congress reforms or repeals the law, securities crowdfunding is destined to do little more than separate mom-and-pop investors from their savings. Here’s why:

From an investor’s perspective, crowdfunding operates most like angel investing. Yet most crowdfunding investors will not act like successful angel investors, who invest in industries they know, exercise due diligence, spend time mentoring the companies they invest in, and diversify their investments. Even so, the majority of angel investments fail. Angel investors earn a profit only because the small percentage of successful companies make enough money to offset failures.

Moreover, crowdfunding’s extensive registration and disclosure requirements not only poorly protect investors but also heavily regulate businesses. The SEC estimates that it would cost $39,000 in fees to accountants, lawyers, and the funding portal to raise just $100,000 and more than $150,000 to raise $1 million. Those capital costs are so high that companies would be better off financing their operations with a MasterCard or VISA. For comparison, consider that underwriting fees for large public offerings are usually under 4 percent.

Compared to the registration exemptions under Regulation D, crowdfunding is a poor alternative. Not only are Regulations D’s disclosure requirements limited, but it also lets a company raise an unlimited amount of capital from an unlimited number of investors, provided those investors are accredited. That leaves only desperate companies using the crowdfunding rules, ones that cannot use better and cheaper exemptions from the registration provisions of the 1933 Act.

Against these criticisms, proponents of the JOBS Act point to the following:8

Women have traditionally received venture capital funding at lower rates than men. One goal of the JOBS Act was to increase opportunities for female-led companies to raise capital. In a recent study, 28 percent of crowdfunding companies have a woman on their executive team, which is approximately double the percentage found in the traditional venture capital world.
An additional goal of the JOBS Act was to geographically diversify entrepreneurs by providing them a way to seek venture capital without relocating to Silicon Valley. Some data show that companies from 44 different states participated in equity crowdfunding campaigns in recent years, suggesting that crowdfunding is living up to its promise of overcoming geographic constraints.
Small and young startup companies were a particular focus of the JOBS Act. Data indicate that many crowdfunding companies were founded very recently (40 percent were under one year old at the time of key filings), and the median age of a crowdfunding company was 1.5 years. Crowdfunding companies are also very small, with a majority (55 percent) having three or fewer employees.
Given these competing perspectives, do you see the JOBS Act as overall positive or negative?

Would you use crowdfunding to raise equity capital for your business?

Would you invest your own money through crowdfunding?

If you were an investment adviser, would you recommend that a client invest through crowdfunding?

Answer rating: 100% (QA)

1 The JOBS Act was created to make it easier for startups and small businesses to raise capital from a wider range of potential investors The Act has been successful in increasing opportunities for fe... View the full answer