Silicon Valley taken for a ride by JOBS Act

It seems like Silicon Valley is so in love with the crowdfunding portion of the JOBS Act that passed the Senate today, it refuses to see what a disaster the overall bill will be.

Indeed, many references I see to the bill still refer to it as a “crowdfunding” bill, as if that was all there was to it. It’s important to note that the actual bill reflects several other bills that were rolled up a few weeks back. Most of this bill represents a staggering rollback of investor protections, and a major rewrite of the rules governing at least 90 percent of all IPOs.

One of those bills rolled into this unholy sausage was the so-called crowdfunding bill that has entrpreneurs wetting their pants.

The Senate passed  a version of the bill Tuesday with some additional protections. Good. I wish, however, they could slice the crowdfunding portion off and kill the rest. I talked about why the JOBS Act is such a nightmare here. Given that generally the valley believes in more openness and more transparency, the region’s support for this dog is appalling.

But blinded by the glare of crowdfunding, it seems that support remains unwavering. I find a lot of merit to the populist instincts behind the crowdfunding push. Yes, let’s stick it to the big banks. Yes, let’s let the common man and woman invest. That doesn’t mean, however, that this framework is the right way to proceed.

People keep making comparisons to things like Kickstarter. But this type of crowfunding is very different. When I donate to Kickstarter, I understand I’m making a donation with no intention of ever seeing my money again.

On the other hand, if I’m giving money to someone starting a business, I expet to see that money, plus some return. It’s a different mindset and expectation. And too many less-than-savvy people are at risk for being taken for a ride.

I’m still a bit confused about companies or ideas people hope this will fund. In the valley, it’s not like there’s truly a lack of venture capital or angel investors. And you have to assume that these folks, with their vast networks and contacts, will sniff out the very best investments and scoop those up.

That leaves the leftovers to be crowdfunding. Not exactly a tantalizing prospect.

Here’s a different thought: Start small and iterate on this idea. Work with the SEC to approve a couple of crowdsourcing platforms. Let the idea play for six months or a year, and discover what does and does not work. Are the companies making pitches disclosing enough? How is this affecting these startups ability to do additional rounds? For instance, if you invest at the crowdsourcing stage, who acts on your behalf to ensure your “shares” are not diluted by follow on rounds? What are your rights to invest in those next rounds if there are caps on your investment? And if the company is faltering, do you have any rights to demand changes, or express dissatisfaction?

Again, I’m not condemning the crowdfunding idea. But there is a better way to proceed to ensure it doesn’t become an open door for fraudsters and scams.

 

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  • Chris Nunez

    Chris: why do you guys use jargon like ‘crowdsourcing’, and other terms that are intended to obscure issues for all but those who are part of the ‘in’ crowd? It chafes my hide when I see these terms slip into what’s supposed to be information for the edification of the public.

    I have a couple of college degrees under my belt, so it isn’t as if I’m untutored, but I also studied journalism, and journalists are supposed to inform the public not help obscrure information. I know that isn’t your intent, but gee whilikers ‘crowdsourcing’, that was never in my civics class course.
    Thank you.

  • @Chris: Thanks for the comment. I’m certainly not attempting to obscure the concept. On the other hand, I find “crowdsourcing” and “crowdfunding” to be evocative and self-evident words. I’d be curious what terms you would find to be more accessible? We do think about what you’re talking about, primarily for our print readers. We have balance the need to be precise and the need to be simple.

 
 
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