Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors
HuffPost Social Reading
Kevin Lawton


Senate Startup Bill Tweaks Could Cause U.S. Brain Drain

Posted: 03/23/2012 9:57 am

A bittersweet moment in entrepreneurial history recently occurred, with the Senate passage of the JOBS Act. After passing in the House, this 6-pack of small business modernization reforms cleared the Senate. While most things were left intact from the House bill, the crowdfunding component was tweaked to allow for "more investor protections". In my opinion, crowdfunding was the most economically important part of the bill, so it's no surprise that the special interests have dipped their fingers in the mix. Unfortunately, America will pay a price for this in terms of brain-drain. Sound familiar?

In over four years of operation, leading crowdfunding site Indiegogo reports virtually no fraud. U.K. crowdfunding leader Crowdcube (which does allow equity finance) reports no fraud. As is the case for U.S. based peer-to-peer lending site Prosper or AngelList, the popular site for angel investors searching for deal flow from entrepreneurs. Never let the facts get in the way of a good FUD story. If you commit fraud online, your life is over.

Fraud feeds on opacity and on small groups, because those factors increase the probably of not being "found out". Ironically, that would well describe the environment of the traditional investment paradigm. But in the social networking sphere, the more viral any story gets, the more the chances that fraud will be exposed by the people who would know. Take for example, the recent viral story of the guy who claimed to achieve flight with a bird-like flapping contraption. It was actually a hoax, 8 months in the making, from a Dutch artist. Time for the world to find out it was a hoax and have the artist "fess up" -- measured in hours.

As The Small Business and Entrepreneurship Council CEO Karen Kerrigan said about the recent Senate vote, "We would have preferred that crowdfunding provision to be less onerous and complex for small businesses, and feel the Securities and Exchange Commission has been given too much rein from a regulatory perspective." Apparently the SEC, who recently warned that the JOBS Act may harm investors, has not had the time to learn about the years of crowdfunding and social networking experience that we have already. Perhaps, they are very busy trying to find out where the still-missing $1.6 billion went, that is owed to 35,000 MF Global customers.

But the worst part of the onerous changes is something that few seem to have contemplated. Every extra bit of regulatory complexity is not only costly to American small businesses. It will also create an unfortunate "brain drain." It's very simple. If we make it hard for Americans to invest in crowdfunding, then entrepreneurs will tend to get funded with larger percentages of foreign money. Even worse, limitations on the amounts or percentages that Americans can invest in national crowdfunding, will force Americans to crowdfund invest overseas. Well, duh!

Many countries are watching the crowdfunding legislation intently and will "fast follow" with their own regulatory changes. Thus, we absolutely need to keep regulation clean, lightweight and harmonizable. It may seem counter-intuitive at first, but every extra regulatory hurdle will produce further economic and entrepreneurial brain drain. Why on Earth, would we want to limit the amount that Americans can invest in their own country? Let's please not make this the "Suck America Dry Act." Please contact your Representative and request that they "keep the SEC out of crowdfunding." Send them this article if you like.


Follow Kevin Lawton on Twitter: www.twitter.com/CrowdfundBook

A bittersweet moment in entrepreneurial history recently occurred, with the Senate passage of the JOBS Act. After passing in the House, this 6-pack of small business modernization reforms cleared the ...
A bittersweet moment in entrepreneurial history recently occurred, with the Senate passage of the JOBS Act. After passing in the House, this 6-pack of small business modernization reforms cleared the ...
  • Comments
  • 9
  • Pending Comments
  • 0
  • View FAQ
Post Comment Preview Comment
To reply to a Comment: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to.
View All
Recency  | 
04:16 PM on 03/27/2012
Brain drain is going to happen! What do you call the fact that 90% of retail products are made in offshore locations? The brain drain has already been accomplished. What is needed is Congressmen with brains to figure out that manufacturing will not return to the US as long as Congress imposes laws on domestic production but will not require products sold in the US abide by the same laws. These laws are a minimum wage of $7.25 (China pays as low as 70 cents/hr.), environmental laws (China has none), worker safety laws (China has none) etc.
Veteran, retired
09:59 PM on 03/26/2012
This is the beginning of the last breath of the American dream. Obama will be re-elected and the liberals will push to eliminate the SBA, with the object being to disrupt small business and to enable large corporations to take over.
09:11 PM on 03/23/2012
Well there is still room for the SEC to regulate family investing, such as loans within a family... Or consider any gift to be actually a disguised investment. Gifts are already subject to regulation and taxation, both on the giftor and the giftee. One more step and charity falls into that ditch too. Alms and tithe will become a springwell for Democratic entitlement money. This administration is coming up with all kinds of new taxes and this is tax season... No presidential election around April 15th though. Wait 6 months, yes, six months.
03:59 PM on 03/23/2012
So, who benefited when the stocks went public? The CEO and the company president received huge bonuses because there were more shares offered. Their compensation was directly tied to how many shares were offered and purchases. So a stock split gave them huge bonuses.

As I said, how can this bill be an investment in our own country when the people who benefit will be the CEOs and the initial investors? Nobody but the rich get richer. I noticed too that the amount of investment dollars allowed went from 5 million to 50 million. Now what kind of investor has that kind of money? Certainly not the small family investor, unless the family is Koch brothers. It seems clear who this bill will benefit and it's not your normal middle class Americans.
03:58 PM on 03/23/2012
"Why on Earth, would we want to limit the amount that Americans can invest in their own country?"

I don't understand how the JIOBS bill would constitute an investment in our country. It is touted as a bill that allows the relaxation of regulations for companies seeking to go public. These are privately held companies that will benefit greatly from the deregulation. They will be receiving investment money from large corporations and wealthy investors. They will ultimately profit by this process, and shareholders will get pennies or nickels in comparison to the millions the companies and CEOs will realize. And it could take years before any profit is realized at all because the investors must be reimbursed first and in the largest chunks of change the business can afford. So, the ones who benefit are the business and the large block investors. I recall a company I worked for going public, and there were stock splits that devalued the shares of employees. The newly created stocks were of no value to the employee who had not yet exercised their options. For instance, I was offered 500 shares, but by the time I was financially able to exercise that option the stock value had been halved twice, and what initially might have been worth a thousand dollars was now worth about $250. I wasn't worth it. And this type of thing happens typically with newly created stocks. This thread continues.
Robert SF
01:46 PM on 03/23/2012
Now the 1% is going after the last twenty, thirty dollars in our pockets. Investment? The only investment is what they've paid legislators at ALEC dinners to do their bidding. Americans need jobs, not opportunities to invest money they can't afford to lose. And even without any fraud whatsoever, Americans will lose money on this for the simple reason that most startups fail.
01:17 PM on 03/23/2012
As a co-founder of an "emerging growth company," IronGate Security Networks, I fully support the JOBS Act, and in particular what it means to companies like ours that are in the challenging stage of moving from "proof of concept" to "go to market." It's one thing to have a great solution for a tremendous market need, but many entrepreneurs and start-ups do not have the luxury of having a stockpile of cash to bring these solutions to life. With the JOBS Act, companies like ours can transition quickly from start-up to stand-out, which only benefits our investors, employees and ultimately our customers.
Carpe Diem!
12:08 PM on 03/23/2012
This job's bill actually repeals the essential restrictions placed on Wall Street. When has the government ever done the right thing?
Veteran, retired
11:09 AM on 03/23/2012
If the US can screw things up - the politicians and lawyers surely will.