Putting your money into an unproven start-up is a titanic risk. Even professional venture capitalists expect most of their big-money bets will fail.
It’s risky business, but Washington is convinced that young, tech-savvy entrepreneurs are an engine for economic recovery, and it wants to help them raise start-up cash by knocking down regulations that protect investors from getting fleeced. That’s why Congress legalized “crowdfunding” in 2012, allowing inexperienced CEOs to raise money directly from an unsophisticated public. That law, the JOBS Act, is delayed while the Securities and Exchange Commission writes the rules.
New Jersey doesn’t want to wait. Sens. Joe Kyrillos (R-Monmouth) and Ray Lesniak (D-Union) introduced a bill this week to bring crowdfunding to New Jersey, though limited to in-state transactions.
What’s the rush? Lawmakers should hold off on this risky bit of deregulation while the SEC figures out how to keep amateur investors from taking a bath.
State Sens. Joe Kyrillos (R-Monmouth) and Ray Lesniak (D-Union) have introduced a bill to create an intrastate crowdfunding system in New Jersey. The Jumpstart Our Business Startups (JOBS) Act, signed in 2012, gave the Securities Exchange Commission until the end of that year to create rules making crowdfunding legal on a national level. That hasn’t happened yet and recent predictions say the earliest the startup community will see a proposed rule is the end of this year.Photo Illustration by Stacy Jones, Photos: (L) Star-Ledger File Photo and (R) Jerry McCrea/The Star-Ledger
Crowdfunding gets lots of buzz, fueled by the popularity of websites such as Kickstarter, where inventors can raise money for pet projects. Altruistic donors back projects they admire in exchange for freebies or a thank-you note — not a share of the company.
The crowdfunding endorsed in Washington and Trenton, on the other hand, lets investors buy shares or equity, without the oversight of a full-blown IPO. It marries neophyte businessmen and novice investors. That’s a formula for trouble.
Both the federal law and New Jersey bill promise safeguards: income-based limits on investments, and intermediaries — called portals — to review sellers and buyers. But there are always loopholes.
Tiny start-ups are speculative. Most fail, without fraud or bad intent. Why should Joe Sixpack have better luck with start-ups than the stock market?