The Democracy of Capital

By  Executive Chairman and co-founder at StartEngine Crowdfunding CrowdFund Beat Guest Post

A Revolution for the 99 Percent

In 1929, ordinary investors got a taste of how capital markets can go wrong. Many small investors lost all of their capital, businesses shut down, and the United States entered into its worst economic collapse in its history. Unless something was done to prevent another disaster, our democratic institutions were at great risk.

Enter the Securities Exchange Commission under President Roosevelt. Its mission is to protect investors from taking more risk than they can afford. The SEC was created under the Securities Exchange Act of 1934, which essentially regulated and restricted how companies can offer shares to investors.

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Before 1934, ordinary citizens could purchase shares in privately held companies. After 1934, they were permanently locked out.

Imagine being the neighbor to the Jobs family in Palo Alto, California. You want to help Steve build his garage company — yes, Apple — but are told that you cannot because you are neither rich nor sophisticated. This is somewhat of a contradiction in how a true capitalistic society should work. No risk, no reward.

Taking risk is part of our culture. Yes, it means you can potentially lose your money or make a small fortune. But that choice should be yours to make. You can decide to buy a house and lose your money if prices go down or you lose your job. So why not buy shares in your best friend’s company?

Roughly 80 years after the Securities Exchange Act of 1934 was signed, President Obama signed the JOBS Act — with the promise to help small business leaders get the capital they need to build their companies and create jobs. This bipartisan bill was signed without fanfare or fireworks, and Americans just shrugged. (Perhaps they were too busy glaring at the Affordable Care Act.) But the new act is going to transform how the 99 percent will be able to participate in the asset class that has yielded the highest returns over the years: private equity.

Yes, consumers, dumb or smart, will be able to invest in their neighbors and college roommates’ companies. Companies will be able to broadcast on social media that they are raising capital. You can invest in your favorite film director and contribute to the next big hit — or flop. You can invest in your favorite entrepreneur’s dream and join him in his journey. This is not a simple change to the securities industry. This is a revolution.

Think of it this way: As of 2014, American citizens have stashed approximately $12 trillion in Roth IRAs and 401K plans. This money usually invested in traditional mutual funds, index funds, and bonds can now be poured into private companies. Add to this $1 trillion in checking and savings accounts, and you start to get the picture. It is a lot of money. This money can now participate in a new asset class that has historically produced superior returns estimated at around 10 percent. This beats the public and real estate markets.

Allowing ordinary citizens to invest in companies means that entrepreneurs from any demographic and location have equal access to capital.

The exclusive white men’s club composed of VCs and angel investors just grew by 200 million new members. Currently, VCs invest $60 billion a year, while angels invest $25 billion a year. That is not a bad sum of money, but they only touch a few thousand companies a year.

There are 600,000 new businesses created a year. These small businesses as a whole create 70 percent of all new jobs. Yes, you read that right. Small businesses are the best job creators. They will help reduce the existing economic anxiety our middle class is experiencing.   They will help everyone participate in a more fruitful economy. The good news is that when an entrepreneur who has raised capital from the general public wins, everyone wins.

The JOBS Act is opening a fault line inside the well established financial industry. Its members were not expecting this when the act was proposed. They probably saw this as a minor new rule that would make Kickstarter a little more interesting. They dismissed equity crowdfunding as another alternative investment vehicle. They are in for a big surprise.

Not only will equity crowdfunding help hundreds of thousands of companies raise capital, but it will also allow tens of millions of ordinary people to invest in promising startups and participate — for the first time in 80 years — in a certain economic boom. Of course, many of those investments will fail, and this means it will be important for these new platforms to educate investors on how to build a solid investment portfolio and not rely on a one-hit wonder.

Our Founding Fathers wrote the Declaration of Independence in 1776, but their words remain true today: “Life, Liberty, and the pursuit of Happiness.” Finally, everyone, regardless of race and gender, can be free to participate in the next great economic boom.

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