Local start-up scene wary as new US crowdfunding laws set to start with little regulation

Local entrepreneurs have voiced their concerns about the Jumpstart Our Business Startups Act in the United States, which makes it easier for start-ups to raise funds through crowdfunding.

The JOBS Act, passed earlier this year, allows entrepreneurs to crowdfund online to fund small businesses and start-ups. Entrepreneurs can also raise funds from non-accredited investors.

However, the regulations won’t be in place until the US Securities and Exchange Commission review period is up in January 2013.

While the bill itself is effective, it’s unknown how the sections that fall under the SEC scope will be regulated, namely how to regulate the offerings targeting non-accredited investors.

In the meantime, entrepreneurs will only be able to crowdfund to accredited investors as of July 4.

Australia-based entrepreneur Rui Rodrigues, a former venture capitalist in Europe, says the JOBS Act has a “noble mission” of removing the barriers for small businesses to raise money.

“This is accomplished by allowing multiple private investors to invest in start-ups in return for equity,” Rodrigues says.

However, he’s concerned about the ramifications this could have for Australia, saying there is a level of “excess optimism” around equity crowdfunding in the Australian start-up ecosystem.

“Equity crowdfunding is certainly a welcomed disruptive change, with a huge potential to develop the Australian start-up ecosystem [like] no other policy or incentive,” Rodrigues says.

“The big challenge will be to make the new easy money also smart money.”

Rodrigues highlighted his concerns about the nature of the JOBS Act.

“While there is no limit in traditional investments by private investors, the act caps the amount and number of individual investors,” he says.

“This limits the total amounts that can be raised, and requires a significant number of investors to scale.”

According to Rodrigues, the planned requirements also demand a complex set of rules, which can result in a “significant legal and financial burden” for an entrepreneur.

“It is also important to note that while this additional cash availability may be extremely valuable for entrepreneurs, this doesn’t come without risks,” he says.

“From an ‘amateur’ investor perspective, there is obviously the risk of misinformation or even fraud.”

“These investors will face challenges like future dilutions or planning for further rounds, which sometimes even sophisticated investors have a hard time dealing with.”

“As for entrepreneurs, such an influx of capital comes at a cost as this money may fall in the FFF (friends, family and fools) investors category rather than the sophisticated investors one.”

In Australia, Rodrigues says it’s still illegal to crowd invest in return for equity, which “gives us some time to tune the details”.

“Hopefully, when this issue comes to the agenda, it will also be accompanied by a full set of regulatory changes to incentivise private and professional investors,” he says.

Ryan Wardell, founder of Sydney-based crowdfunding platform Project PowerUp, agrees Australia has to be “super careful” about how it approaches the issue.

“Part of the reason why it’s hard to raise money is because it needs to be – investing in a start-up is risky… [The JOBS Act] has the potential for a lot of people to get burnt,” Wardell says.

“I think there are all kinds of [other] issues. For the entrepreneur, being beholden to a 1,000 shareholders or investors is an absolute nightmare.”

“If it did come here, without regulation in place, I think there would be a lot of enthusiasm initially.”

“But most [businesses seeking funds] would fall over and average ordinary people would lose a lot of money.”

But according to Wardell, the US should be given at least some credit.

“At least they’re having a crack at it. There will be a bit of pain and a lot of learning before they figure out how to make it work,” he says.

“It’s not even on the radar over here – there are no politicians even talking about it.”

This article first appeared on StartUpSmart.