For many college graduates, and many men and women across America, it has been challenging to find employment that utilizes their expertise and training. Many graduates, burdened by major college debt, are questioning what they should do next. Some are now thinking about creating their own business.

Recently, I met a young woman who created a new line of high-fashion women’s accessories. She received rave reviews from fashion magazines and orders from many of the most sought after boutiques at the major trade shows. The large chains love the product line and said that after she proves herself, they will happily place orders.

So, the challenge is, how does she, or any of you with an idea and a dream, get the training and funding needed to start your business and prove yourselves?

Form a team and make a plan

Before risking your time and money, create a team, talk to potential customers and develop a business plan. A team can assist you to develop your product, marketing plans and a sound financial forecast. The financial forecast will provide you with an estimate of the amount of money you will need to carry you through to where your business is generating a profit from your sales. In life and in business it usually takes more time and more money than expected so prepare for this and have a reserve in your budget.

The team can consist of advisors, consultants, mentors and friends. Take advantage of the free counseling and classes offered through groups such as SCORE, the Small Business Development Center (SBDC), the Small Business Association (SBA) and many local colleges. These resources are available to help you succeed and are good sources for advisors.

Getting the combined experience of a team helps the founders make good decisions and provides a broader base of contacts when needed for advice or funding. When you start talking to banks and investors for funding, having a team makes your company much stronger and more attractive.

After arming yourself with a good business plan and customer references, where do you go to get the necessary funds your business will need?

Sources to fund your new business

Let’s take a look at the climate in this country for getting funds for a new business. Due to the financial crisis, banks are ultra conservative. To make a loan banks want to see a proven track record, profitability, and assets to use for collateral. Entrepreneurs usually have little or no track record or collateral and may have used up their savings and credit cards to get to where they currently are. The banks are most likely going to say no.

The Small Business Administration (SBA) guaranteed loan programs, minority loans or loans for women owned businesses are not much different. The loans still come from banks and unless you have the collateral to cover the loan or can get another person to co-sign or guarantee the loan, the answer will generally be no. In these difficult times asking family and friends to pledge their home to the bank for your business is going to be challenging.

Now, how about the angel investors? Angel investors, like their bigger brothers the venture capitalists, are looking for that billion-dollar home run that they can achieve in the next three to five years through an exit strategy of selling the business or taking the business public. That leaves out most of our small business entrepreneurs and 99 percent of all other startups and small businesses across America. Yet, many of these businesses will grow, thrive and create many new jobs.

Now let’s look at the private investors. Who is going to invest in a startup or a small business and why would they do it? It is usually family, friends and what some writers in the press like to characterize as “fools”, acknowledging the very risky nature of small businesses. In 2010, however, family and friends funded nearly three times as much money into startups and small business as did angel investors. It is a group that needs to receive much more recognition and support. Let’s call them family, friends and the faithful!

To increase your chances of success in getting the support of family and friends, be prepared with a compelling concept and business plan, just like you would do if you were approaching a bank. You need to show that you have researched your market, talked to potential customers, received positive testimonials, and have prepared a plan to accomplish your objectives. Remember, create a team and get the help you need.

New options

To help college grads and many others across this country get the funding needed for their new businesses, new programs need to be created. One option is the new JOBS Act that includes a provision for Crowd Funding. This new type of funding will allow businesses to go online and raise small amounts of money from a large number of people. Until the Securities and Exchange Commission works out the final details of implementing the new law, the rules and costs for a new business to take advantage of this program and potential legal issues are still unclear.

Another option is to offer tax credit incentives to those investors who fund new businesses. Twenty-two states now have various laws offering tax credits to startups and small businesses. Most of these however, focus on promoting high-growth and high-tech startups. One solution is to help promote one of the grass roots Initiatives championing legislation for a national tax incentive plan for the investors that fund all types of startups and small businesses. Startups and small businesses create the new jobs and provide opportunities for many Americans to live a better life.

Your best solution?

For now, your best option may be to create a well-prepared plan and present it with enthusiasm to your family, friends and the faithful. Let them know how much money you need, what you will do with it, what sales you expect and how you will repay their loan or how they will get a return on their investment.

Your family may be there for you because they love you and want to see you succeed, but they and other investors will feel much more confident when they see that you have worked through the details of your business. They will also appreciate that you recognize the value of their money and have a plan to get it back to them.

For all the Family, Friends and the Faithful who support these startups and small businesses, often our college grads, I say Cheers! And thanks for helping revive the American Dream.

 Michael H. Shuman

For nearly a century local investing has been essentially illegal, and Wall Street has controlled all the investment options for the average investor.  Thanks to the JOBS Act that President Obama signed in the Rose Garden last week, local investing is now legal.  Like all legislation, this bill is not perfect, but for local economy advocates, it’s a great game-changer, and one we should not only be enthusiastic about but also play an active role in implementing effectively.

There has been a tremendous amount of misinformation spread about this Act, much of it by liberals I usually admire.  Jim Hightower, for example, condemns the bill for “deregulating Wall Street.”  In fact, the bill spells the end of Wall Street as we know it.  It allows the 99% of us who are not wealthy (“unaccredited investors”) to put our money in the local businesses we love, by removing what were once impossibly difficult and expensive legal barriers.  Those barriers had been so high, so poorly designed, so targeted against small business and small investors,  that they have resulted in almost none of our long-term savings – now totaling $30 trillion – going into the local half of our economy.  The JOBS Act ends this monopoly for good.

To me it’s ironic, and disappointing, that folks like Hightower, Robert Kuttner, and Eliot Spitzer were committed to the status quo and to maintaining Wall Street’s monopoly on capital.  How could such great thinkers get this issue so wrong?  Here are my top five reasons:

First, the critics misunderstood who was pushing this bill.  Kuttner, for example, blames Obama for being “always eager to curry favor with Wall Street donors…”  In point of fact, Wall Street lobbyists played at most a peripheral role.  Small business owners and “makers,” like Woody Neiss and Paul Spinrad, led the charge.  Innovative thinkers in the White House, like Doug Rand at the Office of Science and Technology Policy, played a pivotal role in shaping the President’s views about entrepreneurship.  Non-Wall Street insiders like IndieGogo, a crowdfunding web site, and the nonprofit Sustainable Economies Law Center, pushed hard as well.

Second, the critics, justifiably skeptical of wholesale deregulation, don’t like to concede that any regulation has been a failure.  But any honest assessment of  the history of securities law would observe that we basically regulated local finance out of existence while permitting Bernie Madoffs to operate freely.  For decades, the SEC has held annual meetings where small businesses have urged reforms – modest deregulations that could open up capital to small companies – and none of the suggestions have been implemented.

Here’s an example of the SEC’s intransigence: Three years ago, I recommended in a journal published by the Federal Reserve a $100 exemption from securities filings, on the argument that $100 “risked” on a small business was no more dangerous to an investor than a dinner for two at a Chinese restaurant.  A year later, Jenny Kassan, co-founder of the Sustainable Economies Law Center, and Paul Spinrad of Make Magazine,  sent a petition to the SEC to request the $100 exemption, and 150 people wrote letters of support.  Last May, at a House hearing, the head of the SEC, Mary Schapiro, was asked if she supported this exemption, and she stonewalled, saying that the SEC was convening an internal group in the autumn to “study” the issue.   It was clear that the entire securities law establishment needed to be shaken up, and to their credit, that’s what Congress and the President did in enacting the JOBS Act—Republicans and Democrats alike.

Third, the critics have tremendously exagerrated the dangers of fraud.  The casual reader of the liberal critiques might conclude that the sale of fraudulent securities is now legal, and that “boiler room” operations can bilk grandma of her life savings.  Yet state and federal laws against securities fraud are still in effect.  In fact, the JOBS Act adds a number of new provisions for preventing fraud (through registered intermediaries). Why, moreover, should anyone be banned from spending, investing, or donating a couple of hundred dollars any damn way they please?  The JOBS act exempts grandma from investing $2,000 (higher amounts, if grandma is wealthier).  I was not thrilled with the $10,000 number in the original House bill – again, I originally advocated $100 – but I think $2,000 is fine.  The law does not permit any business to take more than 10% of an unaccredited person’s income or wealth.

Fourth, the critics do not appreciate that there are other approaches to preventing fraud.  E-Bay has all but eliminated fraud through consumer and business evaluations of one another.  So have other crowdfunding sites in the United Kingdom.  In other words, the SEC’s premise – that the only way to prevent fraud is by banning unaccredited investors from making their own judgments – is flat out wrong.

Perhaps their most appalling misunderstanding is how fraudulent the status quo is.  Every day the SEC allows the Ric Edelman’s of the world to sell people on the stock market, promising 10-20% annual returns, when in fact the returns – once inflation and compounding are taken out – are closer to 3%.  These misrepresentations have convinced Americans that putting 100% of their savings into Fortune 500 companies is safer and provides a better return than investing in local business.  In reality, the stock market is becoming an increasingly dangerous and unregulated casino where trades are done by computers that cause flash crashes when they malfunction.  The JOBS Act will allow local businesses to begin to compete for a fair market share of investment dollars.

I said at the outset that the bill is imperfect.  For example, the bill legalizes all kinds of crowdfunding, local and nonlocal.  I believe that local economy advocates now must start educating the public about the importance of favoring local investment.  Our argument should be that knowing the business in which one invests – knowing the products, the entrepreneur, the workforce, etc. – is the best way to prevent fraud.

It’s worth adding that after the bill was signed yesterday, 25 of the people who were most instrumental in passing the bill – none from Wall Street, by the way – got together to discuss ways we could create internal checks and balances on the marketplace, to improve quality control and help identify hucksters.   I hope that similar groups form in every community to create an honor roll of local businesses they know and trust – perhaps businesses that embrace open-book accounting – and that they then encourage residents to prioritize for their crowdfunding.

Like it or not, Wall Street’s stranglehold on investment is over.  We now have a new legal landscape that we can play a pivotal role in shaping.  Local economy advocates everywhere need to step up, not out.

Our own Jenny Kassan is there at the White House today for the signing of the JOBS bill. Jenny wrote an article that was published in the Huffington Post today.

The President will be signing the Jumpstart Our Business Startups Act on Thursday.  The CROWDFUND Act is part of the JOBS Act.  Here is a brief summary of the seven parts of the JOBS Act.

TITLE I—REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES

Exempts something called “Emerging Growth Companies” from many of the disclosure, governance, and other regulations on public companies; an emerging growth company is defined as a business with total annual gross revenues of less than $1,000,000,000

TITLE II—ACCESS TO CAPITAL FOR JOB CREATORS

Eliminates the prohibition on public solicitation and advertising for securities offerings made by private companies as long as all purchasers are accredited investors

Exempts platforms that sell securities under this rule from the requirement to register as a broker as long as they receive no compensation in connection with the sale of the securities

TITLE III—CROWDFUNDING

See separate post

TITLE IV—SMALL COMPANY CAPITAL FORMATION

Increases from $5 million to $50 million the limit on the dollar amount that can be raised in an offering under Regulation A

TITLE V—PRIVATE COMPANY FLEXIBILITY AND GROWTH

Under current law, a company that has 500 investors in any class of equity securities and $10 million in assets must register as a public company – this title increases the number of shareholders needed to trigger this requirement to 2,000 as long as fewer than 500 are unaccredited

Excludes employees that received securities as part of a compensation plan from the total investor count

TITLE VI—CAPITAL EXPANSION

Similar to Title V but applies to banks and bank holding companies

TITLE VII—OUTREACH ON CHANGES TO THE LAW

Requires the SEC to provide online information and conduct outreach to inform small and medium sized businesses, women owned businesses, veteran owned businesses, and minority owned businesses of the changes made by this Act

What does the new crowdfunding law say?

President Obama will be signing the legislation on Thursday!

The name of the law is “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012″ or the CROWDFUND Act.

Here are the basic provisions:

Maximum aggregate amount that can be raised under the exemption: $1 million

Maximum amount per investor:

• For investors with less than $100,000 in annual income or net worth: the greater of $2,000 or 5 percent of the annual income or net worth of such investor
• For investors with $100,000 or more in annual income or net worth: 10 percent of the annual income or net worth of such investor

Intermediary required: The transaction must be conducted through a broker or funding portal (aka intermediary) that complies with the requirements of the Act

Requirements for intermediaries:

• register with the SEC
• register with any applicable self-regulatory organization (as defined in section 3(a)(26) of the Securities Exchange Act of 1934)
• provide such disclosures, including disclosures related to risks and other investor education materials, as the SEC shall, by rule, determine appropriate
• ensure that each investor—
• reviews investor-education information, in accordance with standards established by the SEC, by rule;
• positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and
• answers questions demonstrating an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers; an understanding of the risk of illiquidity; and an understanding of such other matters as the SEC determines appropriate, by rule
• take such measures to reduce the risk of fraud with respect to such transactions, as established by the SEC, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person
• not later than 21 days prior to the first day on which securities are sold to any investor (or such other period as the SEC may establish), make available to the SEC and to potential investors any information provided by the issuer
• ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, as the SEC shall, by rule, determine appropriate
• make such efforts as the SEC determines appropriate, by rule, to ensure that no investor in a 12-month period has purchased securities offered pursuant to the crowdfunding exemption that, in the aggregate, from all issuers, exceed the investment limits of the exemption
• take such steps to protect the privacy of information collected from investors as the SEC shall, by rule, determine appropriate
• not compensate promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor
• prohibit its directors, officers, or partners (or any person occupying a similar status or performing a similar function) from having any financial interest in an issuer using its services
• meet such other requirements as the SEC may, by rule, prescribe, for the protection of investors and in the public interest.

The SEC will exempt funding portals, conditionally or unconditionally, from the requirement to be licensed brokers, as long as they become members of a national securities association and do not

• offer investment advice or recommendations;
• solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;
• compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;
• hold, manage, possess, or otherwise handle investor funds or securities; or
• engage in such other activities as the SEC, by rule, determines appropriate

Requirements for issuers:

• file with the SEC and provide to potential and existing investors and the intermediary—
• the name, legal status, physical address, and website address of the issuer;
• the names of the directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer;
• a description of the business of the issuer and the anticipated business plan of the issuer;
• a description of the financial condition of the issuer, including, for offerings that, together with all other offerings of the issuer under the crowdfunding exemption within the preceding 12-month period, have, in the aggregate, target offering amounts of—
• $100,000 or less—(I) the income tax returns filed by the issuer for the most recently completed year (if any); and (II) financial statements of the issuer, which shall be certified by the principal executive officer of the issuer to be true and complete in all material respects;
• more than $100,000, but not more than $500,000, financial statements reviewed by a public accountant who is independent of the issuer, using professional standards and procedures for such review or standards and procedures established by the SEC, by rule, for such purpose; and
• more than $500,000 (or such other amount as the SEC may establish, by rule), audited financial statements;
• a description of the stated purpose and intended use of the proceeds;
• the target offering amount, the deadline to reach the target offering amount, and regular updates regarding the progress of the issuer in meeting the target offering amount;
• the price to the public of the securities or the method for determining the price, provided that, prior to sale, each investor shall be provided in writing the final price and all required disclosures, with a reasonable opportunity to rescind the commitment to purchase the securities;
• a description of the ownership and capital structure of the issuer, including—
• terms of the securities of the issuer being offered and each other class of security of the issuer, including how such terms may be modified, and a summary of the differences between such securities, including how the rights of the securities being offered may be materially limited, diluted, or qualified by the rights of any other class of security of the issuer;
• a description of how the exercise of the rights held by the principal shareholders of the issuer could negatively impact the purchasers of the securities being offered;
• the name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer;
• how the securities being offered are being valued, and examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions; and
• the risks to purchasers of the securities relating to minority ownership in the issuer, the risks associated with corporate actions, including additional issuances of shares, a sale of the issuer or of assets of the issuer, or transactions with related parties; and
• such other information as the SEC may, by rule, prescribe, for the protection of investors and in the public interest;
• not advertise the terms of the offering, except for notices which direct investors to the intermediary’s web site
• not compensate or commit to compensate, directly or indirectly, any person to promote the offerings without taking such steps as the SEC shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication
• not less than annually, file with the SEC and provide to investors reports of the results of operations and financial statements of the issuer, as the SEC shall, by rule, determine appropriate, subject to such exceptions and termination dates as the SEC may establish, by rule
• comply with such other requirements as the SEC may, by rule, prescribe, for the protection of investors and in the public interest.

Transferability: Securities issued pursuant to the crowdfunding exemption may not be transferred for one year after purchase except back to the issuer, to an accredited investor; as part of a registered offering; or to a family member

Automatically becoming a public reporting company when a certain number of shareholders and asset amount is reached: securities acquired under the crowdfunding exemption will be exempted, conditionally or unconditionally depending on what the SEC does in its rulemaking, from this cap (which was increased from 500 investors to 2,000 by the JOBS Act – see future blog post on this subject!)

State preemption: the states are not allowed to require registration of offerings that are exempt under the crowdfunding exemption; however the can require notice filings and fees in the state that is the issuer’s principal place of business and in any state in which purchasers of 50 percent or greater of the aggregate amount of the issue are residents

Adjustment for inflation: Dollar amounts under the exemption will be adjusted not less frequently than once every 5 years to reflect any change in the Consumer Price Index

How long until the SEC finishes its rulemaking?  You’ll notice numerous places in the law that mention rulemaking by the SEC; until the SEC completes the rulemaking process, the law cannot go into effect; the statute gives the SEC nine months to complete the rulemaking process but there are no penalties if they do not complete the rulemaking within this time, so it is difficult to say how long it will take.

 

Lance Iversen / The Chronicle

Ian Schuster (rear) and Mike Johannsen work on a craft beer for their startup, Schubros Brewery, in their San Ramon test kitchen. Crowd funding would help it expand faster, Schuster says.

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Images

 

Ian Schuster and his business partners have raised almost a quarter of a million dollars to launch their craft beer brewery company, but if they had more money, they could grow the business much faster.

Bryan Brumfield has poured most of his life savings into the artisanal wine business he plans to start after he retires as an Oakland firefighter in March and needs additional capital to bring in outside expertise.

Daniel Hsu has networked up a storm on social media for his e-commerce clothing site and now needs $10,000 in startup capital.

All three entrepreneurs would love to tap the power of social media to find additional investors online who would each put up small amounts of money in exchange for equity stakes in their companies, a concept called “crowd funding.”

But they can’t do so under current law. Companies can sell shares to what the SEC calls “accredited investors” – seasoned, high-net-worth people who understand the risks. But financial stakes for small-time investors are limited to 35 people (fewer in some states), just enough to enable some friends-and-family funding, but not enough to harness the Internet’s reach to attract a larger number of equity investors.

Popular websites like Kickstarter and IndieGoGo show the power of crowd funding by letting people request funds online from strangers to back specific projects – a theatre performance, for instance. But the people who pledge money can only receive perks like T-shirts, not equity shares, in exchange.

Lending sites

Then there are lending websites like Prosper.com that facilitate person-to-person loans. People ask to borrow money for anything from plastic surgery to starting a company and offer a fixed interest rate in return. But again, equity stakes are not allowed.

Now, legislation pending in Congress that enjoys strong bipartisan support and Obama administration backing may make crowd funding possible for entrepreneurs.

Crowd funding “has the potential to be a powerful new venture capital model for the Facebook and Twitter age and its potential to create jobs is enormous,” said Sen. Scott Brown, R-Mass., in congressional testimony last month. “But crowd funding is currently illegal because of obsolete regulations, some dating back to the 1930s. Imagine that – the next Steve Jobs is being held back by rules written during the age of the typewriter.”

Brown is sponsoring the Democratization of Capital Bill, which would let small companies sell up to $1 million in equity online in chunks of $1,000 or less. It is under review by the Senate Committee on Banking, Housing and Urban Affairs.

A similar bill, the Entrepreneur Access to Capital Act, passed the House in November by a wide margin. It would allow up to $2 million in crowd funded investments in $10,000 increments.

But some industry experts worry that crowd funding would entice online hucksters to set up shop.

“A lot of people believe everything they see on the Internet, so we are concerned about fraud,” said Jack Herstein, president of the North American Securities Administrators Association. “Scam artists follow the hottest trends. They could make up fraudulent websites (pretending to be legitimate businesses seeking crowd funding). The mom-and-pop retail investors won’t know who’s on the other side of those websites. Once you push the button and send your credit card number, your money is gone.”

Still, he said, he is not opposed to crowd funding – he just wants to make sure there are built-in safeguards to protect investors. “Everybody should be behind anything that helps the economy,” he said.

That’s exactly the argument made by proponents of crowd funding. The role of small business in job creation is well documented. At a time when banks are reluctant to make loans, allowing small enterprises to solicit funds online so they can start up and grow makes sense, supporters say.

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