President Obama is scheduled to sign into law a new piece of legislation on Thursday afternoon that would allow the general public to invest in startup companies over the Internet, a practice known as “crowdfunding,” which until now has been prohibited by government regulations restricting early investments in private companies to qualified institutions (investment banks) and wealthy individuals.
The Jumpstart Our Business Startups, or JOBS Act would do away with this prohibition, giving average citizens the chance to invest in — and profit from — startup companies using social media and websites like the popular ‘crowdfunding’ platform Kickstarter (which, it should be noted, doesn’t allow the practice of investments yet on its website and has not yet declared any intentions to under this new law).
While the bill has enjoyed relatively smooth bipartisan progress, small but vocal holdouts among Democrats and a much larger chorus of those in the media who have criticized it as essentially providing a massive new avenue for hucksters and frauds to take advantage of ordinary Americans, those outside of the so-called “one percent,” of earners.
The New York Times editorial board, Felix Salmon of Reuters, economist Simon Johnson are just a few of the more notable detractors of the bill, who worry that even well-intentioned startups will have a tough time of managing the new influx of finances that the bill will provide.
From November to March, versions of crowdfunding legislation that easily passed the House became mired in the Senate due to concerns over potential fraud.
According to Sen. Michael Bennet (D-CO), however, one of the JOBS Act’s backers and arguably its savior, the concerns have been addressed in the latest version of the legislation. Bennet introduced an eleventh-hour amendement, along with Sen. Jeff Merkley (D-OR) and Sen. Scott Brown (R-MA), tightening the regulations of new crowdfunding websites and business, which as a result are now required to register and undergo checks by the Securities and Exchange Commission.
The SEC is also required under the amended version to aid investors in understanding the risks of their investments by filling out documentation with the agency. Further, even after the bill is signed into law, the SEC has another 270 days to review and make final changes to its regulation.
“My judgement was that the people in the crowdfunding industry wanted this consumer protection provision as much as lawmakers or more,” said Bennet, in a phone interview with TPM. “Nobody wanted it to be the wild wild West.”
Senate staffers claimed that Bennet’s bill was a “significant course correction at the last minute,” and that although it “didn’t cure all the woes,” Bennet “made the best of a situation that could have gone worse.”
Bennet’s work behind the scenes, along with those of Merkley and Brown was what made the difference, according to one staffer.
“They pushed it like hell,” the staffer told TPM of the amended version.
“What I hope to be able to see is a proliferation of small business ideas that never had access to capital and wouldn’t ever have otherwise,” Bennet told TPM. “Until now, we’ve not been able to realize the potential power of technology to connect people with capital.”
Ed’s Note: This article originally stated that the SEC had 180 days to review and make changes to the legislation, but in fact, the number is 270 days. We have since corrected the error in copy and regret it.