April 17, 2018
On April 5, 2012, I had the distinct honor of standing behind President Obama during the signing of the JOBS Act (Jumpstart Our Business Startups Act).
What brought me to the White House Rose Garden on this auspicious occasion? My company, CareCloud, born in the depths of the economic downturn, was celebrating its third anniversary. Despite the support enjoyed by CareCloud directly, a lack of venture capital returns over the prior 10 years had been seriously choking off the larger VC ecosystem, leading up to the signing of the JOBS Act, especially for early-stage companies. Venture firms were swimming upstream to later-stage rounds that were closer to initial public offerings in an attempt to shorten their investment time horizons. Deserving entrepreneurs were being starved of the resources they needed to build their companies.
After the signing, I was asked by PBS to debate a Columbia University law professor on the merits of the Act. During that debate, I argued that the time had come to reform the Securities & Exchange Acts of 1933 and 1934 given the amount of change the world had seen since that time. I argued that we needed to allow the world which had largely been shut off from investing, to participate. As Americans, we do not always relate to the fact that people in other parts of the world cannot easily invest in great companies, whether private or public.
As much as I believed in the JOBS Act, little did I realize how ready the world was to invest, especially in the areas of crowdfunding. In the early days after the Act, we saw portals like Kickstarter and Indiegogo facilitate crowdfunding for entrepreneurs to start new businesses, sometimes in a matter of hours.
These quicker-than-overnight successes still represented only a fraction of crowdfunding investment opportunities. Crowdfunding portals forced participating ventures to raise funds using alternative methods, such as pre-selling their products to interested buyers. Many companies were successful in raising funds this way without giving away equity in their companies. This mostly worked for entrepreneurs building physical products rather than software products, for instance.
Although the JOBS Act specifically called for crowdfunding, a provision was included as part of the law that gave the SEC a full six months to draft the specific provisions. It wasn’t until 2015 that the first rules were published, and wasn’t until 2016 that they were finally implemented. This allowed companies to receive investment from non-accredited investors, which constitute about 97% of the US population.
As chance would have it, Bitcoin came into existence in 2009, three years before the JOBS Act, introducing the world to cryptocurrency and its underlying blockchain technology. Successors like Ethereum continue to redefine use cases for blockchain technology.
In the wake of the implementation of the 2016 crowdfunding rules, the concepts of non-accredited investor and the blockchain created the perfect storm that was the ICO phenomenon of 2017 – a phenomenon that would trump even venture capital investing in the third quarter of that year.
Companies in varying stages of development continue to issue tokens, representing utility of their platforms and networks, and in some cases, actual securities. These tokens may be sold on public exchanges to buyers all over the world. In some cases, token sales have allowed companies to further fuel their innovation without having to sell an underlying stake in the company to venture capitalists.
These token sales, if properly designed, capitalize companies in a non-dilutive manner, greatly benefiting the entrepreneurs. Such tokens catalyze the company’s products and network by providing incentives to participants, thus gamifying the experience.
Blockchain technology is still nascent but holds tremendous promise. We are witnessing the early days of transformation – the same manner in which the internet and the business models built on it were immature in the mid-’90s. I am hopeful that the intermediaries in the process will truly work to filter poorly formed, non-compliant ventures or those that are looking to commit outright fraud.
About 10 to 15 years from now, we will celebrate a number of companies that rival Amazon and Facebook, but that are built on the blockchain. The greatest legacy of the JOBS Act is still yet to come: providing the fuel for a booming, blockchain-based economic engine that powers new classes of businesses and the people who are investing in them.