First, it should be noted that while the bill does look like it is going to pass and US President Barack Obama has stated he will sign it, it technically has not yet passed. So there is still time for Congress to mess it up, or to attach some unrelated measures that mess up something else.
I'm referring to the JOBS Act, which is largely a measure to loosen regulations on investing in securities. The most important part of the Act is that it will enable crowdfunding -- meaning it will enable unaccredited investors to invest small amounts of capital in small businesses, and for companies to have more than 500 shareholders and still be privately held. I believe these two measures, while they may seem small, will transform the global economy and be part of the solution for building a new, stable foundation for the global economy -- provided there are not too many regulations that prevent this process from working smoothly.
To put it simply, crowdfunding will enable small businesses to more easily get funding. Right now, entrepreneurs must try for a small business loan or some type of grant -- which they may not qualify for or may not prefer relative to equity investments -- or try to solicit capital from accredited investors like venture capital funds. Professional private equity funds are typically looking to purchase meaningful positions in businesses they suspect will generate huge returns. Facebook (FB) is a prime example; the company raised billions of dollars from investors, and is obviously a huge company gearing up for an IPO. That's the kind of opportunity most private investment funds are looking for. If you're an entrepreneur who wants to start a local restaurant......well, you'll probably have to find someone else to put up the money.
And that's where crowdfunding comes in. The Internet enables the collection of small amounts of capital from a large group of people, just like it enables the creation of Wikipedia -- a huge encyclopedia created by small contributions from lots of people. We can even see this principle on SeekingAlpha; many contributors and commenters share their knowledge to create a single resource, fairly comprehensive, on US stocks. If crowdfunding is allowed to flourish, in time it will enable more capital to go to small businesses. This means more more investments, more production, more small businesses, and more jobs.
This process will take a long time to get going -- we are at least a few years away before any meaningful impact, and then a few more years before it becomes an undeniable force. But here is where we might end up going:
- Just as super-wealthy investors from Russia have helped fuel Bubble 2.0, foreign investors could come rushing into US crowdfunding if the market proves itself. The US dollar (UUP) will remain in a downtrend so long as the US runs budget and trade deficits, but this could soften the blow -- and could even lead to a bull market in the dollar if the deficits are transformed into surpluses and the 15.5+ trillion in national debt is restructured (although admittedly I do think this is an extremely unlikely scenario).
- Companies will stay private longer or not go public at all. The current crop of promising technology companies are reluctantly going public as they come up against the 500 shareholder rule. If the JOBS Act ends up eliminating that rule or making it easy to work around, companies may simply forego the hassles and costs of being public altogether. If this actually occurs, I suspect the banks and regulators that profit from public markets will counter-lobby to force the 500 shareholder rule back into play. If the JOBS Act lives up to its full potential, it means investing in (SPY) might not be the way to get in on the biggest and best companies a decade from now; rather, going to a crowdfunding platform that will emerge as a result of the JOBS Act might be where to look.
- The banking crisis of 2008, the rise of Occupy Wall Street movement, and most recently, Greg Smith's scathing indictment of Goldman Sachs (GS) have contributed to a strong resentment of banks like Goldman, JP Morgan (JPM), Citigroup (C), and Bank of America (BAC), among others. Yet, when it comes to funding businesses, there aren't many other options; many small businesses in the US rely on these banks for loans, while promising startups use them as underwriters for IPOs. All of that has the potential to change if the JOBS Act can live up to its hype. Just as Wikipedia has disrupted traditional encyclopedias and how peer-produced web sites like SeekingAlpha are disrupting old media finance sites like the Wall Street Journal, so too can crowdfunding disrupt banking. If you're a shareholder in these banks, you still have time -- probably years -- but the writing is on the wall, and it's starting to become clearer as to what comes next: crowdfunding.