Upstart Business Journal
By Vincent Molinari, CEO of GATE Global Impact
October 27, 2015
As technology has evolved, the landscape dictating how companies can gain capital has changed drastically. There has never been as much access as there is now — especially with crowdfunding strategies available — but we still operate on a system that was created pre-Internet. We need to continue to close this gap in order to compete with other countries and reverse the brain drain in the United States.
The introduction of the Jumpstart Our Business Startups Act of 2012 was a start in addressing technology and social media’s integration into financial services, but we need something that will boost our economy and help startups. Introduced by Rep. Patrick McHenry (R-N.C.) in April, the Reforming Access for Investments in Startup Enterprises Act will go a long way toward tackling the problem of liquidity.
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The JOBS Act was the first step toward addressing the fact that our regulatory system does not account for next-generation technology and social media. This legislation made it legal for companies to solicit investments via the Internet and advertise securities for the first time in U.S. history. It also raised the threshold for mandatory Securities and Exchange Commission registration from 500 shareholders to 2,000.
The JOBS Act was good news for small companies, but with private companies staying private longer, there are still issues that need to be addressed, especially surrounding liquidity for private securities. The RAISE Act, however, faces these problems concerning access to compensation head-on. Here are a few challenges the RAISE Act will help alleviate for entrepreneurs across the nation:
1. Decreased liquidity
Employees and investors face serious challenges in obtaining meaningful liquidity before a company goes public. This is because few startup employees have ready access to capital, with much of their overall compensation coming in the form of restricted options. These shares cannot be resold for at least 12 months.
The RAISE Act exempts such transactions from current regulations, making it possible for employees to monetize their options. By helping startups and emerging growth companies compensate their employees through equity, the RAISE Act will compel those employees to roll up their sleeves and push their companies to the limit — the stronger the employees, the stronger the company will be.
By increasing liquidity, the JOBS Act helps to foster innovation and entrepreneurship, the twin turbo engines of our economy.
2. Weak national economy
The RAISE Act is essential for safeguarding the future of the American economy. We need a mechanism to monetize private securities — and reward employees for the risk they took by accepting lower incomes to ensure their startups had the necessary liquidity to grow.
Our economy is built on the backbone of a strong private sector. Between 1993 and 2011, 64-percent of net new jobs came from small businesses. As more capital becomes available for these businesses, they will be better equipped to innovate and create jobs, improving our national economy.
3. Increased brain drain
Why should someone take a job with a startup? How do we attract foreign brain trusts to America? According to a LinkedIn study, the United States was a net loser of talent in 2014. We cannot lose any more valuable minds to other countries. The RAISE Act would reverse brain drain with its equity-intensive compensation.
The RAISE Act will help markets function, enable businesses to develop liquidity, and provide protection for investors. If you don’t believe me, ask Tom Quaadman of the U.S. Chamber of Commerce.
Vincent Molinari is the co-founder and CEO of GATE Global Impact, an electronic marketplace platform helping to standardize and accelerate impact investing. Molinari is also a managing partner at Constellation Fin Tech, and he consults with members of Congress and regulatory agencies on issues related to capital markets, early-stage companies, and secondary market liquidity.
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