The trouble with lawmakers and lawmaking in general is the long timeline involved in the entire process. By the time the establishment recognises the need for legislation in some area, and then goes through the tortuous motions of actually drafting, discussing, formulating and then passing that particular piece of legislation, the circumstances which necessitated that law have often changed beyond recognition.

So, by the time it actually gets on to the statute books, the ‘revolutionary' piece of legislation often ends up either outdated, infructuous or a downright impediment to whatever it was that the law sought to regulate in the first place. But every once in a while, we can see some piece of legislative action which actually leads one to hope that lawmakers can stay ahead of the curve.

One such piece of legislation, which we should be looking at closely in India, is the JOBS Act passed by the US Senate and Congress last week. Lawmaking activity attracts little attention even in India, and this particular bill in distant US, with its confusing acronym which suggests it has something to do with employment, has attracted even less here.

But the Jumpstart Our Business Startups (JOBS) Act is a significant development for new age start-up entrepreneurs, since it recognises, and incorporates, the changed milieu in which businesses come into existence and function. In particular, a key amendment which was passed along with the larger Act legalises a revolutionary new way of raising money for converting ideas into businesses — crowdfunding.

Revolutionary idea

The Crowdfunding Act essentially enables start-up entrepreneurs to leverage the power of the Internet to raise funding for their projects. Now, anybody with a cool idea will be able to pool the funds of ‘micro investors' into seed capital for the venture. If the idea pays off, then the seed investors can rake in their rewards.

Crowdfunding is not a new idea. Several Web sites such as Appbackr.com, Kickstarter.com or idiegogo.com are already doing this. An incredible array of ‘projects' are already available on these sites, put up by individuals or start-up businesses for backers to take a bet on.

And the crowd response has been staggering. On Kickstarter.com , for instance, 87,142 backers pledged $15 each or more in just two months to fund the development of a new video game, Double Fine Adventure.

Their reward — a copy of the game, which will undoubtedly retail for much more. But so far, due to legal restraints, all such rewards have stayed non-financial.

Exposure to risks

So, while you could, theoretically, get hold of an advance copy of the next Booker winning book, or the next mega platinum song or next new killer app — you could not own a piece of the next Facebook or Twitter or Nintendo. Now, you can. This is a revolutionary idea. By harnessing the power of the crowd, by aggregating micro contributions, start-up entrepreneurs can leapfrog the biggest barrier to getting started — finding the cash to do it.

There are risks of course. Even supporters of the JOBS Act, which eases reporting requirements under the Sarbannes Oxley Act for start-up enterprises with forecast sales below a certain level in the first three years, are unhappy about the kind of risks that unsophisticated investors simply attracted by an idea would be exposed to.

In his testimony before the US Senate in the run-up to the legislation, the president of the North American Association of Securities Administrators, Jack Herstein, pointed out: “If a company cannot get financing from a bank, an SBA loan, a venture capital fund, or even friends and family, it is probably because there is a significant risk that the investment is extremely risky.”

True. But the bill's backers argued that it “cuts the red tape that prevents small businesses from connecting with investors” and opened the doors for ‘mom and pop' investors to back ‘mom and pop' enterprises.

The power of micro finance has been well demonstrated in developing economies such as India. Blips apart, micro loans are transforming the rural business landscape, converting the rural poor into rural entrepreneurs and galvanising economic activity in hitherto handout-dependent ‘backward' areas.

‘Sachet' approach

Crowdfunding uses the same concept — of a micro-sized financial exposure — while multiplying the number of risk takers. A ‘sachet' approach to finance, if you will. And we all know how successful the sachet concept has been in transforming the market for consumer product companies.

By taking relatively expensive consumer products and putting them into bite sized — and right priced — sachets, these products suddenly came within the reach of even the poorest consumer. This has caused volumes to shoot up and radically changed the perspective of consumer product marketers on rural markets. For them, the fortune at the bottom of the pyramid has already been unlocked.

Now, it is the turn of investing. “Every household can, should, and will need to participate in the financial markets directly or indirectly to protect their financial interests,” says brokerage house, Asit C Mehta, in its vision statement. But so far, that is far from becoming reality.

There are only about 2 crore demat accounts in India. Even of these, a very small percentage — less than one in nine according to some estimates — are actually active. About 1.5 crore of the income tax PAN holders do not hold any market assets. Which means that about 98 per cent of the addressable population is currently not being addressed by the financial markets.

Low retail presence

Such low retail participation in the markets is also having its impact on entrepreneurship. As many as 13 initial public offers (IPOs) have already been put off this year, pointed out Jagannnatham Thunuguntla of SMC Global in a recent research note — and we are barely out of March.

The funds these 13 IPOs were hoping to raise amounted to Rs 38,000 crore. Money which has to be found elsewhere if these businesses need to survive and grow.

Poor IPO activity and low retail presence in secondary stock markets also restricts the exit options for angel investors and venture capitalists. They would be able to recycle their money, and unlock funds for further seeding of enterprises, only if both the secondary and primary markets are active and upbeat.

If not, the conveyer belt starts stalling. Maybe what the market needs are ‘retail angels' taking individually small, but aggregately significant, bets on retail enterprise. It is time we harnessed the power of the crowd.

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