Dateline: 05 April 2012
AxSA Factoid of the Week
30 March 2012
As the last decade concluded, medical costs in the United States totaled as much as $2.6 trillion, and that colossal sum is ten times more than overall medical costs in 1980. Surprisingly enough, however, the challenges posed by these rising costs are not readily impactful on the majority of Americans. In fact, many would be stunned to learn that, according to the findings of a salient study conducted by the Agency for Healthcare Research & Quality, as little as five percent of the nation's population actually accounts for 50% of total health-care costs. The findings from this study further suggest that, of the top ten percent of health-care spenders, which account for 63% of total health-care cost, this small pool of chronically ill individuals is largely Caucasian (at 80%), mostly female (at 60%), and over the age of 65 (at 40%).
AxSA on Crowdfunding
Today President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act. This bi-partisan piece of legislation will give new business ventures the ability to raise up as much as $1 million per year in up to $30,000 increments from each non-accredited, individual investor. The bill also will not require the ventures to file for an initial public offering with the Securities and Exchange Commission in order to raise such funds. This financing approach is called crowdfunding. Now signed into law, there will be a period of close to 270 days for the SEC to construct and implement necessary regulations, meaning that this financing approach cannot be utilized until 2013. Nevertheless, the prospects for crowdfunding seem to generate a bit of excitement.
After thorough consideration, AxSA believes that it is appropriate to take an extremely conservative view on crowdfunding as a new means of raising capital for startup businesses. Until and unless the SEC acts to install rigorous safeguards, this consultancy predicts that crowfunding could result in a Spindletop-styled uptick in new-enterprise investment, wherein unseasoned investors hopeful for big returns, as in the time of Spindletop, start snapping up the securities of companies whose fundamentals and projections are based on nothing more than the blue sky. This is to say little of the likely number of fraudulent prospectuses that these unseasoned investors will encounter. Moreover, many of these companies, particularly the well-intended ones, could find themselves dangerously undercapitalized, if they figure that going after small investors will save them time and money, as opposed to taking the more diligent path to seeking sophisticated investors.
While the use of crowdfunding will benefit some, this consultancy believes that, given the already-high rate of business failure in the United States, it surely will not benefit most. A greater number of investors and entrepreneurs face potential losses and, worse, litigation with this approach. Therefore, whether you are a potential investor or entrepreneur, AxSA contends that you must be exceptionally cautious when crowdfunding is utilized.
To be sure, some safeguards are present in the current legislation. For example, any business seeking less than $100,000 must simply produce its tax returns and CEO-certified financial statements. Meanwhile, any business seeking from $500,000 to $1 million must produce audited financial statements to would-be investors. Even still, this consultancy insists that investors must remain vigilant. Here are seven, general tips:
- Request and study the business materials, including the business and marketing plans, all financial documents and projections, and the resumes of the solicitors.
- Vet the founders and managers of the new business venture.
- Learn as much as you can about the business, its operations, its competition, and its market.
- Have a clear understanding of the company's value, the deal structure, and the size of the equity position being offered.
- Develop a clear understanding of any tax liabilities, litigious risks, and so on.
- Document everything!
- Do not invest in any venture with a business model that you do not understand or find suspect. (It is imperative that you remember one caveat to this law is, while you can invest relatively easily, you will not be able to sell your position in a crowdfunded venture nearly as easily.)
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