By Lisa Lovallo, WG’13/G’13, Head of Business Development at RockThePost
On Wednesday, July 10, the SEC made a decision that will change the way entrepreneurs and investors find each other: they lifted the 80-year-old ban on general solicitation for private companies seeking to raise funds. This is exciting news for entrepreneurs who are all too familiar with the cumbersome process of generating interest in their private offerings via word of mouth and personal networking among investors, all while keeping hush-hush the fact that they are fundraising. Now, entrepreneurs will be able to advertise openly that they are seeking funding.
As a main component of the JOBS Act – the Jumpstart Our Business Startups Act signed into action by President Obama last year – the provision lifting the ban on general solicitation will be truly transformative for the startup capital landscape. Currently, there are 8.7 million individuals qualified as accredited investors, but only 756,000 of them have participated in startup investing as an angel. Now that startups can advertise their offerings to their fans, customers, and the general public, the $20 billion angel market could potentially grow tenfold. It’s a huge step towards democratizing access to startup capital.
As Head of Business Development at RockThePost, one of the leading investment crowdfunding platforms, I regularly answer questions related to the JOBS Act and the general solicitation rules. Here are a few of them that help to demystify the recent developments in the regulatory landscape:
What are the effects of these changes to the general solicitation rules?
Once the changes are enacted and entrepreneurs can advertise their fundraising, they will be able to promote it on social networks, their own websites and openly across the internet. Given the tremendous expansion in reach, this will accelerate the fundraising process for entrepreneurs, so they can get back to doing what they do best – growing their business.
When do the new guidelines for general solicitation take effect?
In order for the change to take effect, the SEC first needs to publish the new language for the rule in the Federal Register, and then a period of 60 days begins where public commenting is accepted. The new guidelines should take effect in mid-September.
So, what’s the fine print?
Even with the general solicitation ban lifted, the antifraud provisions of the securities law still apply, preventing companies from making misleading statements, unsubstantiated claims, and omitting important documents or information. Entrepreneurs will need to be very thoughtful and forthcoming with the information they share so as to comply with these provisions. Disclosed written communication covers anything online and offline, including graphic material, TV, audio, and social media.
To publicly advertise, startups will be required to file an Advance Form D fifteen days ahead of when they anticipate advertising their fundraise. They will be required to disclose ahead of time the language they intend to use for marketing purposes.
What is an accredited investor?
An accredited investor is a high-net-worth individual deemed to be financially sophisticated, as defined in Rule 501(a) under the Securities Act of 1933. More information about accredited investors is available here.
Currently, only accredited investors can participate in private offerings via crowdfunding websites until Title III of the JOBS Act is passed, likely in early 2014. Title III will allow non-accredited investors to openly participate in startup investing as well, subject to certain guidelines capping individual investments based on annual income.
If you’re interested in the technical details of the SEC’s guidelines under review for general solicitation, you can find them here.
Bio: Lisa Lovallo is a 2013 graduate of the Wharton MBA/Lauder International Studies MA dual-degree program, majoring in Entrepreneurial Management and focusing on Brazil/Portuguese. She is currently the Head of Business Development at RockThePost in New York City. While at Wharton, she was in charge of communications for the Wharton eClub, launching the club’s new website in 2012, and was also a member of the Wharton Venture Initiation Program. Prior to Wharton, Lisa worked at Bain & Company in Mexico City after completing a Fulbright Binational Business Fellowship there in 2007-2008. She speaks fluent Spanish & Portuguese.