How Lifting The Solicitation Ban Benefits Startups
By Vela Wood
On July 10, 2013, the Securities and Exchange Commission voted in favor of implementing a Jumpstart Our Business Startups (JOBS) Act provision that lifts the ban on general solicitation or general advertising for certain private security offerings to accredited investors.
What was the Solicitation Ban?
Under Rule 506 of Regulation D under the Securities Act of 1933, there was a general prohibition against general solicitation and general advertising for private offerings to accredited investors (this ban is also found in various other parts of the ’33 Act). This ban restricted how small businesses, hedge funds, and private equity funds raised money for private offerings. Essentially, issuers and participants in the offering were restricted from engaging in any form of general solicitation or general advertising to attract accredited investors.
What is the new rule?
Now, Rule 506 has a new paragraph [Rule 506(c)] that permits general solicitations and general advertising in private securities offerings, so long as certain conditions are met by the startup. Startups and private equity funds can now market to the general public as long as they follow certain rules:
- Can only solicit to accredited investors
- There must be reasonable steps taken to confirm that the investor is actually an accredited investor
- Must file a Form D with the SEC at least 15 days prior to solicitation; and
- Within 30 days of wrapping up the general solicitation and general advertising, an amended Form D must be filed with the SEC.
What does this mean for startups, entrepreneurs, and investors?
Rule 506(c) allows startups to publicize that they are fundraising. They no longer have to rely on “word of mouth” within their network of accredited investors to raise capital. It will be easier for accredited investors to find companies they are passionate about supporting. It is estimated that of the 8.7 million accredited investors in the United States, only 756,000 participate in angel investments via angel networks and personal contacts.
What is next?
Ultimately, this will allow more accredited investors to be reached and could increase investments in early stage capital exponentially. However, the lifting of the ban does not help non-accredited investors. Now, if Title III of the JOBS Act is approved by the SEC, this will be the real game-changer in the world of private security offerings.
Basically, if approved, anyone, from Warren Buffet to the stay-at-home mom, could invest and take an equal stake in new startups. But, due to some concerns about bad actors, implementation of this section has been delayed. If the SEC approves this section, not only will more capital be pumped into startups, but there will be three different types of investors: (1) accredited investors; (2) non-accredited investors making over $100K (with 10% limitation on investments), and (3) non-accredited investors making under $100K (with 5% limitation on investments) who will be able to participate in startups.
If this section is approved, states will likely take a more active role in policing startups within their borders. For example, a bill pending in North Carolina would require that investors be warned in “plain English” that they acknowledge they are investing in a high-risk investment and that they may lose their entire investment. Assuming that Title III is approved, more states would likely make the same move. Regardless, the ability for startups to advertise that they are fundraising combined with a whole new segment of potential investors will undoubtedly revolutionize the startup world.