Starting Monday, Startups Can Broadcast Their Fundraising From the Rooftops — If They Heed the Fine Print
In the U.S., the corporate fundraising process has traditionally been conducted behind closed doors, in order to make it a safer process. If companies wanted to raise money from the public, they had to go public. That changed as part of the JOBS Act, which passed in 2012 and has been implemented very slowly since.
Monday, Sept. 23, marks the day the Securities and Exchange Commission lifts its ban on “general solicitation.” Starting then, would-be fundraisers can blog, tweet, shout and post equity offerings on crowdfunding portals.
But, as gleeful as some crowdfunding portals may be about this day finally coming, it’s not going to be dramatically easier to fundraise. Companies still can only accept money from accredited investors — and, unlike before, investors will actually have to prove that they meet the wealth qualifications to be accredited (i.e., income exceeding $200,000 in each of the two most recent years, or net worth of $1 million, excluding primary residence, etc.).
And fundraisers will have to extensively disclose their offerings to the SEC and the public, with stringent restrictions and the risk of a one-year ban from fundraising if they screw anything up.
People in the burgeoning crowdfunding industry are stoked. “This opens up a world of opportunities for American businesses and aspiring entrepreneurs; new investment opportunities for more than 8.7 million accredited investors and millions of startups and small businesses seeking capital,” FundingRoadmap CEO Ruth Hedges said in emailed comments.
The fact that general solicitation exists should open up a broader pool of investors, said Crowdfunder.com CEO Chance Barnett in a phone interview. “You’ll see growth in the number of people who will end up registering as accredited investors,” Barnett said. “There’s a whole class of people whose income levels are high enough so they have the potential to participate.”
But it’s not that easy. For instance, startups can’t just suddenly start tweeting that they want some cash on Monday when they hear the news. As the SEC proposal sets forth, issuers will be “required to file the Form D at least 15 calendar days before engaging in general solicitation for the offering.”
Many watchers are concerned about the strictness of the rules — and they say they’re not just whining on behalf of poor, naive startups.
“If you generally solicit, it’s a higher bar,” said AngelList’s Naval Ravikant in an interview on Thursday. His site, which formerly conducted fundraising behind a login wall, will support general solicitation, but is highly concerned about how it has been laid out.
Ravikant wrote in a letter to the SEC (PDF):
“[R]ules that may be easy for Wall Street are a death sentence for startups. They are easy to break accidentally and the penalty for noncompliance is severe. There isn’t a ‘start’ to a formal financing round that a startup controls. They are constantly testing the waters to see whether their venture is far enough along that it can attract investor interest at a high enough valuation. Over time, startups ‘soft circle’ investors and know they have enough interest to close a financing. The lead investor or startup proposes terms then a close happens very quickly. Chance meetings or opportunities to promote your startup rarely come with a 15-day advance notice built in. More importantly, many entrepreneurs will see others publicly discussing fundraising and will do the same — without filing papers first, since they didn’t know it was required. Fundraising startups aren’t profitable yet, so the penalty for non-compliance — a one-year financing ban — often means death for the startup.”
In the same vein, Union Square Ventures investor Fred Wilson blogged, “It is my opinion, and that of those who we do business with, including our securities lawyers, that these proposed rules effectively make General Solicitation a non-starter for startup companies.”
So, yes, the floodgates might be open — but that doesn’t mean it’s time for the floods just yet.