Looking for Capital? Welcome to a Whole New World
Looking for inspiration this morning, I came across a very interesting article written by Marla Tabaka. I was inspired.
The Security and Exchange Commission has lifted the ban on general solicitation. What does that mean? Basically it repeals a decades old law, from the Great Depression, prohibiting unscrupulous business people from going door to door selling fake securities—supposedly to raise capital to fuel business growth. By limiting who you could approach for outside investment to family, friends, and professional acquaintances it did curtail the door to door selling of bogus securities, but limited the ability of small business owners who didn’t have wealthy friends or family to reach out to for investment.
“In answer to the effect these laws had on small business, the JOBS ACT was signed in April 2012, which legalized securities-based crowdfunding in two separate phases,” writes Tabaka. “What’s called the Title II phase goes into effect today, allowing businesses to advertise their need for capital—as long as they are only accepting accredited investors into the offering and filing the correct form.”
In my opinion, anything that makes capital more available to small business is a good thing. This may even help some of the smaller small businesses on the small business continuum, but it’s likely too early to tell at this point. Tabaka suggests there are a few things entrepreneurs will need to know to stay out of trouble:
- You can legally advertise your need for capital, but…: You must complete the regular Form D, specifying a 506(c) capital raise. You could conceivably start using almost any type of advertising media to secure funds, but most entrepreneurs will likely turn to securities-based crowdfunding sites.
- You’ll need to verify the accredited status of any investors: You can’t take investment from just anyone and must ensure that anyone who does invest in your round is accredited: They have annual income in excess of $200,000 ($300,000 if a spouse is included) or have a net worth of over $1,000,000. In the past you could rely on the investors to self-verify, but no longer.
- There are some ambiguous rules to watch out for: Some of the rules associated with this haven’t gone into effect yet—some may never go into effect. Tabaka suggests, and I agree, “The industry is encouraging businesses to follow the rules about registering your securities outlined by the SEC until the final ones are known.”
- This could be very good for early-stage companies: Some think this will get accredited investors more involved with early-stage companies. This is an area that is very difficult to otherwise find any funding.
- Some crowdfunding fans think this might be good for non-tech start-ups: This is probably the thing that has me the most optimistic about the change. Funding a start-up, particularly one that isn’t a tech start-up, is incredibly challenging.
Like any alternative options to financing, I’m encouraged that there are movements to help early-stage companies find the capital they need to start and grow a successful business. Like Joy Schoffler, founder of Leverage PR, I agree with the idea that, “Just because you can doesn’t mean you should.” And, just because you have more access to potential investors via social media doesn’t mean you can be lazy in how you present your business to potential investors.
A final word of caution from Tabaka, “Lastly, it is critical that business owners thinking about doing a 50(c) offering (generally soliciting) remember that they could be under a microscope. Misstating the truth—even just a bit—or omitting critical information is considered fraudulent activity and could result in stiff punishments.”