SEC Crowdfunding Rules: When Deregulation is Actually More Regulation
Arye Barnehama, founder and chief executive officer of Axio, left pitches his brainwave headband to participants at a demo day in San Francisco, California, on June 18, 2012. (Photo by David Paul Morris/Bloomberg)
The Jumpstart Our Business Startups Act (JOBS Act) was supposed to make it easier for entrepreneurs to raise capital and for individuals to invest in promising startups. But new rules from the Securities and Exchange Commission may create more regulatory burdens for start-ups.
Justin Maddox at 1776, a D.C. accelerator, provides an example of how investors can get snagged:
Say you have a startup. You’ve got a great team, built the MVP, and are getting good traction. In an effort to raise a seed round, you build a 3-minute video with a demo of the product, information about the team, and the terms of your offering. You post the video to your Angellist profile and tweet your followers that you are looking for investors. 31 days later, you land a meeting with famed angel investor Paul Singh, who ends up loving the company. Before writing a check, his lawyer does some quick due diligence, and that’s when everything falls apart. Why? Because it turns out you’ve inadvertently used general solicitation, and he does not want to deal with the ramifications.
What’s general solicitation? The WSJ has an opinion piece that explains:
The Jobs Act was supposed to give startups the option of being exempted from what the securities laws call the "general solicitation" rules, which prohibit public marketing of private securities. …
Startups also worry that the demo days held around the country, where entrepreneurs pitch to investors, could become legal booby traps, since they are advertised publicly and could be attended by people who aren't accredited investors….
What was supposed to be an example of bipartisanship in Washington to liberate a key part of the economy instead became a way for activists on the SEC to impose new controls. Entrepreneurs, investors and everyone who benefits from a thriving economy deserve better.
The SEC has a dual mission—protecting investors and promoting capital formation. Our capital markets aren’t a free for all, so the necessary protections need to be put in place so that investors can use such a vehicle with legal certainty and not be duped by unscrupulous operators. At the same time, moving forward with the SEC’s proposal would be, as New York venture capitalist Fred Wilson called them, on his blog, "a non-starter in startup land."
Crowdfunding provides businesses with a new and unique form of raising capital. It has been used in other venues and should be given a shot for business startups. A company with no track record might rely heavily on demo days as the only opportunity to get in front of potential investors. If that’s gone, so is the company, and that’s the opposite of what the JOBS Act meant to accomplish.
The SEC is already past the deadline. It’s worth more time to get it right and make sure we’re protecting investors and encouraging startup growth.
This post was originally found on FreeEnterprise.com.