Starting Monday, the SEC’s ban on general solicitation is no longer in place, allowing startups to publicly seek out investments.
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The lifting of the 80-year-old ban is part of the Jumpstart Our Business Startups Act, also known as the JOBS Act, which was signed into law by President Obama in April 2012. Traditionally, startups looking for funding were allowed to find investors only through word of mouth, networking and connections. Now, entrepreneurs are able to send out mass emails to potential investors, and post invitations for funding on their websites or social media platforms.
While this section of the JOBS Act is intended to make it easier for startups to get funding and connect with potential investors, investing in startups is still restricted to people considered by the SEC to be “accredited investors.” These investors must have net worth of more than $1 million, excluding the value of a primary residence, or an individual income that exceeds $200,000 for the last two years. Accredited investors can also include individuals whose joint net worth with a spouse exceeds $300,000 for the last two years.
“There are 8.7 million accredited investors in the U.S., but only 750,000 have invested in startups,” says Ruth Hedges, the creator of business plan and due diligence tool Funding Roadmap. Hedges, an advocate for crowdfunding, helped draft the first version of the JOBS Act, which was introduced in 2011 by Rep. Patrick McHenry, (R-NC).
Hedges says lack of exposure is one major reason why millions of these potential investors haven’t invested in startups.
“Their financial advisors aren’t bringing them those kinds of deals. [The lifting of the general-solicitation ban] will expose them to all kinds of new opportunities to invest their money,” says Hedges. She says this part of the JOBS Act will spark innovation and lead to job creation in the United States, as startups are able to more quickly grow their businesses.
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Will This Lead to a Startup Boom?
Only time will tell whether or not the removal of the general-solicitation ban will actually mean more capital-flow for startups.
But, Ben Straughan, a partner at Perkins Coie, an international law firm that specializes in providing counsel to businesses, is doubtful.
“I don’t think it will substantially change how investments get done. Who you know remains paramount, in terms of local connections,” says Straughan. He believes it will still be difficult for a startup in Boulder, Colorado say, to raise money from angel investors in Seattle, Washington barring a personal connection.
Additionally, the SEC is imposing new rules to ensure that non-accredited investors don’t sink their money into startups, which are typically risky investments. Straughan says startups will be required to take “reasonable steps” in order to make certain that investors meet requirements. These steps include checking the W-2s of potential investors to verify income, or checking brokerage account statements that show net worth.
Hedges, however, is much more optimistic about the law’s effect on the startup scene.
“Even if there were a million-and-a-half new investors, which is twice as many people … there’s a tremendous amount of money sitting on the sidelines,” says Hedges.
Hedges says, given social media and digital advancements, investors today feel more comfortable doing business with relative strangers.
“You hire people all over the world you’ve never met. I don’t think it’s any different from investing in people you’ve never met,” says Hedges.