What the New SEC Rules Mean for Small Businesses
Are you looking for investment funding for your business? Thanks to a new Securities and Exchange Commission vote that lifts the ban on “general solicitation” for entrepreneurs under the Jumpstart Our Business Startups Act, it’s about to get easier. Here’s a look at what the new legislation means.
- Introductions are no longer required to request funding. In the past, entrepreneurs seeking private securities could not request funding from investors unless they had a “personal relationship” with them. As a result, entrepreneurs spent considerable time either networking to secure introductions to potential investors or seeking capital from friends and family. The SEC ruling eliminates the need for a personal relationship.
- Entrepreneurs may ask any accredited investor for funds through any method they choose. Currently, only accredited investors — defined as individuals with a net worth of more than $1 million or average income of at least $200,000 per year for the past two years — may invest in businesses. Although 268,160 such investors [PDF] were active in 2012, more than 8.7 million Americans meet the criteria. The ruling allows entrepreneurs to reach out to any of them, using social media, advertising, cold calls, emails, or any other methods.
- Entrepreneurs are responsible for vetting their investors. The new SEC guidelines require fundraisers to review a potential investor’s IRS forms for income verification or to seek written confirmation of assets from a registered broker-dealer or investment adviser to ensure that they meet the “accredited investor” qualifications. The Angel Capital Association takes umbrage at these requirements because investors previously could self-certify. The group sees
the new rule as an invasion of privacy and believes it may deter wealthy investors.
- The JOBS Act’s equity crowdfunding guidelines will give entrepreneurs access to money pooled together from ordinary people. Although the rules are not expected to take effect until later this year, another section of the JOBS Act will allow non-accredited investors to invest privately in startups through SEC-regulated crowdfunding platforms. Crowdfunding platforms like Kickstarter and Indiegogo currently permit individuals to donate money in exchange for
goods and services, but equity-based platforms will permit them to gain actual shares in the companies. This could be a big benefit to entrepreneurs who don’t have access to investors with deep pockets, but do have a great idea they can build crowd momentum behind.