CROWDFUNDING

A Big Day in Crowdfunding History

Starting September 23, start-ups can now advertise that they're raising capital. Here's what you need to know before you do.
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On July 11, the Securities and Exchange Commission voted to lift the ban on general solicitation, or the ability for start-ups to advertise the fact that they're looking to raise capital. 

Today, those rules go into effect. And entrepreneurs should take note: Being able to generally solicit can be a potential game-changer when it comes to looking for new investors and raising capital to fund and grow your business. 

"As an entrepreneur,  you need to constantly be building your network," says Rick Field, the founder and CEO of Rick's Picks, a pickle company he founded in 2004."Until now, I've never been able to communicate that to them. The ability to build out the network of potential people that might be interested is crucial."

Field has chosen CircleUp, a consumer products equity crowdfunding site, as platform of choice--and plans to use social media to drum up investor interest among his fans in the next few weeks.

"Raising money, even if you have a surefire idea... is very time consuming," he says. "It's a mixture of art and science. To increase the pool of opportunity is the greatest thing for us. Now, I can reach out to folks that might have been Internet customers or store customers, who might now see on our site that there's a round in process on CircleUp."

The Caveats

However, the lifting of the ban comes with a couple of caveats. 

First, despite being able to announce and promote that you're fundraising, the SEC still mandates that only accredited investors will be able to invest, and the onus falls on the entrepreneur to make sure each investor is accredited. Individuals with $1 million or more in net worth or more than $200,000 in annual income (more than $300,000 if a spouse is included) qualify. (Third-party businesses are already gearing up to capitalize on this requirement and perform verification services, which the SEC will allow.)

Also, entrepreneurs will have to notify the SEC of their plans to generally solicit 15 days before the company initiates its fundraising process and to update the SEC each time the company plans to market or promote the fundraise. Entrepreneurs must stay on top of--or rather in front of--the paperwork requirement before they advertise or risk ineligibility for a year.

Crowfunding Sites, Rejoice

Still, the lifting of the ban is an incredibly important milestone for many entrepreneurs, especially those running the equity crowdfunding sites that connect potential investors with start-up's ideas.

Mike Norman, who founded WeFunder.com in 2012, says today is perhaps the most important day in his company's business. WeFunder.com has about 20 Y Combinator-incubated companies on its site, all of whom are eager to be able to reach a new pool of investors. 

"It's the first time we're able to actually function as a platform," Norman says. "We'll be advertising for all the companies on our site. We'll be able to get them in front of hundreds of thousands, if not millions of new potential investors."

Being able to reach a new pool of investors has other advantages, as well. 

"If you're a company building something in the legal space, it's super valuable for you to have maybe 50 attorneys that are all coming in at smaller dollar amounts," he says. "They're in your sector, they can help you with sales and connections and get users on your product. It's not just about money. There's a ton of people that can provide tactical, grassroots value that people haven't had the opportunity to access before."

Casting a Wide Net

Ryan Caldbeck, the founder and CEO of the San Francisco-based CircleUp, says many of the entrepreneurs he's spoken with plan to generally solicit in a few ways. First, they'll be able to post about it on social media. Then, they'll be able to talk to the press about it. And for the entrepreneurs really trying to cast a wide net, some have even said they'll try using a Google AdWords campaign to attract interest from potential investors.

"You can imagine someone visits a company website, and now they'll see a message saying "Hey, if you like our brand, you can invest in us," he says. 

Of course, don't expect to see every founder generally soliciting for funds--many will choose not to at all. Field says he plans to wait a few weeks to get a feel for how other entrepreneurs are using social media and press to talk about raising capital online before he does so himself.

But the general mood today among many entrepreneurs is cautious optimism--general solicitation opens up a number of new possibilities for companies seeking funding.

"I would bet the SEC is not too excited about what they have just unleashed," Fred Wilson recently wrote." But I am. This is a step, just a step mind you, toward the democratization of startup investing."

IMAGE: Frank Cezus/Getty
Last updated: Sep 23, 2013




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