In a 4-1 decision today, the five commissioners of the Securities and Exchange Commission voted to lift the ban on general solicitation and general advertising of fundraising rounds. But it comes with a big caveat: The SEC commissioners also voted 3-2 for new regulations that would force start-up founders to file documents with the SEC before raising cash.
Analysts are already wondering if the increased regulation may outweigh the benefits of increased deal flow through general solicitation. It's a valid concern but one that shouldn't overshadow the significance of what has just happened. This ruling has the potential to completely change the way entrepreneurs raise money from investors--and that's a good thing.
General solicitation, if you're not familiar, is essentially what legally prohibits start-ups from advertising investment opportunities through traditional media to non-accredited investors. It's also one of the roadblocks to mainstream, equity crowdfunding portal sites--currently start-ups are required to present sales of securities of their companies through official financial channels--like angel investor groups or advisory firms.
The road to lifting the ban on general solicitation has not come easily--or quickly.
It began back in April 2012, when President Obama signed the the JOBS Act into law. One of the provisions of the JOBS Act instructed the SEC to clarify Rule 506 of Regulation D to allow general solicitation, provided that issuers of the securities took "reasonable steps" to verifty that purchasers of the securities were accredited investors.
But that changes, beginning today. By lifting the ban on general solicitation, entrepreneurs will be allowed to solicit investments through new channels--provided the issuers take appropriate steps to vet investors.
"Lifting the ban will help small businesses, and independent investors, because it will allow for increased flow of information," Rory Eakin, COO of CircleUp, said an email. "Today, with the ban in place, only the most well-known investors get access to the best deal flow, making it more difficult for accredited investors across the country to invest in top deals."
However, today's decision comes with some major caveats. Perhaps most frustrating for entrepreneurs are the additional regulation measures--namely the requirement to file documentation before a 506(c) offering. While those regulations are meant to keep investors protected from fraud, some analysts sense trouble for entrepreneurs.
"Start-ups are going to talk to a reporter about their fundraise, it will hit the media--they won't have filed their form in advance--and then, apparently, they will be ineligible for 506 for one year," Joe Wallin, a start-up lawyer in Seattle, pointed out this morning as he live-blogged the hearings. He added, "The law could have been simplified. Instead, we get more law; more regulations; more complexity; more legal fees...etc."
These regulations will likely prove to be a point of controversy, even if they're simply meant to protect investors from fraudulent activity. Troy Paredes, one of the two commissioners voting against the new regulations, was particularly disappointed with the commission's decision, saying that the new regulations will make it potentially "too costly for an enterprise to expand" operations and that it will "lead to new burdens."
It's true that the additional regulations may add complications--and cost--to the process, especially for first-time founders who are new to the fundraising process. But they're unlikely to present a huge burden for seasoned entrepreneurs, who have established relationships with investors and experience navigating the SEC.
So although there are strings attached to the ruling, lifting the ban on general solicitation--an 80-year-old rule--will help investors connect with entrepreneurs, and vice versa. The decision also weighs in the favor of entrepreneurs and investors who live outside places like Silicon Valley, where old-school networking and personal connections are how financing deals typically happen. By lifting the ban, entrepreneurs living outside traditional tech hubs may find it easier to connect with investors, raise money, and grow their start-ups without having to necessarily relocate.
Later today, the SEC will update its site with proposed rules from today's hearing. Check back here for the latest updates.