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New SEC Rules: Added Opportunities, Added Risks

New SEC Rules: Added Opportunities, Added Risks
Image credit: REUTERS/Jonathan Ernst

Want to raise money for your company? Start advertising.

Formerly, companies looking to raise startup or growth capital had to keep their search very hush hush, as it is now illegal to broadcast your fundraising needs. As of September 23, however, private businesses, startups, hedge funds, private-equity funds and venture capitalists will be able to publicly advertise security offerings to a subset of investors. This will be huge for at least two of these groups: private businesses, startups.

With the implementation of Title II of the JOBS Act, which was passed in April of 2012, private businesses and startups will be able to garner attention from a massive group of private investors through a multitude of public avenues including social media. So, if you’ve been avoiding it up to this point, you may want to get smart on the power of social media marketing. We recommend Socialized by Mark Fidelman, as it's a great quick read.

Even so, don't expect the floodgates to come roaring open. Only certified accredited investors -- or those with a net worth of at least $1 million (excluding their home) or who have a consistent annual income of $200,000 or higher -- will be able to invest at this point. This may change if the SEC implements Title III of the JOBS Act, which is expected to occur sometime in 2014.

Related: What Entrepreneurs Need to Know About the Historic Change in General Solicitation Law That Goes Into Effect September 23  

Businesses may also be forced to pre-file any documentation they plan to use in conjunction with the general solicitation of capital, with the SEC (among other proposed requirements). If these proposals are implemented, there may be stiff penalties associated with companies that don’t comply, such as a one-year moratorium from the ability to raise funding via exemption 506, so pay attention and tread carefully.

Still, there are 8.7 million accredited investors in the U.S. and only 3 percent of them actively invested in private deals last year. That’s because historically, access to investing in top small businesses and startups has been largely limited to well networked angel investors, and venture capital funds, all doing so via exclusive closed door deals. Now that small businesses and startups will be able to broadcast their fundraising efforts, this once closed door private market will be wide open to any accredited investor across the country.

So who does this massive group of accredited investors consist of? Think doctors and lawyers, to successful entrepreneurs and finance professionals. What is unique about this group is their ability to offer strategic skills alongside their investment. These professionals may be great sounding boards for founders as important questions come up and mentorship is needed.

Then, the question is: How will you access these riches? Online marketplaces like CircleUp, Angel List, and (our company) Bolstr, will serve as access points for this new class of investor. Intermediaries should work to enrich the experience of discovering investment opportunities by curating them on behalf of the investor. These platforms also give investors the ability to invest substantially smaller amounts of capital in a given opportunity, than a typical angel investor, allowing for increased diversification across investment opportunities.

Related: Secret's Out: Now You Can Tell the Whole World You're Raising Money for Your Business

But just like all new opportunities, hiccups are to be expected. If you are thinking about raising funding through the new 506(c) general-solicitation rule, make sure you first consult with a securities attorney. There are several new requirements that must be met in order to comply with the rule, and slipping up on any of them will be very costly.

How do you think equity crowdfunding will affect startups and small businesses? Let us know with a comment. 

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Larry Baker and Charlie Tribbett are the co-founders of Bolstr, a marketplace where people can invest in, and support the local small businesses that make their communities home.

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