In late September, the SEC eliminated its longstanding ban on general solicitation. For the first time in 80 years, companies and funds (issuers) can publicly discuss plans to raise capital. While the accredited investor restrictions remain, this rule change has the potential to create a paradigm shift in the way money is raised in the US.
The intent of the JOBS Act was to enable capital to flow more freely to smaller enterprises, so while it is now legal to tell the world about a capital raise, there’s a catch. The SEC has mandated that the issuer take reasonable steps to verify that all investors they accept are actually accredited investors as defined by the SEC. This is just one of many nuances that are vital to understand before deciding to publicly discuss a capital raise. In addition to issuers, other market participants will have to adapt. Here’s a breakdown of how these participants may be impacted by general solicitation rule change:
- Companies: Now it is legal for companies to shout from the rooftops that they are open to new investors. But just because they can, doesn’t mean they should. If a company generally solicits, investors will need to undergo additional vetting before making an investment. Companies need to consider how their potential and existing investors will react to a public solicitation.
- Incubators/Platforms: Incubators & platforms can now cast a much wider net in order to find new investors & evangelists for companies. But the onus of making sure that investors are eligible to invest still resides with the company – so it is important to be thoughtful about which investors to accept and how to manage that process.
- Lawyers: The most important thing is to work with a lawyer to understand the implications of generally soliciting before starting to fundraise. These rules are VERY new so it is reasonable to expect conservative advice. Hear what the lawyers are saying on this LexisNexis panel.
- Investors: Retail accredited investors now have access previously unseen deal flow, which helps them identify more opportunities and deploy more capital. Professional investors that are accustomed to private deals may find the additional requirements for verification bothersome. Most investors are excited about the new rules and the deals that have emerged as a result of the changes.
If you want to learn more, 500 StartUps, AngelList and SecondMarket will be hosting a webinar to discuss how general solicitation can help your company. Join us on November 13. Sign up now!
If you are unable to join the webinar, but would like to learn more about how to simplify your capital raise, reach out to Sudhir Kandula at firstname.lastname@example.org.