An 80-year-old ban that has prevented private companies from publicly advertising their efforts to raise funds will lift on Monday.
If you are an entrepreneur struggling to find investors, that may be very good news. But hold the champagne for now.
What this historic change in general solicitation law really means is that if you are an entrepreneur looking to raise money from investors, you might want to spend some quality time with a lawyer before you go shouting it from the rooftops.
That’s because the Securities and Exchange Commission is expected on Monday to release further guidance on how it will regulate the new law – guidance that may determine how much the change will ultimately end up benefiting entrepreneurs.
“The proposed rules are absolutely critical to determining whether this will be successful or not. They have the potential to dramatically reduce the ability of companies to take advantage of this,” says Rory Eakin, co-founder of CircleUp, an online portal that connects consumer-product entrepreneurs with accredited investors. If the SEC requires companies to file excessive amounts of paperwork, many entrepreneurs may choose to not take advantage of the rule change, says Eakin.
2. Only accredited investors can actually purchase equity in a private company. While the lift of the ban means that entrepreneurs can tell the world that they are raising money, it’s still only accredited investors who are able to make investments, explains Jay Kalish, general counsel at the equity crowdfunding platform, OurCrowd, on a conference call with reporters and investors earlier this week.
In the U.S., an accredited investor has to have $200,000 in annual income over the past two years and be able to prove a reasonable expectation that he or she will maintain such an income during the current year, or $1 million in net worth, not including the value of his or her primary home. Also, anyone with a history of fraud or a felon, a so-called “bad actor,” will not be able to participate.
3. Your mom, grandma and sister will all start to see more advertisements from startups, even if they aren’t accredited investors. While only accredited investors will be able to purchase private company stock, everyone is going to see more advertisements. “For the non-accredited investor, the regular consumer, you can’t stop what is being publicly put in your face, right? Just by virtue of being a consumer of media and just a consumer, period, you will be messaged, too, and that is different than before. It used to be that the SEC prevented you from seeing these sorts of things,” says Mittal. “There is a whole new type of messaging that regular people will be exposed to.”