Lifting an 80 year old ban on public funding: Are the rewards worth the journey?


Lifting an 80 year old ban on public funding: Are the rewards worth the journey?

In October of 2011, an unofficial IPO Task force led the way to the beginning of Jumpstart Our Business Startups (JOBS) Act. Kate Mitchell, a key role player of the Taskforce explained that with “the right rhetoric, the right support and the right response to criticism, the Taskforce’s finding and proposal became major building blocks of the JOBS Act.” The Taskforce’s findings showed that the regulatory actions that were mostly aimed to protect investors from behaviors and risks posed by large public companies have driven up costs for emerging growth companies looking to go public. The finding’s led to the conclusion that, if left unaddressed, would stifle the U.S. economic growth and jeopardize America global leadership.

The creation of the JOBS Act, which went in to effect on September 23, gave new breath to private companies that looked to public funding efforts by advertising publicly. The JOBS Act lifted a ban that lasted 80 years which prevented private companies from publicly advertise.

For entrepreneurs who struggled to find investors, The JOBS Act would be amazing news, but after closer understanding of the Act, there may be cause for concern yet. The Securities and Exchange Commission (SEC) has released further guidance on how it will provide further regulations on the new law, guidance that may actually depict how the changes will actually benefit entrepreneurs. Rory Eakin, cofounder of CircleUp, an online portal that connects consumer-product entrepreneurs with accredited investors, fears that “with the excessive amounts of paperwork, many entrepreneurs may choose to not take advantage of the new rule changes.”

The legislation best known for its crowd sourcing provisions, would allow companies to sell equity in their business to unaccredited investors and was designed to boost capital for entrepreneurs. Instead it has made the process seem like a goal that might be too far to reach? Alex Mittal, co-founder and CEO of Funders Club, an online venture capital firm, has expressed that “the camp of people who have pushed for the lifting of the ban are concerned it will be too impractical to actually practice.” That the supporters of the legislation are unified by the fact that they all feel there is a level of ambiguity.”

There are still a handful of aspects of the legislation that are already determined and some are still up for negotiation.  This is what we know to be true.

1)      Advertising: raising money. Before the legislation, it would have been illegal for any private company to even tell a journalist that they were seeking funding. Entrepreneurs now can use any source of media that is available to them to express their intentions of any public funding efforts, whether it be through blogging, Tweeting, Facebook, or door to door, as long as the investors are accredited.

This new freedom to advertise works for both the entrepreneur and the investor.  It is now also easier for investors to find “cash-hungry” start ups to invest in through this advertising.

Insight provided by Rory Eakin says that the abilities of any company that was searching for investors had been severely restricted,as before, only top tier venture firms and angel investors had access to private offerings  because there was no other information available in the marketplace.

2)      Equity is only for the privileged. Just because entrepreneurs are given the megaphone that doesn’t mean that everyone can act on the offer. It is only the accredited investors who are able to make investments. The requirements to be an accredited investor are that the investor must make an annual income of $200,000 during the past two years and must have a net worth of $1 million not including their primary home. This also excludes anyone who had a history of fraud or a felony.

3)      Advertising from startups will dramatically increase. Everyone who is a general consumer will suddenly hear an increase in noise regarding start ups looking for public funding, even if they weren’t investors in the past. The difference is that before the SEC prevented anyone from being exposed to these sorts of public outreach. Now there no previsions in place to prevent the exposure of advertisements reaching the general consumer.

4)      Are you an Accredited Investor? To know if you are an accredited investor, the process has become more complicated. After September 23, 2013, self-accreditation is no longer sufficient, now an investor who wants  to buy private company stock is required to verify their accreditation status with a certification from a third-party broker dealer, accountant, or lawyer. I can only imagine that this action is to protect the investor and the startup in making the right choices moving forward.

5)      How much paperwork will there really be? Separate regulations will determine when and how often a private company needs to file for the Regulation D form for the purpose of general solicitation. The current proposal, although not completely set in stone, requires an entrepreneur to have filed a Regulation D Form at least 15 days prior to generally soliciting an offering and another after the solicitation is ended. The expectation is that the regulation will be final by the end of the year. There is also speculation that the SEC will require that private companies place a ‘”legend” or warning label. On their marketing materials. Warning potential investors of risks associated with investing in private companies.

It is understood that many entrepreneurs are waiting for the final regulation to be established by the SEC.  This great anticipation does not mean that the communities of entrepreneurs are ready to ‘jump the gun’ and begin a massive campaign to show off all the benefits that the new legislation will provide.  Many of those in the community will wait and cautiously interpret the regulations as well as wait for a final ruling before making their own determination of whether the new legislation is a good or bad situation for them.

About Cathie Briggette

Cathie is responsible for planning, development and implementation of all Touch Ahead Software’s marketing strategies, marketing communications and public relations, both internally and externally. She also serves as the Marketing Director for NSK Inc., which she joined as an associate in 1997 and where she worked as a developer on multiple mission-critical projects — including several financial projects. Prior to Touch Ahead and NSK Inc, Cathie was the Marketing Manager for the US Software Division of Objects 9000, a German-based company. And before that she was the Marketing Director for Pelikan Pens.

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