4 ms·

How exactly is this bill different from just normal contract law? Is it not already super common for small businesses to solicit money from friends/family in ex

by durkie 14y ago

How exactly is this bill different from just normal contract law? Is it not already super common for small businesses to solicit money from friends/family in exchange for a share of the new company?

wtvanhest 14y ago
There is a lot of regulation around raising money for businesses of any size. In general if the investors are accredited you can raise the money, if the investors are non-accredited you cannot. In order for an investor to be accredited, they must make over $200,000/year or have a liquid net worth of over $1m. http://www.sec.gov/answers/accred.htm http://www.sec.gov/answers/accred.htm This bill builds in an exception for non-accredited investors to invest in much riskier companies. Before this bill, the only way for non-accredited investors to invest would be if the company went public which is very expensive.
- gm 14y ago
  So is it illegal to have your acquaintances and family invest in your startup? If not, then have all startups been breaking laws all along? If not, then what's the difference? The link you mention does not address that issue at all (it just defines what an accredited investor is)
  - excuse-me 14y ago
    Technically it often is. The SEC never really cared because historically friends+family funded businesses didn't end up on the market. Your typical neighborhood Italian restaurant doesn't IPO. If it did, and grandma who gave you her famous meatball recipe, turns up with her team of IP lawyers things will get interesting The difference here is that you are inviting 1000s of random people to invest. Then even assuming you are totally honest and above board - once you are marginally succesfull the same VCs will come and screw these investors in the same way that they screw foudners.
  - JumpCrisscross 14y ago
    No it is not, you just have to provide additional disclosure and follow your state's "blue sky" laws. These are just a headache to keep up with which is why it can make an exit or VC raise down the line a bit harder.
    - wtvanhest 14y ago
      Blue Sky laws typically require investors to be accredited unless there are exceptions. Some states may allow for non-accredited investors to invest in startups, but I don't know of any. One area that may or may not work would be if your family member loaned you the money personally. That isn't considered an investment since it is a personal loan. But, in a personal loan, they couldn't ask for equity since that would be an investment.
  - dandelany 14y ago
    My understanding is that SEC Rule 506[1] allows you to have up to 35 "sophisticated" but non-accredited investors. The catch is that you "cannot use general solicitation or advertising to market the securities" - which means friends and family who you approach directly are fine, but a public crowdfunding campaign is not. The new crowdfunding rules will allow companies to publicly solicit a much larger number of investors, as long as the company is raising <$1 million, and each investor is investing <$10k or 10% of their annual income, whichever is lesser. Disclaimers: This is an oversimplification, the law has been passed but the SEC rules have yet to be written and enacted, IANAL and really don't know what I'm talking about. [1] http://www.sec.gov/answers/rule506.htm http://www.sec.gov/answers/rule506.htm
citadrianne 14y ago
It's common, but there actually is no exemption for friends and family. Those offerings should technically be done under the 506 exemption which require investors to be accredited. It was also illegal, before the JOBS Act, to engage in "general solicitation," which is what raising money via a publicly-viewable crowdfunding page would amount to.
- durkie 14y ago
  That's what I was wondering -- I've heard of the accredited investor barrier to entry, but it does seem like rule 506 would allow for investment from anyone.
  - citadrianne 14y ago
    The exemption is just for private placement as opposed to an IPO. You still have to be accredited.
    - durkie 14y ago
      Really? Sorry, not trying to be dense here, but from what I see in 506.b.2.ii: Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description. Sounds like to me that they just require you or your representative to "know what you're doing" if you're not an accredited investor.
    - rexreed 14y ago
      But isn't a general solicitation on a public site considered to be a public offering? My understanding of what a "public offering" is, is that any general solicitation to the public, without qualification, for investment in a security in a company, where a security is any investment without a guaranteed return (as opposed to debt). I understand that JOBS act allows to solicit up to $1M from unqualified investors, but does it allow public offerings of up to $1M without registration?
tptacek 14y ago
As I understand it (ie: barely), the problem here isn't that the SEC is going to send agents in black suits and sunglasses to arrest your parents; rather, the problem is that when a real VC's counsel reviews your company's paperwork, they'll throw a fit if there are nonaccredited investors in the company. As I understand it (less than barely), the biggest real-world issue is that nonaccredited investors can cause extremely expensive legal headaches down the road for a company if those investors decide they've been wronged by the company.

by durkie 14y ago

How exactly is this bill different from just normal contract law? Is it not already super common for small businesses to solicit money from friends/family in exchange for a share of the new company?

wtvanhest 14y ago

There is a lot of regulation around raising money for businesses of any size. In general if the investors are accredited you can raise the money, if the investors are non-accredited you cannot. In order for an investor to be accredited, they must make over $200,000/year or have a liquid net worth of over $1m. http://www.sec.gov/answers/accred.htm http://www.sec.gov/answers/accred.htm This bill builds in an exception for non-accredited investors to invest in much riskier companies. Before this bill, the only way for non-accredited investors to invest would be if the company went public which is very expensive.

gm 14y ago
So is it illegal to have your acquaintances and family invest in your startup? If not, then have all startups been breaking laws all along? If not, then what's the difference? The link you mention does not address that issue at all (it just defines what an accredited investor is)
- excuse-me 14y ago
  Technically it often is. The SEC never really cared because historically friends+family funded businesses didn't end up on the market. Your typical neighborhood Italian restaurant doesn't IPO. If it did, and grandma who gave you her famous meatball recipe, turns up with her team of IP lawyers things will get interesting The difference here is that you are inviting 1000s of random people to invest. Then even assuming you are totally honest and above board - once you are marginally succesfull the same VCs will come and screw these investors in the same way that they screw foudners.
- JumpCrisscross 14y ago
  No it is not, you just have to provide additional disclosure and follow your state's "blue sky" laws. These are just a headache to keep up with which is why it can make an exit or VC raise down the line a bit harder.
  - wtvanhest 14y ago
    Blue Sky laws typically require investors to be accredited unless there are exceptions. Some states may allow for non-accredited investors to invest in startups, but I don't know of any. One area that may or may not work would be if your family member loaned you the money personally. That isn't considered an investment since it is a personal loan. But, in a personal loan, they couldn't ask for equity since that would be an investment.
- dandelany 14y ago
  My understanding is that SEC Rule 506[1] allows you to have up to 35 "sophisticated" but non-accredited investors. The catch is that you "cannot use general solicitation or advertising to market the securities" - which means friends and family who you approach directly are fine, but a public crowdfunding campaign is not. The new crowdfunding rules will allow companies to publicly solicit a much larger number of investors, as long as the company is raising <$1 million, and each investor is investing <$10k or 10% of their annual income, whichever is lesser. Disclaimers: This is an oversimplification, the law has been passed but the SEC rules have yet to be written and enacted, IANAL and really don't know what I'm talking about. [1] http://www.sec.gov/answers/rule506.htm http://www.sec.gov/answers/rule506.htm

citadrianne 14y ago

It's common, but there actually is no exemption for friends and family. Those offerings should technically be done under the 506 exemption which require investors to be accredited. It was also illegal, before the JOBS Act, to engage in "general solicitation," which is what raising money via a publicly-viewable crowdfunding page would amount to.

durkie 14y ago
That's what I was wondering -- I've heard of the accredited investor barrier to entry, but it does seem like rule 506 would allow for investment from anyone.
- citadrianne 14y ago
  The exemption is just for private placement as opposed to an IPO. You still have to be accredited.
  - durkie 14y ago
    Really? Sorry, not trying to be dense here, but from what I see in 506.b.2.ii: Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description. Sounds like to me that they just require you or your representative to "know what you're doing" if you're not an accredited investor.
  - rexreed 14y ago
    But isn't a general solicitation on a public site considered to be a public offering? My understanding of what a "public offering" is, is that any general solicitation to the public, without qualification, for investment in a security in a company, where a security is any investment without a guaranteed return (as opposed to debt). I understand that JOBS act allows to solicit up to $1M from unqualified investors, but does it allow public offerings of up to $1M without registration?

tptacek 14y ago

As I understand it (ie: barely), the problem here isn't that the SEC is going to send agents in black suits and sunglasses to arrest your parents; rather, the problem is that when a real VC's counsel reviews your company's paperwork, they'll throw a fit if there are nonaccredited investors in the company. As I understand it (less than barely), the biggest real-world issue is that nonaccredited investors can cause extremely expensive legal headaches down the road for a company if those investors decide they've been wronged by the company.