15 ms·

The SEC Just Voted To Lift The Ban On General Solicitation

229 points by gbelote 13y ago

hapless 13y ago
I have little doubt that this will accelerate the super-seed trend, wherein small startups avoid VC for extended periods of time. One thing that struck me: the wefunder guys clearly believe this is going to be a big deal for small-time investors. How will firms accept those "$1000" checks? As far as I know, privately held securities can be issued to only a very small number of investors. Will Facebook/Goldman style investment vehicles become a common mode of skirting the law? Is the SEC going to loosen that 500 investor limit?
- gbelote 13y ago
  Good questions. The Facebook/Goldman style investment vehicles have been blessed by the SEC in the form of a No Action letter back in March. For readers unfamiliar: an LLC fund is created that investors invest in, and that fund makes a single investment in the target company. The company only has one investor listed on their cap table and it makes several things (e.g. collecting signatures) significantly simpler. Investors maintain financial rights, but don't have voting rights in the company. We can offer that vehicle to companies as a fundraising option. We also have a standard convertible note specifically for a large number of small investors that we've been using ourselves which addresses "large number of investor" concerns in a different way. The JOBS act has already increased the accredited investor limit to 2000, and once the unaccredited investor legislation takes effect, those unaccredited investors won't count against that total.
tehwebguy 13y ago
Is this effective immediately?
- gbelote 13y ago
  No. Our expectation is within 30 days, as that's usually the delay, but we don't know for sure.
cantankerous 13y ago
I've been a bit out of this loop, but what kinds of protections remain in place to protect small investors from hucksters "starting a company"? Is it pretty much caveat emptor or is there stuff not mentioned in this article? I think this approach is pretty cool, but there are these drawbacks. Are there going to be limits, protections, or restraints? Is the solicitation still only limited to qualified investors or how does this work? EDIT: I see I missed that the article says "qualified investors", but I'm still not sure if that's the legal term or a more loose term.
- Echo117 13y ago
  I'm assuming that qualified investors means accredited investors. SEC definition here: http://www.sec.gov/answers/accred.htm http://www.sec.gov/answers/accred.htm
  - deleted 13y ago
    [deleted]
  - gbelote 13y ago
    That's correct. I changed the post to say "accredited" - thanks!
    - cantankerous 13y ago
      Okay I get it. That was my hangup. Thanks!
- gbelote 13y ago
  There are no new protections for accredited investors. To be accredited you need to either have over $1m in net worth (excluding your primary residence) or have earned an income of $200k/yr as an individual (or $300k/yr as a joint couple) for the past two years. The philosophy here is and has been: if you're wealthy then you can probably take care of yourself. The last remaining piece of the JOBS act is Title III, the part that allows non-accredited investors to invest. There are protections for this class of investors, including income-based limits (you can't invest more than 5%-10% of your income a year) and it requires investments to be made through a crowd on a crowdinvesting platform. The SEC is still working on the exact rules and regulations for this.
Echo117 13y ago
You still need to be an accredited investor to take part in these potential general solicitation rounds (net worth above $1 million, minus primary residence, or annual income of more than $200,000), right?
- gbelote 13y ago
  Yes
- wallio 13y ago
  This article confusingly referred to "qualified" investors but according to other reporting it is actually "accredited" investors [1]. This is particularly confusing because "qualified purchasers" is an even higher standard required for some investments [2]. [1] http://www.reuters.com/article/2013/07/10/us-sec-advertising-idUSBRE9690I520130710 http://www.reuters.com/article/2013/07/10/us-sec-advertising... [2] http://globalfundexchange.com/about/230 http://globalfundexchange.com/about/230
  - gbelote 13y ago
    Good catch, I've s/qualified/accredited. Thanks!
ChuckMcM 13y ago
I think this is a mixed blessing. I agree that the ban has been a hindrance on people trying to find investors but lifting it may not be the best solution. If you look at the way YC demo day works, its a pretty reasonable way for potential investors to find startups which are compatible with their investment goals. I think this addresses the challenge of the general solicitation rule (finding the startups) without the negative of creating a bunch of unvetted startups advertising for dollars. Basically, I believe lifting this ban increases the noise significantly without much boost to the signal. The analog I thought about when I saw the SEC was thinking about going this way was the lift on advertising prescription drugs. That really hasn't been a 'win' for me, while I'm sure some folks have discovered there are drugs available their doctor didn't know about (signal), a whole lot more people are asking their doctors to give them drugs which aren't really appropriate to their symptoms (noise). It has made the national news shows practically infomercials for a variety of meds for 'old people problems'.
- btipling 13y ago
  And what do you think an "unvetted startup" is? Who decides what is vetted and isn't?
  - ChuckMcM 13y ago
    Its the same thing as an "unreviewed Android App", which is to say a completely unknown entity. So in the YC process, folks compete to be selected and then they work to make sure they are ready on demo day. Investors know that Paul and his partners have spent many weeks with these people helping them achieve the maximum potential possible. That is a form of validating their authenticity or 'vetting'. However, with the general ban lifted, startups will now appear "out of the blue" because they used some funding to 'reach out' to "you" a person they bought from a list (typically the HNWI list [1]). That is the noise part. If you're currently getting postal mail (or spam email) from folks who are congratulating you on your success and offering to help (personal wealth management, car dealers for high end cars, high end credit cards) then you are on that list (whether or not you think you should be :-) Because of that, in my 'bad' scenario of how this could be a not good thing, I expect that we'll see lots of "next big thing" pitches showing up on the nightly news (it scores well in the HNWI demographic) and tucked in with those platinum card offers. What is worse, we'll see the rise of companies that prey on individuals who think they have a great idea but just can't get it off the ground. They will offer to "get them funded" by putting them in touch with hundreds of "angels." And they will just be high pressure sales guys who sell lots to unbuilt housing developments in Utah or time share condos in vacation spots. So the real opportunities get lost in all the noise. However, I recognize I'm somewhat cynical here and this could be a really good thing. I'd like it to be a good thing because there are ideas that don't get funded today that should (or would do well if they were). But watching Shark Tank now and then you are reminded there are a lot of people who want to change the world and don't have the benefit of an incubator's advice or tutoring. Those folks are going to be victimized here. [1] The High Net Worth Individuals or HNWI list is sold in various forms by meta-data collection agencies which identify such individuals through public records (vehicle registrations), web purchasing tracking, and other social "cues".
ScottBurson 13y ago
I think it's going to be very interesting to see how this plays out. For one thing, I expect it to continue the trend of shifting the balance of power from investors to founders. Basically, this will be a huge amount of new competition for angel investors. And crowdinvestors don't have voting rights or a board seat. In order to continue to get into deals they want, angels and VCs will have to bring more value to the table and accept less favorable terms. So I would guess, anyway. On the other hand, it isn't necessarily going to be a river of cash for anyone who wants it. Along with the art of pitching to individual investors, one will also have to learn the art of pitching to the crowd -- and will be competing against everyone else doing the same thing. I expect to see a small industry of companies assisting founders in this new kind of marketing.
- 7Figures2Commas 13y ago
  > Basically, this will be a huge amount of new competition for angel investors. It is unlikely to do any such thing. To argue this, you must believe that there exists a substantial number of accredited investors who are not actively investing in private companies because they haven't received random solicitations to do so. The reality is that accredited investors come in all shapes and sizes. The vast majority of the ones who are interested in putting their capital to work through investments in young private companies are already the people we call angel investors. In other words, lifting the ban on private solicitation is not likely to produce enough new angel investors to have a meaningful impact on competition for deals. > I expect to see a small industry of companies assisting founders in this new kind of marketing. There is already a well-established cottage industry of firms that help private companies raise money from accredited investors. Obviously, the firms that do this don't do so for free, and some of them demand finder's fees that no savvy founder would ever pay, but there's absolutely no reason to believe that companies unable to raise money on their own will pay less trying to market themselves to investors directly than paying a finder's fee.
_delirium 13y ago
I don't have a particular objection to the change, but it's a little overstating the previous situation to say that only people with access to private networks could fund startups. Startups couldn't advertise overtly with "Got $1000? Fund us!" banner ads on Facebook, but nothing prevented a potential investor from emailing the contact addresses of interesting companies the investor saw on TechCrunch or HN, and asking if the company is interested in discussing an investment. Some companies will even telegraph their openness to such contacts on their website (not phrased as a solicitation, but making it clear they are in a fund-raising phase).
rdl 13y ago
How does this affect state securities ("blue sky") laws? It doesn't do a lot of good to be allowed to solicit under federal law if you have to comply with 50 (well, some are null, but still close) different regulations. IIRC NY and CA are particularly tough.
- gbelote 13y ago
  You don't need to comply with the blue sky law investor limits. And the 500 investor limit has been increased to 2000, which doesn't include non-accredited investors (once that part of the JOBS act is implemented).
rayiner 13y ago
I think this is a positive step, but doesn't go far enough. It looks like investing is still limited to accredited investors (individual income above $200k, household income above $300k, or net worth above $1M). So basically, most engineers who work at these companies can't invest in companies in their industry, but inexplicably their doctor can. I'm not one to beat the drum of deregulation, but I think the accredited investor requirements are stupid and wrong. The beauty of the securities laws is that they democratized investing by addressing some of the information asymmetries in the public markets. Regimes that reduce disclosure requirements at the expense of creating accredited investor requirements throw the baby out with the bathwater. Essentially, you cut off many promising investments to the masses, and also artificially prop up the returns to a certain class of investors by lowering the supply of capital. It's a solution that's worse than the problem.
- gbelote 13y ago
  The accredited investor requirements are a little silly and outdated. Good news is that more change is on the way in the form of Title III of the JOBS Act, which was signed into law last year. Removing the ban on general solicitation was Title II of the JOBS Act.
- ryandrake 13y ago
  I'm not an expert, but if a few of those engineers pooled their money together into an investment club, wouldn't that club be able to meet the accredited investor requirement?
  - oijaf888 13y ago
    I don't believe the club would have to meet the requirement. I think if you do your investing via an LLC or Corporation you could subvert that rule but I'm not really sure.
    - jplewicke 13y ago
      The "club" would have to have at least $5 million in assets, according to current SEC guidance: http://www.sec.gov/answers/accred.htm http://www.sec.gov/answers/accred.htm .
arbuge 13y ago
One thing I noticed in passing when reading the articles about this today: the accredited investor rules have not been updated for inflation since they were passed in 1982. If they had been, by my calculations, the net worth requirement would be $2.41m instead of $1m and the income requirement $482k instead of $200k. Definitely easier to get accredited these days...
Caskman 13y ago
Just curious, what was the point of this ban in the first place? To protect the public from scammers?
lifeisstillgood 13y ago
I was listening to Alan Kay on the More or less blog today, and what he said resonated here. Basically the stock market no longer bears any relation to the simple business of providing capital to companies to grow. The trade in secondary markets is so huge that the stock market can happily ignore smaller growing companies - and it is it seems if VCs and similar are to be believed. Plus we know it is - reaching IPO should be when a company really starts to deliver, takes the capital and expands. Not when the founders leave, and the growth halts. So yes, a new stock market, not bound to the financial gaming house, is needed to supply capital to growing companies. It wont be kickstarter. But it will be something. And I doubt it will be American. It will be a federation of small markets across India and Brazil and China. And it wont be tech-led. We can barely use the capital.
rgoksor 13y ago
Good points on the opportunities/challenges today's SEC ruling on general solicitation brings to startup funding. At Bison.co, we believe the important changes from these new rules will have less to do with accredited investors and more to do with increasing data openness in the private equity industry. Check out our latest blog post for details on how it will play out... (http://blog.bison.co/2013/07/10/hello-private-equity-marketing/ http://blog.bison.co/2013/07/10/hello-private-equity-marketi...)
jasonlingx 13y ago
And I thought they just legalised streetwalkers...
stevenwinter 13y ago
General solicitations must still be directed only at accredited investors, not the general public. I feel that this is an important point missing from this conversation.
anovikov 13y ago
But the people who invest still need to be accredited investors, i.e. meet some criteria of annual income and/or net worth? Otherwise you will see a flood of scam and trash public image of the whole idea of starting a startup.

229 points by gbelote 13y ago

I have little doubt that this will accelerate the super-seed trend, wherein small startups avoid VC for extended periods of time. One thing that struck me: the wefunder guys clearly believe this is going to be a big deal for small-time investors. How will firms accept those "$1000" checks? As far as I know, privately held securities can be issued to only a very small number of investors. Will Facebook/Goldman style investment vehicles become a common mode of skirting the law? Is the SEC going to loosen that 500 investor limit?

gbelote 13y ago
Good questions. The Facebook/Goldman style investment vehicles have been blessed by the SEC in the form of a No Action letter back in March. For readers unfamiliar: an LLC fund is created that investors invest in, and that fund makes a single investment in the target company. The company only has one investor listed on their cap table and it makes several things (e.g. collecting signatures) significantly simpler. Investors maintain financial rights, but don't have voting rights in the company. We can offer that vehicle to companies as a fundraising option. We also have a standard convertible note specifically for a large number of small investors that we've been using ourselves which addresses "large number of investor" concerns in a different way. The JOBS act has already increased the accredited investor limit to 2000, and once the unaccredited investor legislation takes effect, those unaccredited investors won't count against that total.

tehwebguy 13y ago

Is this effective immediately?

gbelote 13y ago
No. Our expectation is within 30 days, as that's usually the delay, but we don't know for sure.

cantankerous 13y ago

I've been a bit out of this loop, but what kinds of protections remain in place to protect small investors from hucksters "starting a company"? Is it pretty much caveat emptor or is there stuff not mentioned in this article? I think this approach is pretty cool, but there are these drawbacks. Are there going to be limits, protections, or restraints? Is the solicitation still only limited to qualified investors or how does this work? EDIT: I see I missed that the article says "qualified investors", but I'm still not sure if that's the legal term or a more loose term.

Echo117 13y ago
I'm assuming that qualified investors means accredited investors. SEC definition here: http://www.sec.gov/answers/accred.htm http://www.sec.gov/answers/accred.htm
- deleted 13y ago
  [deleted]
- gbelote 13y ago
  That's correct. I changed the post to say "accredited" - thanks!
  - cantankerous 13y ago
    Okay I get it. That was my hangup. Thanks!
gbelote 13y ago
There are no new protections for accredited investors. To be accredited you need to either have over $1m in net worth (excluding your primary residence) or have earned an income of $200k/yr as an individual (or $300k/yr as a joint couple) for the past two years. The philosophy here is and has been: if you're wealthy then you can probably take care of yourself. The last remaining piece of the JOBS act is Title III, the part that allows non-accredited investors to invest. There are protections for this class of investors, including income-based limits (you can't invest more than 5%-10% of your income a year) and it requires investments to be made through a crowd on a crowdinvesting platform. The SEC is still working on the exact rules and regulations for this.

Echo117 13y ago

You still need to be an accredited investor to take part in these potential general solicitation rounds (net worth above $1 million, minus primary residence, or annual income of more than $200,000), right?

gbelote 13y ago
Yes
wallio 13y ago
This article confusingly referred to "qualified" investors but according to other reporting it is actually "accredited" investors [1]. This is particularly confusing because "qualified purchasers" is an even higher standard required for some investments [2]. [1] http://www.reuters.com/article/2013/07/10/us-sec-advertising-idUSBRE9690I520130710 http://www.reuters.com/article/2013/07/10/us-sec-advertising... [2] http://globalfundexchange.com/about/230 http://globalfundexchange.com/about/230
- gbelote 13y ago
  Good catch, I've s/qualified/accredited. Thanks!

ChuckMcM 13y ago

I think this is a mixed blessing. I agree that the ban has been a hindrance on people trying to find investors but lifting it may not be the best solution. If you look at the way YC demo day works, its a pretty reasonable way for potential investors to find startups which are compatible with their investment goals. I think this addresses the challenge of the general solicitation rule (finding the startups) without the negative of creating a bunch of unvetted startups advertising for dollars. Basically, I believe lifting this ban increases the noise significantly without much boost to the signal. The analog I thought about when I saw the SEC was thinking about going this way was the lift on advertising prescription drugs. That really hasn't been a 'win' for me, while I'm sure some folks have discovered there are drugs available their doctor didn't know about (signal), a whole lot more people are asking their doctors to give them drugs which aren't really appropriate to their symptoms (noise). It has made the national news shows practically infomercials for a variety of meds for 'old people problems'.

btipling 13y ago
And what do you think an "unvetted startup" is? Who decides what is vetted and isn't?
- ChuckMcM 13y ago
  Its the same thing as an "unreviewed Android App", which is to say a completely unknown entity. So in the YC process, folks compete to be selected and then they work to make sure they are ready on demo day. Investors know that Paul and his partners have spent many weeks with these people helping them achieve the maximum potential possible. That is a form of validating their authenticity or 'vetting'. However, with the general ban lifted, startups will now appear "out of the blue" because they used some funding to 'reach out' to "you" a person they bought from a list (typically the HNWI list [1]). That is the noise part. If you're currently getting postal mail (or spam email) from folks who are congratulating you on your success and offering to help (personal wealth management, car dealers for high end cars, high end credit cards) then you are on that list (whether or not you think you should be :-) Because of that, in my 'bad' scenario of how this could be a not good thing, I expect that we'll see lots of "next big thing" pitches showing up on the nightly news (it scores well in the HNWI demographic) and tucked in with those platinum card offers. What is worse, we'll see the rise of companies that prey on individuals who think they have a great idea but just can't get it off the ground. They will offer to "get them funded" by putting them in touch with hundreds of "angels." And they will just be high pressure sales guys who sell lots to unbuilt housing developments in Utah or time share condos in vacation spots. So the real opportunities get lost in all the noise. However, I recognize I'm somewhat cynical here and this could be a really good thing. I'd like it to be a good thing because there are ideas that don't get funded today that should (or would do well if they were). But watching Shark Tank now and then you are reminded there are a lot of people who want to change the world and don't have the benefit of an incubator's advice or tutoring. Those folks are going to be victimized here. [1] The High Net Worth Individuals or HNWI list is sold in various forms by meta-data collection agencies which identify such individuals through public records (vehicle registrations), web purchasing tracking, and other social "cues".

ScottBurson 13y ago

I think it's going to be very interesting to see how this plays out. For one thing, I expect it to continue the trend of shifting the balance of power from investors to founders. Basically, this will be a huge amount of new competition for angel investors. And crowdinvestors don't have voting rights or a board seat. In order to continue to get into deals they want, angels and VCs will have to bring more value to the table and accept less favorable terms. So I would guess, anyway. On the other hand, it isn't necessarily going to be a river of cash for anyone who wants it. Along with the art of pitching to individual investors, one will also have to learn the art of pitching to the crowd -- and will be competing against everyone else doing the same thing. I expect to see a small industry of companies assisting founders in this new kind of marketing.

7Figures2Commas 13y ago
> Basically, this will be a huge amount of new competition for angel investors. It is unlikely to do any such thing. To argue this, you must believe that there exists a substantial number of accredited investors who are not actively investing in private companies because they haven't received random solicitations to do so. The reality is that accredited investors come in all shapes and sizes. The vast majority of the ones who are interested in putting their capital to work through investments in young private companies are already the people we call angel investors. In other words, lifting the ban on private solicitation is not likely to produce enough new angel investors to have a meaningful impact on competition for deals. > I expect to see a small industry of companies assisting founders in this new kind of marketing. There is already a well-established cottage industry of firms that help private companies raise money from accredited investors. Obviously, the firms that do this don't do so for free, and some of them demand finder's fees that no savvy founder would ever pay, but there's absolutely no reason to believe that companies unable to raise money on their own will pay less trying to market themselves to investors directly than paying a finder's fee.

_delirium 13y ago

I don't have a particular objection to the change, but it's a little overstating the previous situation to say that only people with access to private networks could fund startups. Startups couldn't advertise overtly with "Got $1000? Fund us!" banner ads on Facebook, but nothing prevented a potential investor from emailing the contact addresses of interesting companies the investor saw on TechCrunch or HN, and asking if the company is interested in discussing an investment. Some companies will even telegraph their openness to such contacts on their website (not phrased as a solicitation, but making it clear they are in a fund-raising phase).

rdl 13y ago

How does this affect state securities ("blue sky") laws? It doesn't do a lot of good to be allowed to solicit under federal law if you have to comply with 50 (well, some are null, but still close) different regulations. IIRC NY and CA are particularly tough.

gbelote 13y ago
You don't need to comply with the blue sky law investor limits. And the 500 investor limit has been increased to 2000, which doesn't include non-accredited investors (once that part of the JOBS act is implemented).

rayiner 13y ago

I think this is a positive step, but doesn't go far enough. It looks like investing is still limited to accredited investors (individual income above $200k, household income above $300k, or net worth above $1M). So basically, most engineers who work at these companies can't invest in companies in their industry, but inexplicably their doctor can. I'm not one to beat the drum of deregulation, but I think the accredited investor requirements are stupid and wrong. The beauty of the securities laws is that they democratized investing by addressing some of the information asymmetries in the public markets. Regimes that reduce disclosure requirements at the expense of creating accredited investor requirements throw the baby out with the bathwater. Essentially, you cut off many promising investments to the masses, and also artificially prop up the returns to a certain class of investors by lowering the supply of capital. It's a solution that's worse than the problem.

gbelote 13y ago
The accredited investor requirements are a little silly and outdated. Good news is that more change is on the way in the form of Title III of the JOBS Act, which was signed into law last year. Removing the ban on general solicitation was Title II of the JOBS Act.
ryandrake 13y ago
I'm not an expert, but if a few of those engineers pooled their money together into an investment club, wouldn't that club be able to meet the accredited investor requirement?
- oijaf888 13y ago
  I don't believe the club would have to meet the requirement. I think if you do your investing via an LLC or Corporation you could subvert that rule but I'm not really sure.
  - jplewicke 13y ago
    The "club" would have to have at least $5 million in assets, according to current SEC guidance: http://www.sec.gov/answers/accred.htm http://www.sec.gov/answers/accred.htm .

arbuge 13y ago

One thing I noticed in passing when reading the articles about this today: the accredited investor rules have not been updated for inflation since they were passed in 1982. If they had been, by my calculations, the net worth requirement would be $2.41m instead of $1m and the income requirement $482k instead of $200k. Definitely easier to get accredited these days...

Caskman 13y ago

Just curious, what was the point of this ban in the first place? To protect the public from scammers?

lifeisstillgood 13y ago

I was listening to Alan Kay on the More or less blog today, and what he said resonated here. Basically the stock market no longer bears any relation to the simple business of providing capital to companies to grow. The trade in secondary markets is so huge that the stock market can happily ignore smaller growing companies - and it is it seems if VCs and similar are to be believed. Plus we know it is - reaching IPO should be when a company really starts to deliver, takes the capital and expands. Not when the founders leave, and the growth halts. So yes, a new stock market, not bound to the financial gaming house, is needed to supply capital to growing companies. It wont be kickstarter. But it will be something. And I doubt it will be American. It will be a federation of small markets across India and Brazil and China. And it wont be tech-led. We can barely use the capital.

rgoksor 13y ago

Good points on the opportunities/challenges today's SEC ruling on general solicitation brings to startup funding. At Bison.co, we believe the important changes from these new rules will have less to do with accredited investors and more to do with increasing data openness in the private equity industry. Check out our latest blog post for details on how it will play out... (http://blog.bison.co/2013/07/10/hello-private-equity-marketing/ http://blog.bison.co/2013/07/10/hello-private-equity-marketi...)

jasonlingx 13y ago

And I thought they just legalised streetwalkers...

stevenwinter 13y ago

General solicitations must still be directed only at accredited investors, not the general public. I feel that this is an important point missing from this conversation.

anovikov 13y ago

But the people who invest still need to be accredited investors, i.e. meet some criteria of annual income and/or net worth? Otherwise you will see a flood of scam and trash public image of the whole idea of starting a startup.