SEC Lifts Ban on General Solicitation; Implements First Phase of JOBS Act for Reg. D, Title II Accredited Investors

SEC Lifts 80-Year Ban on the General Solicitation of Private Placement Equity Investments

By Robert Hoskins

Today, the United States finally inched its way toward the full implementation of the JOBS Act passed in April 2012, required by federal law to be in place by January 2013, but still not fully realized as intended by President Obama and the both houses of the U.S. Congress.

SEC Crowdfunding Call for Comments on November 15, 2013

“We want this new market and the private markets in general to thrive in a safe and efficient manner, and these rules we adopted and proposed are designed to facilitate that objective,” said Mary Jo White, Chairwoman of the SEC. “As we fulfill our mission to facilitate capital formation and maintain fair and efficient markets, the Commission must always focus on strong investor protections.”

Until the general solicitation ban was lifted, hedge funds, VCs, and startups had to quietly raise that money, soliciting by word of mouth and other forms of private communication. Now companies can buy ads, launch PR campaigns, leverage social media and openly announce that they’re seeking investors.

The addition of general solicitation is expected to fuel a new cottage industry of investor matching-making websites that aim to broaden the investment pool to financial stalwarts outside the stanchly protected investment circles of Silicon Valley.

“With general solicitation it will be much easier for investors to find companies they are passionate about supporting,” said Mike Norman of crowdfunding website, WeFunder. The new rule will hopefully open up the capital-starved startup market to the majority of investors. According to WeFunder’s website, only 3% of the US’s 8 million accredited investors are active in the tech startup space.

For example, leading startup investing platform, RockThePost, announced last week that its equity crowdfunding website will provide the following equity crowdfunding investment services:

1. Prominent featuring of startups publicly announcing investment rounds
2. Investor verification system that shifts the burden off startups
3. Secure transactions where Escrow accounts act as a safe haven for early committed investors
4. Full transparency – third party identity checks and legal business verification, crowdsourced due diligence, bank-level security
5. Smart matching of investors to startup investments that match their preferences

Equity crowdfunding sites such as Angelist, Circleup, Crowdfunder, FundersClub, RockThePost and Wefunder are important the nascent industry because according to the Center for Venture Research, only 258,000 investors have made an angel investment out of the 8.7 million accredited investor households eligible to invest in the U.S.

The general solicitation ban lift will allow startups to publicly fundraise via methods such as equity crowdfunding, harnessing the power of the internet and social media to reach potential investors in all corners of the country.

According to a Forbes article, many states have decided not to wait on the SEC. Kansas, the first state to enact laws requiring the registration of sales of securities to the general public 100 years ago, turned out to be the first in the U.S. to enact an “intrastate” Invest Kansas Exemption law. The state of Georgia passed the Invest Georgia Exemption that provides even more freedom for crowdfunding than the Kansas exemption. North Carolina’s House passed a crowdfunding bill that is expected to move to the full legislature in an updated form and be signed into law next year. The state of Washington is currently teeing up crowdfunding legislation and other states will likely follow suit.

Tanya Prive, a co-founder of RockthePost, points out that “One of the other issues I’ve seen is that there are plenty of startups with a large customer base that they cannot tap into for capital support under existing regulations. These people are the biggest fans and evangelists of the brand, who might be first in line to invest. Once the user base is able to engage with their beloved company in fundraising mode via an investment crowdfunding platform, the company will be able to capitalize on the crowd’s interest in their success and accelerate the fundraising process by converting customers into investors.”

“So although there are strings attached to the ruling, lifting the ban on general solicitation – an 80-year-old rule – will help investors connect with entrepreneurs, and vice versa. The decision also weighs in the favor of entrepreneurs and investors who live outside places like Silicon Valley, where old-school networking and personal connections are how financing deals typically happen,” said Eric Markowitz, crowdfunding reporter for Inc. Magazine. “By lifting the ban, entrepreneurs living outside traditional tech hubs may find it easier to connect with investors, raise money, and grow their start-ups without having to necessarily relocate.”

Although large players like private equity firms Bain Capital and Blackstone Group LP could take advantage of the chance to use television ad campaigns, many lawyers and regulators close to the industry have said that they expect smaller funds with fewer resources to test the new rule first.

“By allowing issuers to solicit to a broader group of potential investors, the SEC has showed its commitment to democratizing the investing process and putting an end to yesterday’s ‘old boy’ investor networks,” said Barry Silbert, founder and chief executive of SecondMarket Inc., a marketplace for private shares.

The next important date to watch for is October 31, 2013, when the 2nd wave of SEC crowdfunding guidelines are expected to be issued for Title III investors that will allow unaccredited investors to participate in private placement investments.

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More News on the SEC’s New General Solicitation Rules:

1. SEC Lifts Ban On General Solicitation, Allowing Startups

2. SEC Approves JOBS Act Requirement to Lift General Solicitation Ban

3. Starting Today, Startups Can Broadcast Their Fundraising From the Rooftops

4. The General Solicitation Ban Lift Can Change Startup Investing Forever

5. Crowdfunding Will Flourish Regardless Of What The SEC Does

6. Game Changer: SEC Lifts General Solicitation Ban

7. Boon for Start-ups: SEC Lifts Ban on General Solicitation

8. SEC lifts longtime advertising ban for hedge funds, others

9. SEC Lifts Ban on General Solicitation in Certain Private Placements

10. S.E.C. Lifts Advertising Ban on Private Investments

11. SEC Votes to Ease 80-Year-Old Ban on Private-Investment Ads

12. SEC Lifts Ban on Hedge Fund Ads

13. SEC Lifts 80-year-Old Ban on Advertisements for Private Investors

14. SEC lifts advertising ban on private investments: How it affects you

15. SEC Votes to Lift Ban on Hedge Fund Advertising

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FundersClub Snubs 97% of New Accredited Investors Seeking to Get into the Equity Crowdfunding Investment Business

Surprising regression by FundersClub reverses business model and makes investors jump through hoops to participate in one of America’s biggest financial industry opportunities

By Robert Hoskins

FundersClub, one of the world’s first online venture capital firms, announced that it is changing its membership application process to an invitation-only model. The change will not impact current members, but will require individuals interested in joining FundersClub to be invited by a current member. Alternatively, individuals who are familiar with a FundersClub member, may request a professional courtesy referral to FundersClub. In all cases, individuals must be certified as accredited investors before FundersClub will admit them as a member.

FundersClub is a new type of venture capital platform, built around a unique online marketplace that allows accredited investors to become equity holders in FundersClub-managed venture funds

“This represents a significant shift in how we intend to grow our community of premier accredited investors,” said Alex Mittal, co-founder and CEO of FundersClub. “At a time when crowdfunding platforms are poised to get loud via solicitation and advertising activity, we as an online venture capital firm are actually heading in the opposite direction, focusing on quality and empowering our members themselves to build a thoughtfully curated community,” added Mittal.

Prior to this change, membership to FundersClub was open to all accredited investors who applied through the company’s website, subject to verification of their accredited investor status. The definition of an accredited investor is an individual who has a net worth, or joint net worth with the individual’s spouse, that exceeds $1 million at the time of the investing, excluding the value of their primary residence, or whose income exceeded $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 and has a reasonable expectation of reaching the same income level in the current year.

The new membership process allows current members to invite friends and colleagues whom they know and trust. Individuals that accept the invitation become members of FundersClub once their accredited investor status is verified. Additionally, FundersClub will consider on a case-by-case basis applications for membership.

“We’ve always believed in the value of empowerment. Our invitation-only model underscores that belief and our commitment to providing a safe, reliable and trustworthy environment for our community,” added Mittal.

Alex Mittal and Boris Silver launched FundersClub in July 2012 with one goal in mind — to change the way the world fundraises and invests. Together they had founded five companies, raised more than $20 million in funding and invested as angels in other startups. For FundersClub, the pair raised capital through their own platform and from other top investors including Y Combinator, First Round Capital, Spark Capital, Intel Capital, Andreessen Horowitz, Felicis Ventures, and Tim Draper. All FundersClub members with access to investment opportunities have been certified as accredited investors.

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More Crowdfunding articles on FundersClub:

• Exploring FundersClub. The New Age of VC?

• FundersClub Ditches Dumb Money By Going Invite-Only

• FundersClub braces against general solitication by rewarding investors for referrals

• Funders club offers bounty for startup referrals

• Funders Club Announces It Will Take 20% Carried on Future Funds