These thoughts are completely my own and do not reflect the intent or thoughts of Return on Change, any of its affiliates, directors, employees or stakeholders of any kind.
We start with a shout out to the color guard of the days of old, when Terminator returns for the second time to herald the end of days. So we’ve heard Commissioner Aguilar and his complaints against the lifting of the ban on general solicitation under Title II and how investors will now be left naked, unprotected and in the cold. In a tundra where only issuers now bear appropriate weapons, surely this is the coming of the end where rampant fraud will cause countless investors to lose their mortgages on shell companies that sell nothing but shares of the Brooklyn Bridge, right? Absolutely not.
Title II of the JOBS Act directs the Securities and Exchange Commission to amend safe harbors under the Securities Act of 1933 to permit the use of general solicitation to offer securities. What this means is that startups will be able to publicly advertise that they’re raising money in private offerings, gaining access to a broader network of investors that go beyond first-degree connections. The final rules will be effective on September 23, 2013.
Only “accredited investors” are allowed to participate in these private offerings and purchase securities. Issuers must take reasonable steps as outlined by the SEC to ensure the accreditation status of all the purchasers. Accredited investors are individuals who meet certain requirements set forth by the SEC.
What this means for investors is that they can now learn about investment opportunities through social media advertising or any other communications outlet, which includes online websites where investors can go in and view startups who are looking for funding. Previously where investors mostly learned about investment opportunities via word of mouth or funds, Title II opens up a whole new world where investors can find specific startups or industries to invest in as the communication barrier is lifted.
Detractors of Title II argue that general solicitation facilitates fraud by allowing fake issuers to cast a wider net for victims.
We are consistently focused on investor education and protection to adequately arm potential investors with the proper tools to fend for themselves when reviewing and discerning different investment opportunities. With the lifting of the ban on general solicitation, private issuers will now be able to advertise their offerings in the public forum. Before the naysayers come out and start criticizing startups using this newfound medium to market their private securities, we wanted to share a few thoughts.
Watch out for the Funds
With what often seem like unlimited deep pockets, the hedge funds and mutual funds of the world will now be able to completely change their marketing and advertising strategies. A lot of funds that use PR firms to handle their communications will likely build entire marketing teams dedicated to advertising offerings. With heavy coffers and a little bit of ingenuity, these funds are much more capable of leading investors astray than a startup tweet-soliciting their 5 digit capital raise.
Let’s count the numbers
Similar to the fund concept, typical raises for startups are staggeringly smaller than any institutional raise. So before you start bashing on startups trying to raise money for legitimate and highly promising businesses that create jobs, let’s rethink the already highly regulated industry, their communication tactics, and how much (or how little) fraud they’ve caused thus far.
Title II does NOT create a free for all
There will be a natural shifting, due to the network effect, of conduits created for fundraising (such as portals) as well as for communications. While there may be some growing pains as in any nascent stage of regulation and industry, the technology of our day and age will make it so much simpler.
So this article was obviously written in the anticipation that there will be countless scathing pieces released about how fraudulent hucksters will completely take advantage of the general public with this new ability to advertise. If you think about it just briefly and take into account the amount of information that everyone has at their fingertips thanks to the internet, general solicitation will even further empower investors by providing additional industry and deal information which will allow for improved pricing and due diligence mechanics.