Nearly every week I come across a startup company or investment firm that offers this explanation when I ask for more details about their financing efforts: “We can’t talk about that because of SEC regulations.”
In other words, buzz off or we might get in trouble. However, the times they are a changing. And that excuse may no longer be valid for not wanting to talk to pesky reporters like me. The SEC today voted 4 to 1 today to institute new rule as part of the JOBS Act that would allow startups and investment firms to freely discuss the money they are trying to raise.
TechCrunch notes that the preexisting rules had been in place for 80 years: “While it may pose added risk of investors being misled, it should make it significantly easier for companies to raise capital to start or continue financing a business.”
Some argued that the existing rules had made it far more challenging to entrepreneurs to attract capital, going through private back channels to raise cash. By allowing for more open communication, one could imagine that entrepreneurs will now be able to tap a bigger pool of backers, perhaps even using online tools like AngelList more aggressively. But that’s also been the worry.
SEC Commissioner Luis Aguilar, the only dissenter today in the vote, argued the changes will “make fraud easier by allowing fraudsters to cast a wider net for victims,” reported the AP.
What do you think? Are these rule changes a good thing? Will they make it easier for you to raise capital as a startup founder if you can more freely talk about what you are doing in the press or at industry events?
I asked Seattle attorney William Carleton, who has been closely following the issue, for more details on the rule changes, and here’s what he had to say:
In about 60 days, startups will be able to freely advertise and talk about what they do, IF they follow a new rule that is going to impose burdens that are not imposed today by the current rule.
Once they start talking and freely advertising about what they do, once they start doing this, then they are automatically under the new rule. They are then locked in, and will have to take extra steps and extra care about (a) who can invest, and (b) what filings are made, before they start advertising, let alone before they sell any stock to anyone. In effect, the offering is made more expensive and subject to delays, if the startup chooses to advertise.
The smartest and best deals probably will not advertise. They will stick with the old rules, that does not impose the new burdens.
The new rule – for those startups who opt to fall under it – will be more complicated and require much more pre-planning. Right now, under the existing rule, which will stay in place as an option, startups don’t have to make regulatory filings in advance, nor do they have to do special diligence on the accredited status of their investors (they can simply rely on what investors tell them). Under the new rule, for startups that opt to follow it, sure, they can tweet for investors, advertise, set up websites, advertise on GeekWire, whatever they like, BUT, they will then have to:
- Take extra steps to verify that all of their investors are accredited (perhaps by using third party services; SecondMarket has already announced one)
- File a Form D in advance of first sale (this means finalizing deal terms with a lead angel and then, instead of closing, making a filing and waiting)
- Make other filings or disclosures to the SEC that we don’t know the specifics on just yet
