A vital piece of the 2012 Jumpstart Our Business Startups Acts (JOBS Act) went into effect last week, drastically changing startup finance. Startups are now allowed to use advertising and other methods to gain funding from investors, a process known as “general solicitation” that was previously illegal. Finding funding is now a whole different game for startups, with different rules, altered strategies, and expanded opportunities to acquire capital. Here’s an overview of some of the effects.
- Entrepreneurs have more options: Previously restricted in how they could seek capital, startups tended to flock to a handful of influential investors and locales for funding. With the deregulation, expect a shift in power.
- Platforms are changing: AngelList recently introduced AngelList Syndicates, a funding mechanism made possible by the relaxed regulations. Now, investors can choose to place their money with “angel investors”, usually notables in the entrepreneurial world who are known as shrewd investors. These “angels” then in turn will invest their own money and the money from their Syndicate into startups of their choice. This allows angel investors to write much larger checks, and thus startups to obtain more funding at once.
- Funding is faster: With startups able to reach out to more potential investors, they have a better chance of securing funding more quickly. Venture capital firms can take weeks to negotiate investments, while private platforms can come through within hours.
While there are undoubtedly benefits to the new regulations, some experts fear the new red tape that comes with the allowance of general solicitation will discourage startups from taking advantage of advertising. For example, form D must be filed with the SEC at least 15 days before and up to 30 days after a company advertises for funding. Startups must also register all written advertising materials.
Additionally, the burden of making sure investors are accredited is now on the startup, not the investor. Companies must obtain tax returns, bank statements, or other proof from individuals that they meet requirements to invest—an annual income of at least $200,000 or a net worth of $1 million (excluding a primary residence).
Furthermore, if a company, inadvertently or otherwise, violates these rules, it could face a one-year ban on fundraising—a restriction that could spell disaster for a fledgling startup.
This is Only the Beginning
While this phase of the deregulation may seem drastic now, this is just round one. Expected to go into effect in 2014 is a far more controversial provision of the JOBS Act that removes investor regulations—instead of “accredited investors” who the SEC thinks can absorb the loss that all too often goes with investing in startups, anybody will be able to put their money into a startup and buy a piece of the action.
This piece of legislation is raising eyebrows, as it opens up huge avenues for fraud. Nevertheless, it also represents a huge opportunity for startups to make gigantic gains in the marketplace. Investors and business owners alike should keep in mind that while the current startup shakeup is making waves, this is only the beginning—there’s an even bigger change coming within the next year.
Learn more about how the JOBS Act may impact your business.
[Image source: SEC]