How the New SEC Rules Can Help Businesses Get Funding

By Kathryn Hawkins Tuesday, September 17, 2013

If you’re seeking investments for a startup business, new legislation from the Securities and Exchange Commission should make it easier to get access to the cash you need to grow your company.

Under the Jumpstart Our Business Startups (JOBS) Act, which was signed into law in April 2012, Congress has eased the restrictions on who can invest in a company, and how they can be approached.

In the past, there were two factors that greatly restricted entrepreneurs’ ability to secure investment:

  • Companies that sought to raise investment without going public were generally subject to a “ban on general solicitation.” This meant that they were restricted from advertising the fact that they were seeking funds, and could not approach potential investors without an existing relationship. This meant that business owners who had access to large networks of family and friends with substantial cash had a clear advantage, while others would have to spend a disproportionate amount of time networking and seeking investments to potential investors.
  • Such companies were also restricted to seeking funds from an unlimited amount of “accredited investors,” along with just 35 “non-accredited” investors. Along with various types of businesses, an individual accredited investor is defined as someone with a net worth of more than $1 million, excluding the value of his home, or someone who earns at least $200,000 per year individually or $300,000 jointly. This meant that, after reaching the 35-person limit on non-accredited investors, entrepreneurs must seek out venture capital firms and angel investors rather than asking for smaller amounts from their less-wealthy associates.

Now, both of those guidelines have been changed for the better:

  • As of July, the SEC eliminated the ban on general solicitation for non-public businesses seeking funds. That means that start-up businesses are now free to publicly advertise their request for funding on websites, in magazines, on the radio, and anywhere else they see fit. Entrepreneurs can now reach a much broader audience, targeting precisely the types of investors they’re looking for by advertising in specific trade magazines, at trade shows, on specific websites, or using targeted LinkedIn or Facebook ads, among other methods.
  • Although the rules have not been set in stone yet, the JOBS Act will soon allow non-accredited investors to pool their funds and make investments through approved equity crowd-funding sites, such as FundersClub and Wefunder, which will allow individuals to invest as little as $1000 at a time.

For small businesses who need funding to grow, these changes could mean the difference between sinking and swimming—and, for individuals, it can provide an opportunity to invest in start-ups they care about, giving a much-needed boost to the small business economy.

*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.

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