In February 2011, Devin Scott wrote an interesting HBS Blog about the “Jobs Act,” including some of the advantages coming to small businesses due to its passage and anticipated signing into law by the president.
After it was signed, the process of writing the regulations (rules) about how the law should be followed began, and on Sept. 23, 2013, one of the key advantages for small business became available. It’s called “Rule 506 (c)” and it allows small companies to raise startup capital in a way that was formerly a serious federal crime: by “general solicitation.”
You see, when the Securities Exchange Commission (SEC) was created in 1933, with Joseph P. Kennedy as the first Chairman, there were only TWO ways to sell stock in your company: 1) To make a PUBLIC OFFERING and 2) to make a PRIVATE PLACEMENT. Each of these methods required strict adherence to law and many hours of document crafting and due diligence on the part of lawyers.
Now, we have a third option: the public solicitation. Without eliminating the two existing options, the SEC is now allowing companies the ability to publicly advertise that their stock is for sale. The solicitation can be made repeatedly and can take many forms of public noticing such as TV, radio, newspapers and magazines, public meetings, etc. There is no limit to the amount of advertising you can do or how long your campaign can last.
There is, however, a slight catch: When people respond to the solicitations and desire to purchase your stock, the company MUST take reasonable efforts to prove that the investor has a net worth of more than $1 million, OR that the investor has made at least $200,000 for both of the past two years and is reasonably expected to make $200,000 in the next year. This is the definition of an “accredited investor” in its simplest form.
If the company cannot be assured that the investor qualifies, they cannot take his money.
In the past, investors could simply sign a document stating that they were accredited investors. This is called self-certification and it satisfied the company’s requirement to allow ONLY these high-net-worth individuals to buy their stock. But with the new rules for public solicitations the company must actually perform some due diligence on their investors.
All things considered, this newly legal way of raising investment capital for your company is GOOD NEWS for small businesses all across the USA and will open up new sources of funds for entrepreneurs.
NOTE: There is also a FOURTH method of raising investment capital in the JOBS Act which has been called, “crowd-funding” but it has not yet been completed by the regulators and is not expected to become available until next year. You can be sure we’ll report on it when it becomes available.