This week, the Securities and Exchange Commission (SEC) lifted a ban that had been in place for decades and that barred making public share offerings not registered with the SEC. The law was originally put in place to minimize potential fraud and financial losses associated with risky business undertakings. In about two months, start-ups will be able to advertise, market, and publicly disclose that they are fundraising, considered a boon for small businesses.
In response to a provision from 2013’s Jumpstart Our Business Startups (JOBS) Act, new businesses will be better able to raise funds. The Act’s aim is to ease the way for smaller firms to raise cash from many investors who might, for example, invest smaller amounts, receiving a small equity stake, instead of having to seek larger, much more difficult to obtain funding. In response, entrepreneurs are planning on massive marketing efforts to reach the appropriate investor audience, for example, printing investment offers on billboards and tee shirts, according to the Wall Street Journal. By marketing in this way, business owners are able to avoid much of the work and legal complexities involved in securing investors.
Passed by President Obama last year, the JOBS act, mandates that the SEC relieve some of the rules smaller businesses, start-ups, and investors have had to deal with. A section of the new act lifts an 80-year-old ban on so-called “general solicitation,” or marketing, to raise funds.
Coulter Lewis, owner of Quinn Popcorn LLC said he has about one dozen angel investors who learned of his business through networking; however, “finding the right people was very difficult, especially because we’re in food, not in tech.” Lewis seeks to raise cash using Twitter and Facebook so that he can increase staff and broaden product offerings. “We’d make every corner of our network aware that we’re looking to raise capital,” says Lewis, who started the business with his wife, Kristy, in 2010.
“There’s a million different creative ways we can reach out to new investors now,” says Nathan Derrick, 33, who founded SupplyHog, a Web marketplace that has been selling residential construction supplies for the past two years. “When you’re looking to grow a business, you just want to get out there and get all the attention you can.”
Previously, under restrictions in place since 1933, private offering solicitation was banned; however, selling registered securities for public offerings can be financially prohibitive to a smaller business. “It’s really, really tough to have to hold your tongue and not say what you’re doing or to capitalize on the buzz you’re getting,” Derrick says. Heath Abshure, president of the North American Securities Administrators Association notes that, with the ban lift, “Whoever has the slickest ads will make the most money here.”
“This removes the biggest barrier to entrepreneurs,” Fundable’s Eric Corl told John Koetsier of VentureBeat. “This will give entrepreneurs a much better way to reach outside of their network for capital.” For example, Craig Sher, co-founder of StearClear LLC—a designated-driver service that provides cars and drivers to those who have overindulged on alcohol—intends on targeting investors by placing ads in restaurants and bars, which is where much of his client base originates.
For most start-ups, says Sher, the process to raise cash is inefficient, time-consuming, and costly, especially given that many firms require expensive terms and a guaranteed return on investment (ROI). “Before, it was like having your house for sale but not being able to tell anyone about it but your friends and family,” Corl says. “This will open up a tremendous amount of capital for entrepreneurs.”
Loten, Angus; Janofsky, Adam; Needleman, Sarah E. “SEC Clears Way for Entrepreneurs to Tweet, Blog About Unregistered Shares“; The Wall Street Journal; July 10. 2013.
Koetsier, John. “SEC: Startups Can Now Advertise They Are Fundraising; Crowdfunding Has To Wait“; VentureBeat; July 10, 2013.