The Securities and Exchange Commission (SEC) finally lifted its 80 year restriction on advertising for Regulation D offerings. What does this mean? Unregistered companies trying to raise capital that were previously banned from seeking funding from the public at large through public solicitation can do so now in the form of equity crowd funding.
This was done through an amendment to Rule 506 of Regulation D of the Securities Act, 1933 in accordance with Sec 201 (a)(1) of the Jumpstart Our Business Startups Act (JOBS) Act that was passed a year ago in April. Despite being passed a year ago this legislation was still waiting on the SEC to formulate rules to implement it. We can’t be happier with the decision. Critiques of deregulation are quick to warn against the backlash opening the floodgates may create but this is a misunderstood reading of the change. Permission to advertise does come with its own safeguards to ensure against fraudulent acts. Rule 506 of Regulation D, apart from the lift on the ban on general solicitation, still stands and as such even though advertising is allowed to the public at large only accredited investors are allowed to invest.
Small startups struggling to raise capital now have the savvy investment minded public to rely on. If you have an idea and product that the world wants then the world shall receive. One could argue that how this is any different from campaigns on sites like Indiegogo or Kickstarter? Isn’t that also public solicitation? Well, yes it is. But the difference is that crowd funding on these sites are based on a ‘rewards’ system. You are provided with a tangible incentive to invest, in most cases the product the company manufacturers at a reduced cost. Crowd funding based on ‘equity’ is totally different. In this case you gain a part of the company, its success or failure is of direct consequence to you. You are an owner of a share of the company.
This is a giant leap forward but only the first phase of implementing the JOBS Act. These rules will become effective on September 23, 2013. There are a number of sections the SEC is still working to formulate rules for. We will keep you updated with all the latest developments. Keep checking in!