The SEC has just (finally, over a year after the overarching act was signed) ruled on, and approved Section 201(a) of the Jumpstart Our Business Startups Act. The approval won 4-1. Here’s what this means for you.
This ruling removes a ban on general solicitation (public announcement or advertising of any kind) for private placements that has been in place for 80 years (Securities Act of 1933). As a reminder, the Securities Act generally, and the prohibition of general solicitation for private placements specifically, was designed to protect “unsophisticated investors” from losing all their money.
I put “unsophisticated investors” in quotations because the SEC used a pretty crude metric for “sophistication”—wealth. If you were wealthy, you were considered smart enough to make your own investment decisions, and you were accredited. If you were not wealthy, you were not smart enough to know what to do with your [small amount of] money, and you were unaccredited. For obvious reasons, this ban has been the big sticking point on crowdfunding. On the one hand, we still want to “protect old ladies”—i.e., guard against fraud and nefarious behavior—but on the other, wealth is a terrible measure of investor sophistication.
This TechCrunch article and Dan Primack at Forbes have nice summaries of the fine print of what this ruling means, but here are my bullets:
Accredited investors are still the only people and institutions (very generally: individuals = Net worth > $1M or income > $200k; institutions = AUM > $5M) allowed to invest in non-publicly listed securities offerings (private placements).
Companies and funds can now openly advertise that they are ‘privately’ (ie. non-public exchange listing) raising funds.
Companies and funds are not required to openly advertise that they are fundraising.
If you choose to do it the old-fashioned way, nothing changes.
If you advertise, there are some additional rules and filings required, the biggest of which is that there is a bit more required to prove that your investors are actually accredited. Previously there was more than a little bit of “don’t ask don’t tell,” which adds to the farcical nature of this accredited investor business in the first place.
This will be fascinating to watch evolve. Will I get Google Ads served to me to invest in Pets.com? Will it be looked upon unfavorably to openly advertise that your equity is for sale? Or the opposite?
And then the biggest question still remains: when and if open solicitation will be available to unaccredited investors, or a corollary: will the definition of accreditation ever change?