Among other provisions, the bill does away with the ban on so-called “general solicitation” — the idea that a company can’t advertise itself to investors. If it is signed into law, start-ups would be able to announce their fundraising intentions to venture capitalists.
The bill’s proponents include Naval Ravikant, who runs AngelList, a type of social network for venture capitalists. He said he feels the bill rolls back outdated regulations that don’t apply to today’s start-up ecosystem.
“General solicitation is an old rule on the books that should be eased,” he said. “Previously, some overzealous processor could have gone after an investor for violating it, and that could destroy a start-up’s entire financing.”
The bill also establishes a framework for crowdfunding — which enables small companies to solicit equity capital from myriad small-dollar investors.
As we reported last week, companies seeking crowdfunding investment would still file with the Securities and Exchange Commission, and one amendment would limit individuals with an annual income or net worth of less than $100,000 to investing 5 percent of their income in crowdfunding.
AOL co-founder and Startup America chair Steve Case, who was a vocal advocate for the bill, said the crowdfunding provision would help entrepreneurs who don’t live in venture hot spots like Silicon Valley or New York City, or whose business models don’t appeal to venture capitalists.
“Capital is not adequately deployed across the nation, and this will be another tool that will help provide capital to underserved regions,” Case said. “Overall, that will be a good thing for innovation and for job creation.”
Michael Mayernick, co-founder of the Web optimization company Spinnakr in Washington, said he’s frequently had to turn down family and friends who have wanted a stake in his company in exchange for a small investment. If crowdfunding were legalized, he would be able to say yes.
“It always helps to have the first money in when you’re raising money from professional investors,” he said.
The JOBS Act includes other measures that would loosen regulatory requirements for smaller companies seeking to go public, creating a new classification called “emerging growth companies.” For companies with less than $1 billion in revenue, the number of audited financial statements required for an IPO would be reduced, and those companies would be exempted from having to hire an external auditor prior to the offering.