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 He said he feels the bill rolls back outdated regulations that don’t apply to today’s start-up ecosystem.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.
Furthermore, it provides for “mini” public offerings, under which companies raising $50 million or less would not be held to some of the financial disclosure requirements that most publicly held companies are subject to.
“This will try to reduce some of the costs of being a new public company,” said Rick Kline, partner at Goodwin Procter, a technology lawyer in Silicon Valley. “It will trickle down and encourage investment by VCs and earlier-stage investors who will view exit timing and strategy as not being so far off.”
Voices of caution
Some experts, as well as the editorial boards of Bloomberg and the New York Times, expressed concern that the law would pave the way for investor fraud by allowing collaboration between brokers and analysts who cover the new, emerging-growth category of companies.
“An industrywide resolution in 2003 forced structural changes designed to end some of the conflicts of interest,” wrote former New York governor Eliot Spitzer in Slate last week. “The bill ... will remove the critical protections imposed in the analyst settlement a decade ago..., allowing them to return to the fraudulent practices of yore.”
Jeffrey Stibel, CEO of Dun and Bradstreet Credibility Corp in California, told us previously that many of the relaxations in regulatory structures might allow shady bankers to swindle unwitting investors.
“Under this bill, you can now go to my grandmother and say, ‘I want you to invest in a company,’ but the whole thing can be effectively a scam and you’ve just created the air of legitimacy to skirt the law,” he said. “Previously, you had to go to a qualified investor, who has enough sophistication to sniff out fraud.”
But Case said he thinks the Senate amendment, as well as other protections written into the law, will be sufficient in order to safeguard investors’ money.
“The amendment helps strike a reasonable balance between providing the capital people need and at the same time doing it in a way that provides a responsible way of protecting investors,” he said. “Any time there’s change, there’s going to be concern.”