Under the decades-long ban on general solicitation and advertising, companies can only privately advertise their offerings to accredited investors (a category including individuals with more than $1 million in net worth), sometimes on private online platforms restricted to those
investors. The new measure would let start-ups advertise to the general public — potentially via social media, e-mail or billboards, for instance — but would still prevent unaccredited investors from buying stakes in these companies.
While the move is widely supported by entrepreneurs, it has drawn criticism from investor advocates who believe public advertising could push investors into bad or fraudulent investments. It could also put pressure on intermediaries — which often connect start-ups and investors online — to change their business models.
Lifting the ban could improve the U.S.’s entrepreneurial landscape by “removing barriers that hurt startups,” Steve Case, co-founder of America Online and chairman of investment firm Revolution wrote in a statement. “By combining innovation in capital formation with safeguards to protect investors, a well-implemented JOBS Act can help unleash a new wave of entrepreneurial activity and job creation.”
It could also provide investors with more information about available offerings, noted Rory Eakin, co-founder and chief operating officer of CircleUp, a platform allowing accredited investors to buy stakes in fledgling consumer products companies.
“As we’ve long advocated, it’s a positive for individual investors and for small businesses. Fundamentally, the opening of information helps individual investors, and certainly helps small businesses to spark the conversation.”
However, the measure could force intermediaries like CircleUp — which introduces accredited investors to start-up offerings on a password-protected platform — to adjust their models.
“It will allow issuers to talk directly to investors,” Eakin said. “We must improve our services even more” to continue drawing start-ups and investors, he added.
This could mean ramping up the market data available on the platform so investors have more incentive to use it, or “giving them access to what other investors are doing, creating a more transparent marketplace and eliminating closed-door conversations,” said Ryan Caldbeck, CircleUp’s co-founder and chief executive.
Alex Mittal, founder of FundersClub, an online platform connecting venture capitalists to start-ups, noted that the measure might force platforms like his to highlight the non-financial value it brings to start-ups and investors — the platform’s due diligence and background research process for start-ups, the investment expertise of the platform’s team, or the size and influence of its network of investors, for instance.
“That kind of thing will stand out in a world where anybody can start to solicit investment in private companies...it’s going to create this renewed emphasis on the accuracy of what you’re conveying,” Mittal said.