On Monday, a Securities and Exchange Commission rule that lifts longstanding restrictions on how startups can market equity stakes to investors will take effect. That doesn’t mean the startup community is happy.
The rule was adopted in July and follows from the Jumpstart Our Business Startups Act, which called for ending the 80-year-old ban on general solicitation. Effectively, that means that startups, venture capital funds, and other private investment vehicles will be able to tell more potential investors that they’re raising money.
On the same day that the SEC published the general solicitation rule, however, it also proposed amendments that will likely diminish the rule’s impact. The proposals include requiring startups to file with the SEC before they start raising money and to send the agency all written documents used in solicitations. It also includes severe penalties for companies that find themselves on the wrong side of new fundraising rules.
The result, wrote Union Square Ventures’ Fred Wilson in a blog post last month, is to “neuter General Solicitation to the point that it is legal but nobody avails themselves of it.”
It’s unclear when the offending amendments would take effect. The comment period ends on Monday, which could create an awkward interim period in which general solicitation is allowed, without the looming new strictures. That has led to speculation that the SEC will finalize the additional rules on Monday, says Rory Eakin, chief operating officer at crowdfunding portal CircleUp. “If they’re trying to protect investors, they wouldn’t want a lag where general solicitation is allowed and the protections aren’t in place,” he says.
It’s also unclear whether the proposed amendments will ever be finalized. Last week the Small Business Administration’s Office of Advocacy told the SEC that the new rules failed the federal Regulatory Flexibility Act, which requires agencies to assess the effect of certain rules on small businesses. The SBA asked the SEC to create a new comment period for the amendments, which would delay implementation.
Some startups, meanwhile, are gearing up to take advantage of general solicitation rules as soon as they can. Crowdfunding site Rock the Post is planning a “digital demo day” for Tuesday, to let startups pitch accredited investors via live stream. And startup accelerator FlashStarts is streaming its demo day, which was scheduled for Monday so that participating startups could be among the first to use general solicitation to pitch investors.