This could get noisy: New rule lets startups shout for money

The SEC on Monday will lift the ban on "general solicitation" and begin to allow companies to publicly talk about their fundraising efforts. Get ready to hear all about it.

Richard Nieva Former senior reporter
Richard Nieva was a senior reporter for CNET News, focusing on Google and Yahoo. He previously worked for PandoDaily and Fortune Magazine, and his writing has appeared in The New York Times, on CNNMoney.com and on CJR.org.
Richard Nieva
4 min read

The tech startup scene is mainly cloistered to a few hubs, namely Silicon Valley and New York, and a few other pockets. But if you haven't heard much about the companies just trying to get off the ground, starting Monday, perhaps you will.

As part of the JOBS Act's implementation, "general solicitation" restrictions will be lifted. That means companies will be able to tweet, shoot videos, pitch, and call potential investors about their fundraising efforts, instead of legally having to keep mum about investment opportunities. So, if you pay even scant attention to startups, expect them to get louder about raising money.

Realistically, that means that most startup founders will begin reaching out to their loyal user bases and not go overboard with the new rules, Naval Ravikant, founder of the online investor network AngelList, told CNET. Overdoing it could also attract regulatory scrutiny, and antics could cause credibility issues said Joseph Wallin, a partner at the law firm Davis Wright Tremaine, and editor of Startup Law Blog. "I think most companies (hopefully) will behave safe and sane," he said.

Still, for every sane, reasonable pitch for money, there's also the possibility of some late-night capital-seeking infomercial from an e-commerce company for dogs. "Entrepreneurs are creative. It's hard to predict what crazy stunts they'll pull to get investor attention," wrote Ravikant and Kevin Laws, AngelList's COO, in an op-ed that appeared on TechCrunch.

Take it from the horse's mouth: Jason Calacanis is a road-tested entrepreneur. He's co-founded a few companies, including Weblogs, the company that created the blogs Engadget and Joystiq, and sold to AOL in 2005. He's now at it again with Inside.com, a still under-wraps Web site.

So what would his playbook be for leveraging the new general solicitation rules? "For me, I would write a blog post explaining what Inside.com is, share screen shots, team member interviews and then tweet, do press and e-mail my list."

Despite legal issues, some entrepreneurs have already done this kind of promotion in the past. Demo days are Silicon Valley's version of commencement ceremonies -- events where companies get onstage and pitch their startup to a room of investors and press. They are technically examples of general solicitation, though the SEC has historically turned a blind eye. Some companies have been even more explicit about their panhandling.

But Calacanis thinks it will be more helpful for some than others. He said it won't be much of a boon for the lesser-known founders, but the high-profile founders will cash in. "The winners will win even more attention and investment -- perhaps 10 times the increase -- and the marginal companies will see a marginal increase."

While many in the startup community see the new rules as a clear positive, there's still just a cautious excitement around the changes. That's because there are some tradeoffs. If a company generally solicits, the bar for proving an accredited investor's wealth requirements -- for an individual, that means having a net worth of at least $1 million, or an annual salary of at least $200,000 -- is a lot higher. The SEC is vague about the process, only saying that "reasonable steps" to verify that each investor has to be made to prove accredited status. A company that generally solicits is also not allowed to take funding from non-accredited investors, whereas it would otherwise be allowed to have up to 35 of them.

On top of that, the SEC has also proposed new rules (PDF) for general solicitation that will rein in the policy. For example, the SEC wants companies to notify it 15 days before it publicly speaks about funding. It would also require the companies to include legal boilerplate with their solicitations. To be clear, those rules have not yet been approved, and the SEC is still taking comments and feedback on the proposed changes. It's a complicated piece of policy, and many recent press reports have contained errors about what changes have already been approved by the SEC.

But despite some of its limitations, ditching the policy against general solicitation is not insignificant. It's been around since 1933 as a part of the Securities Act, passed in the midst of the Great Depression. "After the stock market crashed, the thinking was, selling securities unregulated is a bad idea," said Wallin. Not soliciting to the general public meant protecting people from fraud.

Then came the Internet -- and Twitter and Facebook and YouTube and blogs. And it might be a case of regulation not keeping up with reality. In April 2012, President Obama signed the JOBS -- or Jumpstart Our Business Startups -- Act into law. Its goal is to promote funding to small businesses by making securities regulations for startups more lax. Ravikant was one of the main proponents of the act.

Still, there are detractors. The AARP has been critical of the changes the JOBS Act affords because of concerns that it will be retirees that will be getting fleeced. And of course, just because you're allowed to do something, doesn't mean everyone will. Some companies will consider general solicitation declasse. But others will jump on it, and the important thing is now it's fair game.