SEC Repeals Startup Solicitation Ban

7-15-2013 10-26-46 PM

The Securities and Exchange Commission voted four to one last week to repeal a longstanding law that forbids startups, venture capitalists, and hedge funds from advertising to the general public to raise funds.

The rules, some dating back as far as 80 years, were initially put in place to ensure that investors were not misled about investment opportunities. The idea at the time was to encourage companies to go public if they wanted to openly raise money from the public. This option has become considerably more difficult in modern years as the IPO process itself is now much more complex and not always possible for startups. As the repeal goes into effect, it should have a significant positive impact on startups looking to get the word out about their early stage funding rounds.

While the news is good, the changes do not address the most pressing issue to early stage startups: crowdfunding. The SEC has yet to rule on the Jumpstart Our Businesses Act of 2013, which would allow startups to begin soliciting funds from non-accredited investors via crowd funding sites. Currently, crowdfunding platforms like Indiegogo are powered by consumers gaining something other than equity for their investment. Investment crowdfunding sites like AngelList are only open to authorized investors with a verified net worth of more than $1 million. The proposed changes would allow anyone with extra cash to become and equity backed stakeholder in a startup, providing a broad new source of capital to the severely capital-starved startup market.

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