Is Raising Money in the US About to Get Easier?

I recently read that as part of the April, 2012, JumpStart Our Business Startups Act (aka the JOBS Act), there is pressure being put on the Securities & Exchange Commission (SEC) to remove some of the restrictions around private company financings. In particular, the SEC has been directed to relax its rules regarding how companies can advertise private offerings to the public, under Reg D, Rule 506.

I haven’t worked in the securities law field now for a long time, but when I did, Reg D was a private company’s best friend. This is the piece of securities law regulation that allows companies to raise money from outside investors without having to prepare audited financial statements or register their offerings and have them approved by federal and/or state securities agencies. As I worked extensively with start-up companies ‘way back when,’ it was something I was very familiar with.

Reg D offerings do have some limitations, though. First, you can’t offer securities to just anyone. U.S. securities laws are very clear that these are for accredited investors only. Accredited investors must have a net worth of $1m+, excluding the value of their personal home, or they must have sustainable, supportable earnings of $200k+ per year. Second, there are huge restrictions based on how you advertise these offerings. Basically all public advertising is out, leaving you with word of mouth and private networking only.

It’s hard to sell out an offering and raise capital though, if no-one knows you’ve got stock for sale, which is why the SEC is tinkering with its rules. Private companies can’t put out press releases, announce offerings on Twitter or FaceBook, etc.

So, assuming that the new rules pass without issue, you can expect to see a lot more advertising, as companies try and use this to their advantage to capture a wider market for their shares. If that sounds like a good idea to you, as a company owner, remember this: it’s still going to be crucial for you and your company administrators to understand who you can and can’t sell shares, interests or anything else that can be identified as a security. It will be more important than ever to make sure you vet all would-be investors, to make sure they meet the accredited investor qualification. Advertising may bring a great opportunity for you to raise capital and reach a wider market, but not without its own price.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

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