
The SEC Just Voted To Lift The Ban On General Solicitation - gbelote
https://wefunder.com/post/36-the-sec-just-voted-to-lift-the-ban-on-general-solicitation
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ChuckMcM
I think this is a mixed blessing. I agree that the ban has been a hindrance on
people trying to find investors but lifting it may not be the best solution.

If you look at the way YC demo day works, its a pretty reasonable way for
potential investors to find startups which are compatible with their
investment goals. I think this addresses the challenge of the general
solicitation rule (finding the startups) without the negative of creating a
bunch of unvetted startups advertising for dollars. Basically, I believe
lifting this ban increases the noise significantly without much boost to the
signal.

The analog I thought about when I saw the SEC was thinking about going this
way was the lift on advertising prescription drugs. That really hasn't been a
'win' for me, while I'm sure some folks have discovered there are drugs
available their doctor didn't know about (signal), a whole lot more people are
asking their doctors to give them drugs which aren't really appropriate to
their symptoms (noise). It has made the national news shows practically
infomercials for a variety of meds for 'old people problems'.

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JumpCrisscross
My instinct is to lash out against this move. General solicitation lowers the
amount of social vetting a manager must go through before being able to raise
funds. It also makes un-accredited investors more aware of the investment
barriers around them, which could loosen resolve for maintaining those walls.

But 2013 isn't 1933. The average sophisticated investor is more versed in
finance, more wary of solicitation if they are not, or closer to one of the
former.

What this is, is a boost to non-conventional assets and managers. The ones too
young or crazy to have made it through the traditional vetting process.
There's already plenty of noise if some idiot broker put you on a mailing
list...

~~~
wwweston
> But 2013 isn't 1933. The average sophisticated investor is more versed in
> finance, more wary of solicitation if they are not, or closer to one of the
> former.

"This time, it's different."

[http://www.reinhartandrogoff.com/](http://www.reinhartandrogoff.com/)

~~~
clavalle
I think things are fundamentally different now than in the early 30's. Not pie
in the sky 'well people are more sophisticated now' different.

There are a ton of tools that people can use to gather information on a
potential investment and the people involved.

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mortehu
While it's easier to be smart about investing, it's also very easy to not be
smart. I'm pretty sure most retail investors invest with zero or negative[1]
information advantage, but don't lose a lot of money because the median
expected value of investment opportunities open to the public is positive.

1\. Due to cognitive biases.

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rayiner
I think this is a positive step, but doesn't go far enough. It looks like
investing is still limited to accredited investors (individual income above
$200k, household income above $300k, or net worth above $1M). So basically,
most engineers who work at these companies can't invest in companies in their
industry, but inexplicably their doctor can.

I'm not one to beat the drum of deregulation, but I think the accredited
investor requirements are stupid and wrong. The beauty of the securities laws
is that they democratized investing by addressing some of the information
asymmetries in the public markets. Regimes that reduce disclosure requirements
at the expense of creating accredited investor requirements throw the baby out
with the bathwater. Essentially, you cut off many promising investments to the
masses, and also artificially prop up the returns to a certain class of
investors by lowering the supply of capital. It's a solution that's worse than
the problem.

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ryandrake
I'm not an expert, but if a few of those engineers pooled their money together
into an investment club, wouldn't that club be able to meet the accredited
investor requirement?

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oijaf888
I don't believe the club would have to meet the requirement. I think if you do
your investing via an LLC or Corporation you could subvert that rule but I'm
not really sure.

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jplewicke
The "club" would have to have at least $5 million in assets, according to
current SEC guidance:
[http://www.sec.gov/answers/accred.htm](http://www.sec.gov/answers/accred.htm)
.

~~~
jsams
Actually, 501 already requires that the indivual investors of the 'club' also
be accredited, and the club cannot be formed for the purposes of 'an'
investment. However, a group of engineers could form an entity and each become
active managers, and their club is able to accept funds from the engineers via
a 4(2) exemption under the '33 Act. Then, so long as they didn't run afoul of
the '40 Act, they could invest so long as they had $5m in assets. And the neat
thing about intellectual property is that the engineers could purchase their
stake in the club via a combination of cash and IP, easily and lawfully
exceeding the $5m threshold.

~~~
lmm
So what, write a short story and value it at $5m? Surely there are laws about
market valuation, even for IP?

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hapless
I have little doubt that this will accelerate the super-seed trend, wherein
small startups avoid VC for extended periods of time.

One thing that struck me: the wefunder guys clearly believe this is going to
be a big deal for small-time investors. How will firms accept those "$1000"
checks? As far as I know, privately held securities can be issued to only a
very small number of investors.

Will Facebook/Goldman style investment vehicles become a common mode of
skirting the law? Is the SEC going to loosen that 500 investor limit?

~~~
gbelote
Good questions. The Facebook/Goldman style investment vehicles have been
blessed by the SEC in the form of a No Action letter back in March. For
readers unfamiliar: an LLC fund is created that investors invest in, and that
fund makes a single investment in the target company. The company only has one
investor listed on their cap table and it makes several things (e.g.
collecting signatures) significantly simpler. Investors maintain financial
rights, but don't have voting rights in the company.

We can offer that vehicle to companies as a fundraising option. We also have a
standard convertible note specifically for a large number of small investors
that we've been using ourselves which addresses "large number of investor"
concerns in a different way.

The JOBS act has already increased the accredited investor limit to 2000, and
once the unaccredited investor legislation takes effect, those unaccredited
investors won't count against that total.

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cantankerous
I've been a bit out of this loop, but what kinds of protections remain in
place to protect small investors from hucksters "starting a company"? Is it
pretty much caveat emptor or is there stuff not mentioned in this article?

I think this approach is pretty cool, but there are these drawbacks. Are there
going to be limits, protections, or restraints? Is the solicitation still only
limited to qualified investors or how does this work?

EDIT: I see I missed that the article says "qualified investors", but I'm
still not sure if that's the legal term or a more loose term.

~~~
Echo117
I'm assuming that qualified investors means accredited investors. SEC
definition here:
[http://www.sec.gov/answers/accred.htm](http://www.sec.gov/answers/accred.htm)

~~~
gbelote
That's correct. I changed the post to say "accredited" \- thanks!

~~~
cantankerous
Okay I get it. That was my hangup. Thanks!

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ScottBurson
I think it's going to be very interesting to see how this plays out.

For one thing, I expect it to continue the trend of shifting the balance of
power from investors to founders. Basically, this will be a huge amount of new
competition for angel investors. And crowdinvestors don't have voting rights
or a board seat. In order to continue to get into deals they want, angels and
VCs will have to bring more value to the table and accept less favorable
terms. So I would guess, anyway.

On the other hand, it isn't necessarily going to be a river of cash for anyone
who wants it. Along with the art of pitching to individual investors, one will
also have to learn the art of pitching to the crowd -- and will be competing
against everyone else doing the same thing. I expect to see a small industry
of companies assisting founders in this new kind of marketing.

~~~
7Figures2Commas
> Basically, this will be a huge amount of new competition for angel
> investors.

It is unlikely to do any such thing. To argue this, you must believe that
there exists a substantial number of accredited investors who are not actively
investing in private companies because they haven't received random
solicitations to do so.

The reality is that accredited investors come in all shapes and sizes. The
vast majority of the ones who are interested in putting their capital to work
through investments in young private companies are _already_ the people we
call angel investors. In other words, lifting the ban on private solicitation
is not likely to produce enough _new_ angel investors to have a meaningful
impact on competition for deals.

> I expect to see a small industry of companies assisting founders in this new
> kind of marketing.

There is _already_ a well-established cottage industry of firms that help
private companies raise money from accredited investors.

Obviously, the firms that do this don't do so for free, and some of them
demand finder's fees that no savvy founder would ever pay, but there's
absolutely no reason to believe that companies unable to raise money on their
own will pay less trying to market themselves to investors directly than
paying a finder's fee.

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lifeisstillgood
I was listening to Alan Kay on the More or less blog today, and what he said
resonated here.

Basically the stock market no longer bears any relation to the simple business
of providing capital to companies to grow.

The trade in secondary markets is so huge that the stock market can happily
ignore smaller growing companies - and it is it seems if VCs and similar are
to be believed.

Plus we know it is - reaching IPO should be when a company really starts to
deliver, takes the capital and expands. Not when the founders leave, and the
growth halts.

So yes, a new stock market, not bound to the financial gaming house, is needed
to supply capital to growing companies.

It wont be kickstarter. But it will be something. And I doubt it will be
American. It will be a federation of small markets across India and Brazil and
China.

And it wont be tech-led. We can barely use the capital.

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Echo117
You still need to be an accredited investor to take part in these potential
general solicitation rounds (net worth above $1 million, minus primary
residence, or annual income of more than $200,000), right?

~~~
wallio
This article confusingly referred to "qualified" investors but according to
other reporting it is actually "accredited" investors [1]. This is
particularly confusing because "qualified purchasers" is an even higher
standard required for some investments [2].

[1] [http://www.reuters.com/article/2013/07/10/us-sec-
advertising...](http://www.reuters.com/article/2013/07/10/us-sec-advertising-
idUSBRE9690I520130710)

[2]
[http://globalfundexchange.com/about/230](http://globalfundexchange.com/about/230)

~~~
gbelote
Good catch, I've s/qualified/accredited. Thanks!

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arbuge
One thing I noticed in passing when reading the articles about this today: the
accredited investor rules have not been updated for inflation since they were
passed in 1982.

If they had been, by my calculations, the net worth requirement would be
$2.41m instead of $1m and the income requirement $482k instead of $200k.
Definitely easier to get accredited these days...

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_delirium
I don't have a particular objection to the change, but it's a _little_
overstating the previous situation to say that only people with access to
private networks could fund startups. Startups couldn't advertise overtly with
"Got $1000? Fund us!" banner ads on Facebook, but nothing prevented a
potential investor from emailing the contact addresses of interesting
companies the investor saw on TechCrunch or HN, and asking if the company is
interested in discussing an investment. Some companies will even telegraph
their openness to such contacts on their website (not phrased as a
solicitation, but making it clear they are in a fund-raising phase).

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Caskman
Just curious, what was the point of this ban in the first place? To protect
the public from scammers?

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rdl
How does this affect state securities ("blue sky") laws? It doesn't do a lot
of good to be allowed to solicit under federal law if you have to comply with
50 (well, some are null, but still close) different regulations. IIRC NY and
CA are particularly tough.

~~~
gbelote
You don't need to comply with the blue sky law investor limits. And the 500
investor limit has been increased to 2000, which doesn't include non-
accredited investors (once that part of the JOBS act is implemented).

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rgoksor
Good points on the opportunities/challenges today's SEC ruling on general
solicitation brings to startup funding. At Bison.co, we believe the important
changes from these new rules will have less to do with accredited investors
and more to do with increasing data openness in the private equity industry.
Check out our latest blog post for details on how it will play out...
([http://blog.bison.co/2013/07/10/hello-private-equity-
marketi...](http://blog.bison.co/2013/07/10/hello-private-equity-marketing/))

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anovikov
But the people who invest still need to be accredited investors, i.e. meet
some criteria of annual income and/or net worth? Otherwise you will see a
flood of scam and trash public image of the whole idea of starting a startup.

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stevenwinter
General solicitations must still be directed only at accredited investors, not
the general public. I feel that this is an important point missing from this
conversation.

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tehwebguy
Is this effective immediately?

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gbelote
No. Our expectation is within 30 days, as that's usually the delay, but we
don't know for sure.

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jasonlingx
And I thought they just legalised streetwalkers...

