I am not a lawyer.
Jumpstart Our Businesses
On April 5, 2012, the Jumpstart Our Business Startups Act became the law in Cincinnati, along with the rest of America. Wide and far-reaching in scope, my take on the law boils down to a couple things:
Easing securities and investment regulations will unlock an unprecedented pool of capital to the country’s small businesses and startups. More investments means more economic activity and of course jobs.
On the flipside, it opens up to anyone investment vehicles alternative to their 401(k)s, IRAs, or non-qualified mutual funds and stocks. Instead of giving my money to a faceless online investment portal, I could potentially invest it in promising, local companies in exchange for ownership and wait for the best. I become captain of my own destiny.
To be clear, I believe that the JOBS Act is a good thing. Since the 30’s, protecting grandma from con artists has outweighed helping new companies find investors (even though nothing protected her from sending money to a Nigerian prince, or blowing it on the high-stakes slots at the casino). Now grandma has greater control of her financial potential, and businesses have a wider pool of capital.
However, to paraphrase a famous person, with great financial power comes great responsibility. To mitigate this responsibility, the SEC now has the unenviable task of trying to separate the baby from the bath water.
Most recently – some parts of the JOBS Act are in effect, and some are still under comment – the SEC has lifted the ban on general solicitation. This means that businesses can now publicly advertise that they are seeking investment through billboards, commercials, and newspaper ads. But this comes at a hefty regulatory price. Participants in an offering that generally solicits face heightened verification requirements to prove that they are “accredited.” Businesses must also submit solicitation materials 15 days before the ad hits.
This is also included under public advertisement:
Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.
Here in Cincinnati, I would lump the GCVA, Brandery Demo Day, and even events such as Startup Weekend (go sign up!) under this rule. I’ve seen plenty of pitches where a business has presented a specific ask, and in some cases terms, to a general audience. If the regulations are interpreted most conservatively, any company that pitched now has to require personal financial documents of any of its investors in that offering. It’s even feasible that they would’ve had to submit their slide deck to the SEC 15 days prior to pitching, for every event!
This Is NOT Better
It’s funny that even though pitching and asking at startup events before was explicitly illegal, the SEC took a “don’t ask, don’t tell” attitude. And now that it is legal, the SEC is asking… for a lot.
Interpreted this way, the JOBS Act places a huge burden on early stage companies, which is the exact opposite of its intent. Startups must spend more of their precious time filing the necessary solicitation materials. And investors who do not wish to hand over a trove of personal financial documents to the SEC may just choose to sit these offerings out entirely. Companies deemed in violation of the rules, though ambiguous, must return the money, and are banned from fundraising for at least a year.
So in typical fashion, we are left to kiss government on one cheek while slapping the other. My impression is that startup lawyers across the country are taking a “trust but verify,” or CYA, approach, which seems to be the best approach for now. If you are reading this at the SEC, please jumpstart our businesses, but don’t kill them.