SEC Reviewing How Startups Raise Capital

Breathtaking, front page news in the Wall Street Journal this morning. The Chairman of the SEC has sent representative Darrell Issa a letter stating that the Commission is looking for "ways to reduce the regulatory burdens on small business capital formation."

500px-Seattle_-_Read_All_About_It_at_night_01The Journal article suggests that rule changes could include raising the number of shareholders private companies may have before triggering public reporting, and "relaxing a strict ban on private companies publicizing share issues, known as the 'general solicitation' ban."

I think the Journal piece misstates the function played by the Reg D prohibition on general solicitation. Or to be fairer, the article simply references, uncritically, an antiquated justification for the ban: "The intent of the rule is to keep companies that need cash from targeting potentially vulnerable investors."

To paraphrase what I said here earlier this week about the general solicitation prohibition: private financing is every day taking place digitally, and yet the analog rule -- built for a time when to broadcast (via radio, TV or newspaper) could fairly be said to equate with public solicitation -- remains on the books. But the rule is not needed because the accredited investor definition is in place, and it works.

As long as a financing is limited to accredited investors, it should not matter whether the angel or VC first heard about the company through AngelList, a tweet, a pitch forum, or in any other manner. Far from "targeting potentially vulnerable investors," who are not eligible to participate anyway because they are not accredited, open communication of offerings is about finding the right investors for the particular deal.

Fun times!

We'll see a fair number of people call for the lowering of the accredited investor standard, or the elimination of the concept itself. It would be a huge mistake, though, to spin wheels here. As paternalistic as the accredited investor definition is, and as hard as it is to justify on philosophical and democratic grounds, it's the bedrock for angel investing.

But at the risk of oversimplifying matters, the accredited investor definition is pretty much the only rule we need.

It'll be fascinating to see what comes of Chairman Schapiro's letter and the Commission staff's review.

Photo: "Read All About It" by Joe Mabel.


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