JOBS Act Rules – What startups should know

The new federal securities rules (and some draft proposals) that will allow startups to raise funds through general solicitations is fraught with peril. Buyer beware.

From the Global Accelerator Network:

The SEC’s new rule lifting the ban on general solicitation became effective on Monday, September 23rd – changing the funding process for startups forever. General solicitation should increase funding opportunities for startups, but there are important issues and complications that entrepreneurs and the professionals in our ecosystem need to know to protect themselves in this new financing world.

Thanks to a collaboration with the Angel Capital Association, we recently cohosted a webinar which reviewed these impactful changes. You can enjoy a recording of this webinar in its entirety above.

If you are interested in receiving updates about future public broadcasts, as well as other GAN news and events, please subscribe to our once monthly mailing list.

What you need to know:

• Crowdfunding (like Kickstarter or IndieGogo) is not a general solicitation; those rules have not yet been approved.
• Entrepreneurs can now raise unlimited amounts of funding for private exempt offerings through advertising and direct solicitation.
• “Quiet” solicitation can still take place at Demo Days, pitch competitions, blogging, etc., but the attendees need to be verified as qualified investors.
• Changes to Rule 506(c) require extensive (and costly) information be provided to investors if the round involves unaccredited investors. Best bet: Don’t do it.
• The new reporting requirements are tricky and they are in a weird proposed limbo of SEC rules. Pay very close attention.
• The method for verifying accredited investors will be closely scrutnized. Understand how to apply the “Safe Harbor” verification tests to protect your startup.
• Be very clear about the rules on Bad Actors (people who have been convicted of security violations, etc.).
• VCs are very wary about how the SEC will interpret the rules. Until there is more clarity, don’t expect VCs to invest in startups involved in these types of deals.
• Seriously. Get a knowledgeable securities lawyer. Don’t skimp on an expert who can help protect your personal assets and the future of your startup.

What can you do now?

• Leave a comment on the SEC site to help influence the proposed Form D rules.
Contact your member of Congress about startup sector and investor concerns.
• Read up on this issue at Angel List.
• Print out this cheat sheet from the Startup Law Blog.
• Find a knowledgeable securities lawyer.