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New rules take effect today allowing young companies to advertise for investors. For decades, raising private capital has been, well, private. By law, investment deals had to avoid publicity.
That Securities and Exchange Commission ban is now lifted. Companies can even crowd-source online to raise funds.
But, at the same time, other restrictions also take effect aimed at limiting the exposure of the common investor. An investor now needs to be ‘accredited.’ Many see the move to open the investment process to more scrutiny as a positive step toward transparency.
Cromwell Coulson is CEO of OTC Markets Group, which operates electronic marketplaces for companies trying to sell stock, but are not big enough for the stock exchanges. He says that the secrecy shrouding the old system made it easier to commit fraud.
“If there was no ban on general solicitation in advertising, information about what Bernie Madoff was doing would have gotten out sooner, and his fraud would have collapsed much earlier,” says Coulson.
The ability to publicize could have major results for start-ups. Coulson says, “It should open-up and unlock a lot of access to capital. And that should be great for small companies.”
On the other hand, new rules also restrict who can respond to the ads soliciting new investors.
In the past, rich people could check a box to affirm that they were, in fact, rich. Now they’ll have to prove it.
Warren Hanselman is with the San Diego Tech Coast Angels, a kind of investment club for very wealthy entrepreneurs who help each other vet new investment opportunities.
“Basically, you need to demonstrate with your tax returns, or you have to have an accountant do a audited statement and certify that, within the last 90 days, they’ve looked at your financials and you qualify as a high-net-worth individual,” says Hanselman.
Some see the new accreditation hurdle as one that’s not worth jumping.
“Every angel investor I know of, that I have talked to, said there is no way that I’m ever going to do that. I’m not going to turn my books over to the company. I’m not going to have to, every 90 days when I want to write a check, go to an accountant to get the forms filled out,” says Hanselman.
So while ads may reach more potential investors than ever, the restrictions could backfire with the super rich.
“They’re making it extremely difficult for angel investor to write a check,” says Hanselman.