SEC lifts ban on general solicitation

In short, a lot of noise is about to be introduced to the private markets, and distinguishing signal from noise will become critical for investors, and standing above the crowd will become critical for startups.

Today is a historic day in the world of private fundraising. The SEC commission has voted to lift the ban on general solicitation. When the new rules go into effect, companies who follow SEC guidelines can market and discuss their fundraising efforts for the first time in decades.

Why the change?

As one SEC commissioner noted in today’s 10am EST meeting announcing the SEC’s recommendations, “The world looks very different from 1982 when the [private offering] rules were adopted. Technology has changed the way we interact with each other.”

Why does this matter?

The lift of the ban increases transparency into available private offerings, and eventually, greater efficiency will come to the capital private markets, where 4x more capital was raised in 2012 than in IPOs.

For decades, private companies (e.g. startups) have been handcuffed from being able to reach a broader investing audience, forcing them to deal with an insider’s group of investors and to engage in backroom deals where they typically don’t have a fair position. If you think of private company stock as a product, what seller of a product isn’t allowed to market their own goods, after all?

Conversely, millions of investors are unaware of promising private investment opportunities, again, leaving a very small group of backroom-dealing investors to be able to access these opportunities.

Why be cautious?

It’s not all good news for investors or startups. In tandem, well aware that the lifting of the ban is a big change with potential for negative impact, the commission has recommended adopting rules requiring more information disclosure from those raising money privately, tighter monitoring, and rules preventing bad actors (e.g. felons) from taking advantage of general solicitation. Surprisingly, the SEC is first lifting the ban, and then later developing and implementing further rules.

One commissioner opposing the adoption of the lift of the ban ahead of more specific investor protections gave an analogy. Imagine trying to make a railroad train go faster with a faster engine. Wouldn’t you want to first inspect the tracks to make sure the railroad tracks can handle the faster speeds before putting the new railroad cars on the tracks and risking a derailing? (I was breaking out the popcorn at this point in the meeting, BTW).

With the introduction of the public disclosure and even advertising of the availability of private company securities, it only makes sense that the quality of the private company securities and the standing of the people making the offerings become extremely important.

Get ready for a wave of less than credible issuers (including offline and online folks) pushing all sorts of private offerings. In this new normal, issuers will be put under increased pressure to demonstrate the merits of the opportunities as well their own qualifications to investors, and investors will be wise to heavily scrutinize the reputation of issuers and the quality of offerings before proceeding with an investment.

In short, a lot of noise is about to be introduced to the private markets, and distinguishing signal from noise will become critical for investors, and standing above the crowd will become critical for startups.

What are other implications?

VCs have long been saying that for the best startups, money is a commodity. Particularly at the early stage of a company’s development, with the expected increase in capital base addressable by private companies, investors will be put even under more pressure to demonstrate how they can add value beyond their dollars.

What’s the timeline?

The trigger is from when the SEC’s release gets published in the Federal Register. The release usually is published 10 days after the public meeting.  Rules often go into effect 30 days from publication, but it can be 60 days or 90 days. I believe Mary Jo White, SEC Chairman, specifically stated 60 days in today’s meeting. In other words, expect these changes to go live in mid to late September.

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