Shackles drop off fundraising for startups. Should we worry?
Entrepreneur Nicole O'Rourke has a novel idea for raising cash that would have been illegal until this week: smacking a "fund me" sticker on every bottle or can of hair products from her start-up business, Rock Your Hair.
O'Rourke is among the first to take advantage of the lifting of a years-long ban, mandated by the 1933 Securities Act, on using advertising to find investors in private companies. Intended originally to prevent opportunists from targeting the gullible, it has long been considered a bedrock protection against scams. Lifting it, with some protections, should help startups and thus boost the overall economy, proponents say.
Scores of websites have sprung up to connect budding financiers with struggling entrepreneurs who are eager to tap new sources of cash and close funding rounds far more speedily than under the traditional venture model. There are now dozens of sites with all sorts of business models, ranging from charging companies to create listings to taking a cut of an investor's eventual profits.
While many have been around for months, in some cases years, they could not highlight details about the deals on their sites until Monday. Before then, potential investors had to be registered on the site as accredited investors -- those with net worth, not including their homes, of $1 million or more-- to learn about the start-ups seeking funding.
"Public Fundraising. It's here. Tell the world you're raising money," trumpets the AngelList web site. On Monday, it took the wraps off a new type of investment vehicle, a syndicate, where one angel investor - typically an affluent person who provides capital for a startup - leads a group of accredited investors to back a company in a type of minifund.
"General solicitation has arrived!" reads the text at the top of the Rockthepost home page, which lower down features an endorsement from Barbara Corcoran, an investor who is also a regular guest on the start-up show Shark Tank.
The relaxation of the ban, however, may not work out so well for thousands of investors who could be drawn into companies without understanding the hazards.
"It's an area that has a lot of potential for misuse and fraud," warned Daniel Carlson, a San Diego-based securities-fraud lawyer.
Securities and Exchange Commission lawyer David Blass said officials are watching the area carefully.
Under Monday's rule change, private companies can now ask for dollars from accredited investors through moves such as sending out tweets or Facebook updates, advertising on websites, or, in the case of O'Rourke, attaching stickers to products. Previously, such private companies largely would have been limited to investments from friends, family, and venture firms.
Currently, the change in law on advertising for dollars affects only accredited investors. Startups who take money under the new rules will have to go through some extra steps to verify that their investors are accredited, such as collecting tax forms and bank statements.
Eventually, more investors will be allowed to make small investments in private companies under certain circumstances, perhaps next year, lawyers say. That is the so-called crowdfunding provision of last year's Jumpstart Our Business Startups, or JOBS, Act.
FLYING CARS, ARTISANAL PICKLES
The shift allows retirees, doctors, lawyers and the like to get a piece of investments with a little more razzledazzle than they are used to-- say Terrafugia, the flying car company using Wefunder to find investors, or Rick's Picks, "artisanal pickles crafted with nuance and wit," working with CircleUp.
Both Wefunder and CircleUp are among the relatively new sites that put young companies in front of potential investors.
Of course, to entrepreneurs, the lifting of the ban on advertising serves as a tremendous boon.
"Considering that startups sometimes take months to raise seed and Series A rounds, this offers a glimpse into an option magnitudes of order faster," says author and entrepreneur Tim Ferriss. On Monday, he helped logistics startup Shyp raise $250,000 in little under an hour, coming from an AngelList syndicate in Shyp that he led himself....MORE