Ever wanted to invest in the next big startup but learned about it too late (or not at all)? Had you invested $1000 in Facebook (FB), LinkedIn (LNKD)and Apple (AAPL) before they went public, the overall return would have been off the charts.
Fortunately, starting this week, any private company will be able to advertise for investors through the internet, social media, television, and even billboards. And that's good news for investors with a higher risk tolerance or investors that want to invest as little as $1000 in the next Apple. You can do it all on sites like Angel's List, OurCrowd, ibankers and Bolstr.
For example, my company Raynforest is testing out the new regulations on Angel List by advertising on LinkedIn, Facebook, through email and banner ads (I'll provide an updated article to discuss the results).
According to Bolstr's co-founder Charlie Tribbett, roughly 3%, or 256,000 of the 8 million accredited investors in the US are active angels, and those angels invest roughly $21 billion each year. I suspect though, with a flood of new investment options being advertised broadly, that the 3% figure will become 10% or higher given how easy it is to invest in $1000 increments.
So here are the highlights of the new general solicitation rules:
- Entrepreneurs can widely advertise that they are raising money for their idea, startup or product. These new rule changes will benefit investors, hedge fund managers, angel syndicates, broker dealers, crowdfunding platforms, and of course entrepreneurs seeking capital.
- According to my attorney at Cooley, LLP under general solicitation rules, the individual or company seeking capital must take reasonable steps to verify that a potential investor is "accredited" (the investor has income over $200,000 per year individually or $300,000 with a spouse - or has more than $1,000,000 in net assets).
- Accredited investors will need a third party to verify their accredited status. That means an investor who wants invest will need verification from an accountant, attorney, broker dealer or a service like that from Angel List.
- The new general solicitation rules include, "a premium on the precision and accuracy of a company's language. The SEC and State Security regulators will be paying close attention to companies that utilize the 506(c) regulation. Do not engage in any exaggeration or puffery - particularly with any historical statements."
- The final rulings on general solicitation are not complete. Many have voiced concerns over investor protection. The SEC has accordingly proposed new rules that are currently open to public comment but have not yet been acted upon by the SEC.
What's exciting is that general solicitation empowers entrepreneurs to fund new startups, innovative products, and concepts - all online. It's like a SharkTank for the rest of us. But this huge change in the rules to advertise broadly comes with one major challenge: more now rests on the entrepreneur to verify accreditation. If they get it wrong, it could be costly.
What investors need to know:
If you have a financial appetite for startups or want to invest as little as $1000 in the next "big thing", then this new investment world is for you. The boundaries are gone. You can now invest in the same round, on the same terms, as the best and brightest venture capital firms.
When asked about what the new investment changes mean to crowd funding and investors, OurCrowd's CEO Jon Medved said, "These regulations represent a groundbreaking development for the equity crowdfunding business. Until now we were marketing our deals in the US with our hands tied behind our back given that we couldn't speak publicly about the investment opportunities on our website. Now the SEC has allowed us to speak loudly, directly and clearly about the fine investment opportunities on our website."
These new rules mark a huge shift in the investment world. No longer are investors limited to investing in deals found through family and friends, they can now participate in deals that are sourced on traditional channels. That can be both dangerous and beneficial, and it will become critical that investors take the time to understand the risks and the rewards.
But in the end, this is certainly a better situation for both investor and entrepreneur. More importantly, it will add liquidity to companies that are focused on growth and jobs. And who doesn't want that?
Note: A special thank you to Audrey Jacobs of OurCrowd and John Kallassy of iBankers for some of this article's background information.