When the JOBS Act was enacted in spring 2012 and directed the SEC to develop within a short time frame the securities rules to lift the general solicitation ban and enable companies to generally advertise for funding, and to enable equity crowdfunding, it was everyone’s thought–including mine– that raising money would become more facile and less expensive. So far, time has proven this wrong, and Rule 506(c) is not a panacea for early stage or emerging growth companies.
The SEC currently requires companies and their principals to pre-file a Form D with the SEC 15 days prior to making a general solicitation, file offering materials, and file an amended Form D post-sale. Failure to comply will result in a one year ban from fundraising. Many entrepreneurs aren’t even aware that they can’t mention the prospective investment to someone they don’t know without tripping this part of the law. Furthermore, all investors must be “accredited investors”, and the companies must make “reasonable steps” to ensure that. Thus, investors must divulge net worth or net income to the company, and if they’re reluctant to do so, either they can enlist a third party service company (there are a few, including Seed Invest) to receive the information and so inform the company, or else not invest in the company.
In these closing days of 2013, nearly two years after the JOBS Act was enacted– halcyon days—I think most companies using Regulation D, an exemption from registration of securities, will continue to rely on Rule 506(b), which does not permit general solicitations but is easier at this point. Obviously, they have to rely on pre-existing relationships with accredited investors, or rely on a broker-dealers to establish such relationships, but they have less filing expenses, and will avoid the problems that will arise when and if the new investors are unwilling to divulge their personal financial information.
