The SEC will have 270 days to interpret the basic concepts in the Jumpstart Our Business Startups Act and turn them into practical regulations, but businesses are already preparing for the tectonic shifts in the way they acquire investors.
The Right to Solicit Broadly
The first change, coming in 90 days, will allow businesses engaged in private offerings to publicly solicit funding -- in short, they'll be able to let the broad community of investors know they are raising money. Previously, it was illegal for a small private startup to solicit funding like that, unless it was ready to make an initial public offering. And IPOs are major proposition, typically reserved for startups weill beyond the early stage, with serious capital behind them.
Bill Clark, CEO of MicroVentures, an Austin, Texas-based firm dedicated to helping startups raise capital or connect with angel investors, sees this change as opening up a bright new frontier for the little guy.
"Now you can finally tell your network you're raising money," Clark said.
Naturally, the SEC will regulate this on the advertising and promotion front.
"The fear before was that people were going to be targeting people who didn't have a good background in investing," Clark said. "We're not going to say 'We have the new Facebook: You're going to get a 10-times return on your money.' Any time you promote something or guarantee money or use those terms, it's a red flag for the SEC."
Crowdfunding and Spreading the Love
The new rules on crowdfunding, scheduled to take effect in 2013, will allow laymen and unaccredited investors to buy into these small businesses. At the moment, regulations limit companies to 500 shareholder accounts, and the people who hold them must be vetted and approved. Next year, that number jumps to 2,000 for accredited investors, and becomes unlimited for everyone else: Any average Joe will be able to take flier on the entrepreneurial spirit.
"Now almost anyone can get involved," Clark said, "And that takes a lot of money that's sitting on the sidelines and puts it into play, and that's going to open the door for a lot more companies to get funded."
Previously, small companies looking to raise money without registering their securities with the SEC had to use what's known as Reg D 506, a "safe harbor" exemption for specific types of private offerings, but soon startups will be able to use the crowdfunding exemption.
It Takes a Village
This shift at the legislative level reflects some of the changes that have taken place across the economy, and the national culture. After 3 years when unemployment teetered around 9%, there's a clear need to funnel capital into creating new businesses or expanding existing ones to provide more jobs. And in today's social and technological environment, it has become ever more common to harness the power of collective energy to bring these projects and businesses to fruition.
For example, the popular fundraising website Kickstarter has been used to crowdfund upwards of 15,000 creative projects such as indie bands' albums or low-budget movies. The business has been especially energetic of late: Kickstarter had two separate million-dollar campaigns meet their goals in February. Elevation Dock, a company that created a holding dock for iPhones, was the first Kickstarter campaign to hit seven figures, and Double Fine Adventure, a campaign to fund the creation of a new game by Tim Schafer and 2 Player Productions, became the second.
In a further sign of the times, Palo Alto-startup Crowdtilt allows users to create online campaigns to "group fund anything."
"Instead of funding a $40,000 documentary, the site is being used to fund weddings, bachelor parties and backyard barbeques," Crowdtilt's 25-year-old co-founder, James Beshara, told DailyFinance in March.
And the incentive is often as much for the creative partners as for the seed investor. "Kickstarter and the like have proven that these large numbers of engaged users have the appetite to take part in these projects to get something later on," Clark said. "Not only are you going to help me create this but if it does become successful, you are going to get a chunk of this."
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