Deals

SEC: Startups can now advertise they are fundraising; crowdfunding has to wait

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In about 60 days, startups will legally be allowed to advertise, market, and publicly disclose the fact that they are fundraising, the SEC just decided in a public hearing. But crowdfunding from non-accredited investors will have to wait.

“This removes the biggest barrier to entrepreneurs,” Fundable’s Eric Corl told me just minutes ago. “This will give entrepreneurs a much better way to reach outside of their network for capital.”

The JOBS act, passed by President Obama in early 2012, mandated that the Securities and Exchange Commission ease rules on startups, small businesses, and investors. Section 201(a) of the act lifts an 80-year ban on “general solicitation” — i.e., marketing — when startups are raising money.

But crowdfunding, which was a big part of the JOBS act that was intended to allow non-accredited investors (read: not rich) to invest in startups, will have to wait.

“It’s split into 2 different phases,” Corl told me. “First is the removal of the ban on general solicitation, and the second phase is the removal of the requirement of accredited investors.”

There’s no timetable for that phase, which is more controversial than the first, as SEC officials are concerned that naive investors could lose their retirement savings or more in ill-advised investments. Initial discussions on crowdfunding are likely to take much longer than the two months of reviews and implementations that will be taken before today’s decision on general solicitation is actually final and in operation.

But Corl is excited about even the first step.

“Before, it was like having your house for sale but not being able to tell anyone about it but your friends and family,” he says. “This will open up a tremendous amount of capital for entrepreneurs.”

It will also be good for investors. Now investors in Milwaukee, for instance, will be much more able to participate in investment rounds in Silicon Valley. They’ll know more about startups, and they’ll be more aware of who is raising money.

And, of course, it will be good for companies like Fundable, which offer ways for startups and others to broadcast the fact that they are seeking investment. In the last 90 days, Fundable has already handled $12 million in funding commitments. Corl expects to see that figure grow significantly with the passage of this part of the JOBS act.

Which opens up a whole new can of worms, of course.

“The biggest risk isn’t fraud, it’s failure,” says Corl. “But investor education is going to be a very important aspect.”