Jumpstart Our Business Startups, a piece of the JOBS Act, just went into effect on September 23, 2013. This legislation gives private companies the ability to advertise investment opportunities directly to the public. Let’s take a look at some of the particulars of this legislation and what it means to startups…
Less emphasis on existing connections. Historically, startups have not been able to advertise a private placement. In order to reach out to private investors, you needed to have existing connections. Now, there is no need for existing connections—companies can go directly to the source. This is pretty exciting because it means that a small company doing small fundraising can be more open about it—and hopefully yield greater success.
Investors must be accredited investors. Even though you can now widely promote the fact that you are fundraising, you’ll only be able to accept funds from accredited investors. Accredited investors are those with at least $1 million in net worth or $200,000 in annual income (minimum $300,000 with spouse). It’s not enough for a potential investor to self-report as being accredited. The accreditation piece needs to be certified by a third party.
Make sure SEC is notified of your solicitation plans. If you are planning to solicit, you will need to notify the SEC 15 days prior to initiating the fundraising process. Also, every time you plan to advertise an investment opportunity, you must update the SEC. If you fail to notify the SEC of your solicitation plans, you can become ineligible for a year.
Check your exemptions. If you are currently using CA exemptions, you’ll now need to have federal exemptions. Be sure to refile to take advantage of federal law.
New connections. Just as venture capitalists are known to offer connections in addition to funds, so too can this new pool of investors offer the possibility of valuable connections. Advertising your investment opportunity will allow you to reach a much wider pool of potential investors, all of whom have the potential connections that will help to accelerate your growth as much as the cash infusion you seek.
Time savings. Fundraising, as anyone who has raised funds knows all too well, requires a huge time investment. Making connections, preparing your pitch deck, putting together financials, meetings—all of these things take a lot of time. The ability to advertise your investment opportunity directly to many interested investors is potentially a great and quick way to reach potential new investors.
Increased avenues for solicitation. One of the simplest ways you can take advantage of this new legislation is by advertising investment opportunities on your website or through social media. Some companies may choose to issue press releases to advertise their opportunities.
One of our clients, TechShop, a nationwide chain of fabrication studios and workshops, has already jumped on this opportunity with a public announcement of their plan to raise $60 million to expand their chain from Los Angeles to New York.
TechShop’s CEO Mark Hatch has effectively spread the word of their public solicitation via a press release that earned TechShop huge exposure.
“TechShop is a hometown platform where innovators and entrepreneurs can go to build their dreams. Each TechShop location delivers the tools and support a community needs to inspire a revival of small business and manufacturing that can create new jobs and a stronger local economy,” said Mark Hatch, CEO of TechShop, in a prepared statement. “And the JOBS Act is giving us the freedom to continue pioneering a business model that is by and for the people around us who are building the next great thing.”
Even though you can now advertise investment opportunities directly to the public doesn’t necessarily mean that you will want to or that you should. This is certainly an exciting development for startups. But, while it changes the rules in terms of how you can seek investments, it doesn’t change the when, why, and how much of investment.
Just because you can potentially raise more funds doesn’t always mean you should. Continue to focus on milestone funding: how much do you need to achieve the next milestone and take you to the next level? Anything more than that is a risk as you rush to scale.
How is the Jumpstart Our Business Startups Act affecting the way you fundraise? Tell us about it in comments below or contact Early Growth Financial Services with questions about raising funds for your startup.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of outsourced accounting, finance, tax, valuation, and corporate governance services to companies at every stage of the development process. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.