When the Jumpstart Our Business Startups (JOBS) Act was announced, it promised to quash a number of Securities and Exchange regulations that had made startup company funding an arduous process restricted to the most well-connected angel investors and venture capitalists. It would allow startups to publicly sell stakes in their private companies, and allow crowdfunding (like what we’ve seen on Kickstarter) for the company itself, rather than for a product or project.
For the tech industry, this should mean a massive power shift. No longer will tech-geeks turned entrepreneurs have to hand over control and a massive stake in their company to one of the few investors legally allowed to buy in. Now, with the first changes implemented via new SEC rules released last week, and crowdfunding supposedly coming soon, for better or worse, the Zuckerbergs of the world will stay in charge and can solicit funding, before going public, from individual investors.
Phase I: Lifting the Solicitation Ban (Final Rules Issued 7/10/13)
For those unfamiliar with the process, let's set the stage pre-rule change. Tech geeks, seeking investment, would have to engage in the oft-hated networking rituals. This meant hobnobbing in Silicon Valley, meeting in closed back-room sessions, and hoping that one of only a few existing qualified investors would buy a stake in your company.
Now, after filing a Form D to notify the SEC that the company will solicit public investment, startups can raise funds from accredited investors. Once they've finished fundraising, they file an amended Form D. It's a simple as that, and a little bit of advertising. Fundable, a platform that caters to startups seeking investments, has a great infographic detailing the process.
As for that accredited investor bit, for now, investments are limited to those who have a net worth of $1 million or more (not including their primary residence) and/or had a net income of $200,000 annually over the last two years.
Why the restriction? It's mostly a long-standing "save them from themselves" rule, one that will soon be gone. The SEC didn't want snake oil salesman peddling "brilliant startups" to uninformed consumers, who would then almost certainly lose everything (startups almost always fail.)
That long-standing restriction will soon be gone, however, when the SEC implements the rest of the JOBS Act, which allows "crowd-funding" startup investment.
Phase II: Crowdfunding (TBA)
Now that the solicitation ban has been lifted, the SEC will set to work on crafting appropriate regulations to allow crowdfunding by non-accredited investors. It won't be an easy task, as they'll have to balance the interests of protecting uninformed investors,preventing fraud, and implementing the JOBS Act mandate in a single set of rules.
When the "accredited investor" limitation is lifted, however, we'll likely see a number of Kickstarter-like platforms raising funds for tech companies, and in exchange, investors will receive a stake in the company. Think of it like buying stock, except the company hasn't gone public yet (which means less SEC reporting and transparency requirements).
It's going to be interesting.