The Deal: SEC Fund Advertising Rules a Boon For Crowdfunders
NEW YORK (The Deal) -- Operators of online equity crowdfunding platforms may be the first to benefit from the rules approved by the Securities and Exchange Commission on July 10 that will allow general solicitation and advertising in private placement financings.
"It's a game changer for us," said Ryan Feit, the chief executive officer of SeedInvest LLC, a New York-based equity crowdfunding web portal. "Up until now we've been allowing crowdfunders to raise money from accredited investors in a bubble because we couldn't solicit or advertise. Finally, we'll be able to use the tools we've built in our system."
Those tools include technology for sending out solicitations and advertising through the Internet, including social media websites such as Twitter. SeedInvest also has developed technology to allow it to verify the accredited status of potential investors, Feit said.
The new rules, which are expected to take effect by late September, were enacted under Title II of the Jumpstart Our Business Startups Act. Title II of the JOBS Act called for ending the ban on general solicitation of private placement financings that are made under Rule 506 of Regulation D of the Securities Act and under Rule 144A of the Securities Act.
Such offerings are used by private companies to sell securities, by public companies to sell unregistered securities in private investments in public equity, or PIPE, transactions and by unregulated investment vehicles such as hedge funds to raise capital. These investments are meant to be limited to wealthy, sophisticated investors and institutions. Advertising such offerings had been forbidden in the past to assure that they were not marketed to investors who were unable to understand them or to bear the risks involved.
Although such offerings may now be advertised, actual investment will remain mostly limited to accredited investors in Regulation D offerings and to even wealthier "qualified institutional buyers" in Rule 144A offerings.
The passage of the JOBS Act in April 2012 led to the launches of websites such as SeedInvest, CircleUp Network Inc. and FundersClub Inc. that offered to match startups and other privately held companies with investors. Older Web sites such as AngelList and SecondMarket Holdings Inc. began offering similar services.