One of the most important ways that the JOBS Act helps entrepreneurs is through something called general solicitation. As a result of the legislation, January is likely to mark the first time that startups will be allowed to publicly advertise the opportunity to invest in their companies. This will make it much easier for them to find interested investors, and reduce the amount of time it takes to close a round.
Most of us don’t learn that a startup is raising money until after their round has closed. That’s because right now startups are prevented by law from publicly advertising the fact that they are raising money. They cannot post an investment opportunity to social media, ask a reporter to write about their fundraise while it is still open, or even make an announcement in front of a public crowd.
The JOBS Act eliminates this ban on advertising, but the SEC needs to write rules before the law goes into effect. Those rules should be published in January, meaning that all the advertising activities that are currently illegal for startups to engage in will become fair game. Startups will be able to advertise investment opportunities to anyone, but they will still be restricted to accepting money from accredited investors until sometime around April when another part of the JOBS Act takes effect that enables every American to invest in startups.
Today entrepreneurs have to spend a huge amount of time networking their way to investors that might be interested in their startups. This high touch process means that the vast majority of potential investors simply never hear about the opportunity to invest. Unless the investor is only a few degree of separation away from the entrepreneur, its unlikely that they will even hear about the deal. Only 3% or 256,000 of the 8 million accredited investors in the US are active angels, and those angels invest $21 billion each year. General solicitation will enable entrepreneurs to broadcast investment opportunities far and wide, giving those 8 million investors a chance to find out about startups that interest them while they still have the opportunity invest, and a clear way to reach out and make it happen.
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1 A special note on calculations: Over $16 million from accredited investors (i.e., the rich) was invested into 110 startups conducting Regulation D offerings on Wefunder since 2013. Regulation Crowdfunding is not legal until May 16th. We'll update these numbers to include those offerings then.
2 Startup investing is super risky. Seriously. The companies you love just might go bankrupt. You may lose all your money. You can't always resell your investments. You may have limited voting rights. Invest because you want to support what you love, not because you think you're going to make oodles of money.
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