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The SEC Just Voted to Lift the Ban on General Solicitation!

on Jul 10 2013
All-around lover of software and startups. Big fan of JFDI and getting stuff done.

This morning the SEC voted YES to make Title II of the JOBS act a reality. This will remove the ban on General Solicitation (effective September 23rd), allowing companies to publicly promote their fundraising rounds. We're going to see some exciting changes to the startup ecosystem!

Some Background

For the past eighty years there has been a ban on what's called General Solicitation. A company that's actively fundraising couldn't publicly say so. The law required them to talk to investors individually, essentially closing off investment to all but the well-connected (and those with the time to meet with hundreds of individual entrepreneurs).

As a founder the general solicitation ban makes it harder to find investors. Raising money is a high-touch sales process and your lead gen doesn't scale well. It's a slog. Fundraising is a soul-sucking process of meeting after meeting that is very time consuming and distracting.

As an investor the general solicitation ban hurts deal flow. There are great companies out there fundraising today and you simply won't hear about them. Knowing the right people matters and you need a strong enough reputation so that the good founders reach out to you. Deal flow makes or breaks your portfolio.

Early-stage investments are very risky and so it's important to diversify your portfolio. But as an investor it's hard to make many small bets, unless you consider $25k a small bet. Founders won't pitch you for a $1k check, their time is better spent chasing $25k-$100k investments. So to keep your portfolio diverse you need to be willing to invest hundreds of thousands of dollars. Learning is expensive when you're new to angel investing.

So, Title II...

Title II changes the landscape because it makes general solicitation legal.

This enables founders to play a different fundraising game. Creating a public fundraising profile and promoting it through Twitter and Facebook. Getting press about a celebrity investor who just invested (and tactfully mentioning the round is still open). Running well-targeted ads on Google and Facebook to find doctor-investors for a innovative medical device company. Founders can better apply the power of Internet marketing to draw in accredited investors, helping them raise more money faster.

Pitching goes from one-to-one to one-to-many.

As an investor your geography and personal network matter less. You can live in Kentucky and invest in biotech in Boston. You can be a part of those fundraising rounds without a well-groomed personal network.

And it becomes practical to invest in smaller increments. This is a big deal.

When a company raises a crowd round they're happy to take a $1000 check from a lot of diverse investors. In fact they want a bigger network of advocates. With platforms like Wefunder the economics are different here because founders are able to tap a larger pool of prospects and folks can invest asynchronously.

When you can invest $1k in 25 companies you spread your risk more as compared to traditional $25k investments. You can make faster decisions without hours of in-person diligence. The cost of making a bad bet is smaller. This lowers the barrier to investing cross country, growing your selection pool.

So get ready for General Solicitation!

Fundraising and investing are about to get a lot more interesting.