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US Startups Law Update: SEC (Securities & Exchange Commission) Lifts Ban on General Solicitation

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US Startups Law Update: SEC (Securities & Exchange Commission) Lifts Ban on General Solicitation

In a major legal development in US for startups, the SEC lifted the ban on general solicitation for startups on July 10, 2013. However, the startups will not be able to raise money publicly at present as the new regulations will become effective afterwards, probably in September.

In addition, the SEC is presently working on new regulations that may include certain prohibitive restrictions for tech startups to raise money publicly.

Using Dormant Capital to Launch Businesses

Once these new regulations become effective, tech startups can use a wide variety of means to announce their fundraising intentions, which could very will help them launching businesses and not ditching the idea due to lack of funds.

In addition to conventional angel investors, funds could also be raised from a network of connected investors. This will definitely lead to utilization of a phenomenal amount of dormant capital amongst hundreds of thousands of potential investors.

General Solicitation

One of the advantages of General Solicitation is that it allows startups to publicly announce that they’re raising money, across multiple platforms, such as Social Media (LinkedIn, Twitter, Facebook), Websites, Blogs, TV advertisements, etc.

Once these proposed regulations become in force, the startups will be able to publicly announce that they’re raising money. However, money can only be received from accredited investors.

With regards to non-accredited investors, the new provisions are silent, which however was part of the intention of the JOBS Act (first signed into law in April 2012).

Accredited Investors

Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as “accredited investors.”

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

  1. a bank, insurance company, registered investment company, business development company, or small business investment company;

  2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

  3. a charitable organization, corporation, or partnership with assets exceeding $5 million;

  4. a director, executive officer, or general partner of the company selling the securities;

  5. a business in which all the equity owners are accredited investors;

  6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;

  7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or

  8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Further information regarding the SEC’s registration requirements and common exemptions may be found in the brochure, Q&A: Small Business & the SEC.

Raising money from accredited investors will require startups to be cautious and carefully scrutinize that their investors are accredited.

Additional Requirements

Regarding additional requirements for startups that will raise funds by general solicitation once these new regulations become effective, there are chances that these new regulations will be prohibitive in nature, exact details of which may become available soon. For example, such restrictions may require the startups to notify the SEC in advance prior to begin the process of general solicitation.

It shall also be noted that these new regulations will also be applicable to foreign companies that intend to raise money in the U.S., as they will be subject to the same requirements as a U.S. company.

Conclusion

Once these new provisions come into effect, even though with prohibitive restrictions, these will definitely prove to be a boon for startups, as they can look forward to sign deals beyond a limited group of traditional angel investors. 

To know more about us, get connected with us on LinkedIn or mail us at info [at] techcorplegal [dot] com

Visit our Tech Patents Blog homepage: http://www.techpatentstrategy.com

International Business & Management Company in Singapore: Starting a Business in Singapore: http://www.techcorpgroup.com/

Contributors: Prity Khastgir and Rahul Dev 

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