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In July, the SEC voted four-to-one to implement Title II of the Jobs Act, lifting the ban on general solicitation of private offerings. That means issuers of non-public equity – namely small businesses – can now approach accredited investors directly and more easily raise capital in private markets.
The private capital markets have been a continuous source of financing, as the cost and burden of regulation has encouraged potential issuers to stay away from public markets.
According to the SEC, in 2012 $1.7 trillion was sold in private securities versus $1.2 trillion in the public markets.
Reg D offerings are the largest portion of the private capital raised. Last year, $903 billion was raised in Reg D offerings about 65% of which was in the form of equity offerings.
Reg D offerings do not have to be registered with the SEC (private placements) but do have a series of rules depending on the type of issuance. One rule has been that the issuing organization cannot market to investors.
However, that has now been opened up to accredited investors individuals with incomes greater than $200,000, and couples with more than $300,000 combined or a net wealth of more than $1 million less the value of a home.
That encompasses around 8.7 million households in the US. Currently, only around 750,000 of those households invest in private offerings.
The adoption of the rule takes effect on September 23, but new filing and disclosure requirements for issuers are only now being discussed. Daniel Gorfine, director of financial markets policy and legal counsel at the Milken Institute, says this approach is controversial.
There are proposed disclosure rules and requirements that are open for public comment but the ban on solicitation will be lifted prior to those rules being reviewed and voted on by the Commission, he says.
Perhaps the SEC is doing this intentionally to speed up the process and see how the market develops before determining the need for or finalizing the rules, but it is an interesting and potentially risky experiment.
CircleUp has been connecting companies looking to raise funds with accredited investors since April 2012 raising $15 million for 15 businesses from a network of thousands of investors.
Founder and COO Rory Eakin says the new solicitation ruling will now enable CircleUp to advertise the names of the companies using its online investment platform and give investors more opportunities to invest with greater transparency.
Eakin says the ruling is good news for small businesses. There are 28 million small firms in the US employing 60 million people yet only 50,000 issuers have used a Reg D offering in the last four years.
Once small businesses are permitted to advertise a fund raise, I would expect that more will do so. They can use their own websites and inform their customers about raising funds and approach investors directly. It will also give individual investors more information.
Meanwhile, Title III of the Jobs Act, which pertains to crowdfunding and raising capital from non-accredited investors, looks no closer to being finalized.