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Startups, Take Note: Title II of the JOBS Act Has Lifted the General Solicitation Ban

Last week, we discussed the Sarbanes-Oxley Act and what startups should know about it. We noted that shortly after the Sarbanes-Oxley Act was enacted, critics argued that it restricted innovation and suffocated the growth of startups and small companies because the cost of compliance was too great for them. In response to these concerns, the government, on April 5, 2012, enacted the Jumpstart Our Business Startups Act or JOBS Act. The purpose of the JOBS Act is to encourage funding of small businesses and startups by easing certain securities regulations. For example, the JOBS Act extends from two to five years, the time that certain small companies and startups have to begin complying with the requirements of the Sarbanes-Oxley Act, i.e., certifying the accuracy of financial information. It also provides an exemption from the requirement to register certain public offerings with the Securities and Exchange Commission.

According to Forbes magazine, Title II of the JOBS Act takes effect today, and it lifts the ban on general solicitation, allowing startups to publicly advertise that they are seeking investments. General solicitation means “to publicly advertise the opening of an investment round in a private company by utilizing mass communication.” As reported by Forbes, “[b]eginning today, September 23, 2013, under Title II of the JOBS Act, entrepreneurs will be permitted to publicly advertise that they are fundraising for their businesses, something that was previously illegal for the past 80 years under Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933.” The only restriction under Regulation D 506C is that all investors must be accredited, generally having earned $200,000 for the past two years, or $300,000 if married, or having a net worth of $1 million not including a personal residence (see more on compliance next week).

What Does Removal of the Ban Mean for Startups

Is removal of the general solicitation ban good news for startups? Yes and no. For starters, the deregulation allows startups to advertise their deals and reach out to more investors, which can be very lucrative. Some critics argue, however, that Silicon Valley technology startups will be the least affected by the lifting of the ban because the private capital markets for the technology industry already are extremely efficient. After all, the vast majority of venture capital money lives in Silicon Valley. On the other hand, removal of the general solicitation ban will help startups in other industries. Another benefit is that startups will no longer face the possibility of a one-year ban from fundraising — one of the potential consequences for failing to follow the regulation against general solicitation.

The economic impact of the lifting of the ban against general solicitation remains to be seen, but the consensus on its taking effect is mostly positive and optimistic. As one private equity expert noted, this is a gargantuan change in U.S. securities law, allowing entrepreneurs to speak to the world to try to raise capital and opening up the floodgates to global fundraising. Next week, we will discuss what startups must do to comply with the regulations of Title II if and when they choose to generally solicit their fundraising efforts.

We Can Help

The Law Office of Kristina M. Reed is highly experienced in all phases of business law, from startup to profitability. If you have questions about startups in our area or need assistance in ensuring that you are in compliance with the ever-changing rules, regulations, and laws governing startups, please contact us.