Crowdfund | General Solicitation and Its Impact on Raising Capital
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General Solicitation and Its Impact on Raising Capital

Up until the fall of 2013, private companies were banned from publicly marketing a capital raise – known as General Solicitation – because of the SEC’s fear that the average person would be duped into investing in glorified snake oil scams. But thanks to the JOBS Act, that ban – which was enacted in 1933 – is now officially over.

But what does that mean for you?

While the ban on General Solicitation served a good purpose for decades, in recent years it became a real hurdle for private companies looking to leverage the interconnectivity of the web to raise money.

As North Carolina Republican Congressman Patrick McHenry is quoted as saying, “When it comes to security laws, there’s a paternalistic view that the average investors can’t make these decision for themselves.”Sleazy Salesman Pointing

With the JOBS Act, and the new opportunities involved with General Solicitation, small businesses are now legally able to advertise their fundraising efforts across a multitude of digital channels, such as social media, emails, and websites. This, in turn, exposes their company to a wider audience and gives them even greater opportunity to raise capital.

General Solicitation does not mean that it’s open season for investments

One of the misconceptions of General Solicitation is that it allows the general public to invest in your company (unless of course we take the onerous steps of drafting a Reg A+ offering).

That isn’t so. While businesses are now able to reach out to the masses, only accredited investors can invest in your business. An accredited investor is defined as:

1. An individual income of more than $200,000 per year or a joint income of $300,000 in each of the preceding years and a reasonable expectation that the same level of income will continue into the following year.
2. A net worth exceeding $1,000,000 either individually or jointly with a spouse, excluding the value of their primary residence.

Furthermore, it’s up to the private business owners to ensure that those who are investing are, in fact accredited. By publicly marketing their fundraising efforts, private companies are increasing the amount of work they have to do in order to ensure they follow the letter of the law.

In fact, there are a host of obstacles surrounding a company’s venture into General Solicitation that should be taken into consideration. Violating any of the regulations involved in the process could leave your company banned for one year from raising capital. That’s why it’s vital that you surround yourself with a team of experienced lawyers, broker dealers and advisors who have proven experience with the rules involved with the JOBS act.

General Solicitation does not benefit every company

The general consensus is that the more people a company can advertise their fundraising efforts to, the more money that company will raise.

While that seems sensible in theory, in reality not every business will benefit from General Solicitation. A company creating a highly technical software application may struggle to appeal to the masses. For these types of companies, the time and effort associated with General Solicitation may not be worth the return on investment.

On the other hand, companies that have a fairly straightforward and tangible product (such as a new device to keep a smartphone powered up) will find it far easier to communicate to the wider public. Their product is easier to understand and relate to, thus these companies are more likely to benefit from public advertising.

Investors need to tread cautiously

Investing in private companies can offer fantastic returns; however that potential comes with considerable risk. As such, investors need to be careful which crowdfunding channels they choose to become a part of.

Reputable crowdfunding portals will attract top-tier investors, which in turn attract quality companies that are more likely to offer you some type of return.

That being said, it’s still wise to determine, upfront, how much of your portfolio you plan on dedicating toward this type of investment. Once you determine your preferred amount, spread that number across at least 5-7 companies. By diversifying your investment, you can mitigate some of the risk involved.

Why General Solicitation is a very good thing

This monumental change in how companies can advertise their fundraising efforts gives them more opportunities to raise capital efficiently. The result is, hopefully, a far more streamlined process that gives entrepreneurs more time to focus on building their business.

Investors will also benefit from the change. They now have access to a greater number of potential companies from which to choose, thus putting them in the position of finding those opportunities that offer the greatest potential of a return.

Yet with all of the benefits associated with General Solicitation, there are drawbacks that need to be considered. Above all are the complexities surrounding the regulations and paperwork, as well as the harsh punishments dished out to companies found in violation of the law.

However, if a private company works with a team of professionals, and has a product that can appeal to the masses, they’ll likely find that this new access to General Solicitation will pay off in the form of a larger pool of interested investors. We’re already seeing some of the benefits through Reg A+ and 506(c) offerings.