SEC lifts ban on open fundraising by startups, VCs, other funders

Cromwell Schubarth

Senior Technology Reporter- Silicon Valley Business Journal

The Securities and Exchange Commission lifted a decades-long ban on open solicitation of funds by startups and fund managers on Wednesday.

The move was mandated by the JOBS Act more than a year ago, but was held up while the SEC studied how to implement the new rules.

The ban on general solicitation had forced founders and funders to solicit funds in private meetings and through word of mouth, although some new platforms such as AngelList have provided ways to be more transparent about fundraising.

The SEC said investment in funds and startups will still be limited to accredited investors whose liquid net worth is more than $1 million.

It also said that reasonable steps must be taken to assure that the investors meet that net worth standard.

Further, it will now require anybody doing a general solicitation to file a Form D with the SEC at least 15 days before starting their campaign. They must file a followup within 30 days of ending the solicitation.

It isn’t clear that established funds in Silicon Valley will start advertising since they prefer to raise money from large institutional investors.

Emergence Capital Partners founder Brian Jacobs told me, “Most VCs I know don’t want to raise money from individuals.”

Jacobs said that many VCs got started by raising money from their friends and from successful entrepreneurs but shifted to institutional backers later on.

“Those aren’t particularly reliable investors over the long haul,” Jacobs said. “Ultimately most venture funds want the stability of institutional backing.”

Alex Mittal, CEO of the FundersClub online venture capital platform, expects a wave of new offerings from funders and founders.

“In this new normal, issuers will be put under increased pressure to demonstrate the merits of the opportunities as well their own qualifications to investors, and investors will be wise to heavily scrutinize the reputation of issuers and the quality of offerings before proceeding with an investment,” he said in an email to me.

One immediate result of the SEC ruling was a satirical Twitter stream of possible hedge fund advertising slogans, such as, “Fee all that you can fee.”

Cromwell Schubarth is the Senior Technology Reporter at the Business Journal. His phone number is 408.299.1823.