Small businesses and startups are adding notices to their websites and Facebook accounts encouraging the public to take a chance and help fund the new businesses they frequent. This may seem strange or new, and it is in a way. In mid-September, the Securities and Exchange Commission (SEC) lifted its 80-year-old ban that prevented private startups and small businesses from publicly asking for investments without an IPO.
The ban was started in response to the great stock market crash of 1929, and was initially intended to save the public from investment scams. The new rules don’t allow just anyone to make an investment yet, though:
‘Through the new rule 506(c), companies are permitted to use general solicitation to reach investors, essentially reaching out publicly in a private offering, as long as every ultimate investor in the offering is accredited,’ said Stephen Graham, a partner at Fenwick & West, who also co-chairs the SEC’s Advisory Committee on Small and Emerging Companies.
Accredited investors are defined as those folks whose annual net worth is in excess of $1 million, or those who make $200,000 per year or more.
Some businesses are taking their investment pleas directly to social media. According to an article in the Wall Street Journal online, Rick Fields, who owns Rick’s Picks, an artisanal pickle company, has not only added “an eye-catching orange-and-blue ‘FUND US’ notice on his company’s website,” he also plans to “selectively tout the investment offer on Facebook and Twitter, to reach as many potential pickle investors as possible.”
Another small business owner, Gregory Lok, plans to use professional sites such as LinkedIn to run ads for investors to his online home décor marketplace. Says Lok, “You have to be very careful about who you bring into your company.”
The article goes on to explain that businesses that use this tactic to raise new capital are now required to alert the SEC to new funds raised within 15 days of the first investment. If the company fails to file the proper paperwork within those 15 days, it can be “barred from raising additional capital for a full year.”