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July 2013

SEC Opens Floodgates to Allow Private Companies to Advertise Fundraising Efforts

On July 10, the U.S. Securities and Exchange Commission by a 4-1 vote lifted the 80-year-old ban on general solicitation and advertising for certain private securities offerings. This allows private companies to advertise their fundraising efforts, making it easier for them to find accredited investors.

Under the new rule, companies can solicit funds from anyone, but only accredited investors will be allowed to purchase. The SEC defines “accredited investors” as those having a net worth of at least $1 million, excluding their primary residence, or annual income of more than $200,000 in each of the previous two years.

Previously, companies had to go public to raise money openly. Private companies could only raise money by soliciting privately through previously established relationships and word of mouth. Under the rule, private companies can buy television and newspaper ads, set up websites, cold call or shout from the rooftops that they are seeking investors.

General solicitation will fuel a new era of Internet crowdfunding. The launch of websites such as kickstarter.com, indiegogo.com, and crowdfunding.com over the past few years created a platform for entrepreneurs to solicit donations from the public to fund their start-up companies. Under the new rule, these entrepreneurs will be able to advertise for equity investors in their companies. These websites, which already have grown significantly, now will see exponential growth. According to a crowdfunding industry report prepared by Massolution, crowdfunding platforms raised $2.7 billion in 2012 and they are projected to raise $5.1 billion in 2013.

Critics of the new rule say it poses increased risk of fraud. The SEC’s only dissenter, Luis A. Aguilar, called the rule “reckless” and said “[t]he record is clear that general solicitation will make fraud easier by allowing fraudsters to cast a wider net for victims.” Opponents also claim there are insufficient means of verifying that investors truly are accredited.

The SEC noted its role to monitor the effects of the new rule. SEC commissioner Elisse B. Walter said “[i]t’s important that investors have confidence that the market for private investments has not turned into the Wild West.”

The rule is the result of the Jumpstart Our Business Startups Act (the JOBS Act) signed into law by President Obama in April 2012. The JOBS Act required the SEC to study and establish new rules that allow start-ups to advertise their fundraising efforts. The new rule will go into effect 60 days after publication in the Federal Register.

To view the SEC’s press release, see http://www.sec.gov/news/press/2013/2013-124.htm.

D&O and Shareholder Litigation

James M. Grady
Tamara Seelman



D&O and Shareholder Litigation

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