New SEC rules could open equity options for Maine businesses
For the first time, a startup entrepreneur can raise funds from perfect strangers without the usual introductions. Thanks to new rules from the Securities and Exchange Commission, it is now easier for investors and promising startups to find each other.
But there are upsides and downsides in this new investment landscape.
It used to be that an entrepreneur's first funds were from friends and family. They knew you best, and were willing to take a gamble. Only after exhausting those funds and your own could you travel to outsiders, known as angels, and later still to venture capitalists. The SEC, after dragging its feet perhaps for good reason, this summer issued new rules for general solicitation that allow a private company to advertise for investment.
A new company may now raise convertible debt or equity in a general solicitation, but only from accredited investors. There are many unaddressed legal issues within the general solicitation rules, and many investors are concerned, for good reason. Previously, private investors could self-certify themselves as legitimate investors. Now private investors must produce tax returns, credit scores or other reliable information to the issuer before any funds can be accepted.
To help the SEC collect data on how investing will change, companies seeking investment through a general solicitation must file a Form D with the SEC at least 15 days before they start. Then they must provide the fundraising documents and amend that Form D to state that they're done soliciting within 30 days of finishing. These requirements may generate more of a roadblock than exists today.
The rules continue to require adequate disclosures, so an issuer company must make sensitive financial and proprietary information available to strangers and must be certain about security, especially pertaining to the storage and management of such information.
In traditional fund screening, a company would only approach a trusted local investor. Now with investors who are not necessarily from a trusted network, this may be harder to confirm. Managing information and investors has always been a challenge, especially when it comes to getting a 51% to 66% consensus among owners to raise new capital or to change a corporate charter, but these challenges will now prove greater.
Those are the downside risks, but the new rules will stimulate greater access to capital for companies traditionally unable to access the markets. Another benefit is that Maine companies have a broader range of small investors to approach, making success more likely. Often with limited Maine-based investors, companies growing here have been lured to the Boston area to access needed funds.
It is also good news for consumer product and non-tech companies that raise very little from the traditional private equity markets. General solicitation will expose growing businesses to a broader investment pool of passionate investors, opening the possibility of deals now only available to angel groups or venture funds in places like greater Boston, North Carolina, Texas and California.
Crowdfunding changes
Crowdfunding is also on the SEC radar. Current rules allow an unaccredited person having an income of $100,000 or more to invest up to 10% of her net worth, but the implementation of unaccredited investor crowdfunding has been delayed by fears that vulnerable elderly couples watching a television commercial will be duped into handing over their retirement funds for stupid investments or to bad actors. The Madoff scandal demonstrated that this can happen to the most sophisticated of investors. While fraud is of course at issue, investing at the early stages has never been for the faint of heart. These regulations do not eliminate the need for significant information disclosure that anyone can understand and use to make a reasonable decision around whether to invest in a company.
With the regulatory changes, it will be much easier for startups to raise money more quickly and from a wider range of investors than before, which is a great opportunity for Maine-based companies.
Karin A. Gregory is managing partner at Furman Gregory Deptula with offices in Boston and Biddeford. She can be reached at karin@fgd-law.com.
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Maine crowdfunding law to boost businesses
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