Equity Crowdfunding and Advertising: Be Careful What You Wish For
It is official — on July 10th, 2013 the Security and Exchange Commission (S.E.C.) lifted the ban for private offering advertising. This means that once the rule goes into effect (60 days after publication in the Federal Register — so we are talking about mid September), startups along with venture capital funds, private equity funds and hedge funds will be able to market their stocks and investment products via TV, radio and social media to a wide audience.
Can I show you my pitch deck?
The new S.E.C. rule is only a partial implementation of the JOBS Act but is a radical departure from an 80-year-old policy that used to keep public in the dark regarding any investment opportunities in private companies.
The biggest irony is that in order to invest into the advertised companies you still have to fit an accredited investors profile having an annual income of at least $200,000 or liquid assets of at least $1 million. If you don’t make the cut, it is sort of like “you can watch it but don’t touch it.”
But things get serious if you are an entrepreneur raising capital. There are at least two very important points:
1) You must pre-register your offering with the S.E.C., filling out a special form called “Form D in Rule 506 (c)” at least 15 days prior your official capital raise;
2) You will be subject to the anti-fraud provisions so any statements regarding the investment opportunity in your company that you post on Tweeter, LinkedIn, Facebook and likes might be considered by the S.E.C. as misleading and will be used against you.
Meet the hedge funds
Evidently, with a new rule we’ve got a new regulative burden for entrepreneurs and only time can tell us if it is justified. In 2012 there were only 268,160 active angel investors who invested $22.9 billion. The question is: Now with a better visibility, can young private companies find the love from 8.99 million U.S. households who actually fit an accredited investors profile but so far stay out of the angel investing?
When I asked Anthony Scaramucci, the co-founder of Skybridge Capital, a global alternative investment firm based in New York “what’s next,” he answered me with his usual wit and optimism: “The big hedge fund managers will sniff their noses at ads and thus provide the opportunity for the upstarts to dislodge them. A failure to use all tools will be a business school study on losing market share.”
Anthony Scaramucci is considered to be one of the most charismatic (and controversial) modern hedge fund mangers; he consulted the production team of Wall Street 2, is the author of Goodbye Gordon Gekko and is a regular contributor on CNBC.
His fund manages about $8.2 billion – a gigantic amount especially if you remember that the whole crowdfunding industry was estimated to be $2.7 billion in 2012 and according to the Massolution Report will reach $5.1 billion this year. Overall, hedge funds manage approximately $2.2 trillion in assets, up fourfold since 2000 . If you wonder where the money came from — they came from you — nearly two-thirds of the hedge industry’s assets are now drawn from pension funds.
Now, I don’t think that entrepreneurs will have to compete with, let’s say, hedge fund managers for accredited investors. Most people I know who invest in startups want to make a difference (think impact investment), people who invest in hedge funds want to make a financial return with no strings attached (plus there are traditional hedge funds’ fees which are an expense for any investor regardless the return).
Nevertheless, I am wondering if one day someone as charming as Scaramucci will show up at your doorstep asking to ward off dragons from your house and showing his success rate — will you be strong enough to not to be seduced? I am talking to you, dear angel investors! The experiment on accredited investors is on, but I can hardly wait to see the rest of the population having a legitimate right to participate in the private investing too.
Coming soon: regular investors are in – accredited investors are out
Those who strongly disagree, try to hear me out.
Probably it is true that the vast majority of people have no capacity to make smart investment decisions into the privately held companies due to their luck of experience or certain analytical skills. In fact, I bet they might be just content enough without exercising their right of getting involved into the intellectual burden of weighting “risks versus rewards” analysis. But how come anyone can have a power to justify the conjecture of such capacity and determine what kind of financing choices people ought to make in a free society?
There is a fascinating government data that shows a breakdown of what a typical American household buys . For example, the average family spends 5.7 percent of a budget on dining out and 7 percent on cars. Does anyone have a problem with that? Why there is so much noise about spending 5 percent of the budget on equity then, if the individual choose to do so?
And we desperately need a new generation of angel investors as we need jobs.
Several studies confirmed that practically all jobs in the United States are created by start-ups while established businesses are rapidly shedding jobs instead of creating them. As the Kauffman Foundation revealed, on average, one-year-old firms create nearly one million jobs, while ten-year-old firms generate three times less. Furthermore, the National Bureau of Economic Research confirmed “the younger companies are, the more jobs they create regardless of their size”. Finally, 60 percent of the jobs created by start-ups still exist five years later, according to the new research by the Heritage Foundation.
Spread the word. And do your best.
Victoria Silchenko is the founder of Metropole Capital Group which is in collaboration with CrowdsUnite (“Yelp” of crowdfunding) is starting a reward campaign “Crowd’s Choice”. The winners will be announced at the second annual Next Generation Entrepreneurship and Global Crowdfunding Forum in Los Angeles on November 15th, 2013