Tomorrow, the SEC is expected to announce new rules for General Solicitation, the way private companies and others can advertise offerings. This change was a key component of the JOBS Act passed by Congress in April, and much has been written about the benefits for technology start-ups and others since then. Today, we are featuring a post from Ryan that debuted in Forbes today.
In April, President Obama signed into law the JOBS Act, which was designed to make it easier for small businesses to access capital and create new jobs in the process. On Wednesday, rules for one of the key provisions of the JOBS Act, the removal of the SEC’s longstanding ban on “general solicitation or advertising” for companies selling securities without SEC registration, will be announced. In the past, companies that sold securities to accredited investors were able to avoid the expensive and burdensome process of SEC registration under a “safe harbor” exemption in the Exchange Act. However, one downside to raising capital this way has been that companies cannot take part in “general solicitation or advertising”, which nominally prohibits issuers from advertising securities offerings, but has effectively caused companies contemplating an offering to cease all public communications, making the fundraising process very inefficient.
While some experts are predicting that the removal of the general solicitation ban will help spawn the next Facebook or Google, tech companies will actually be the companies least affected by the change in law because the private capital markets for tech are already extremely efficient. According to Pricewaterhouse Coopers’ and the National Venture Capital Association’s MoneyTree Report, almost 60% of the $28 billion of venture financing in 2011 went to the tech industry (including biotech). Silicon Valley, where the vast majority of venture capital money resides, has a long and storied history funding tech companies. “Demo days”, gatherings where promising (mostly tech) start-ups exhibit their wares to potential investors and industry observers (which straddle a legal grey area under the general solicitation ban) have become all the rage over the last few years, led by the success of start-up incubators like Y Combinator. Leading Silicon Valley law firm Fenwick & West summed up the early-stage investing environment well in its Second Quarter 2012 Silicon Valley Venture Survey: “The venture environment continues to be a “tale of two cities” with software and internet/digital media thriving and life science and cleantech lagging.”
Thus, there is clearly an efficient market for start-up tech companies with sound business models to raise capital today, without the need for the publicity that the removal of the general solicitation ban will afford them. There may be a few tech companies in obscure geographies that stand to benefit from the ban’s removal; however, tech companies that will be able to raise capital because of the ban’s removal when they were not able to before will mostly be the product of adverse selection. Great tech companies can already raise VC and angel money so the ones who have not been able to are primarily the ones whose business models are not sustainable. If these companies can now raise money because of increased publicity from the ban’s removal, investors may be in for a bumpy ride.
However, there is definitely a bright side to the ban’s removal for companies outside the Silicon Valley bubble. For example, the consumer industry accounts for nearly 15% of GDP but less than 5% of venture capital funding, yet according to a report by the Kaufmann Foundation, the leading authority on VC and angel investing returns, angel investments in consumer products companies have produced average returns of 3.6x invested capital over 4.4 years. Consumer companies and companies in other industries that have not been the historic focus of venture capitalists will be the big beneficiaries of the ban’s removal, as these companies that exist outside the Silicon Valley ecosystem will be able to publicly alert potential investors that they are raising money.
The JOBS Act is a great step in the right direction for America’s small businesses and will remove a lot of red tape that has prevented job creation. While the removal of the general solicitation ban is an important piece of the Act, the companies who will benefit the most from it are not the darlings of Silicon Valley, but the businesses of mainstream America.