September 17, 2013
Entrepreneurs to Advertise for Investment through Crowdfunding
by Robert Kropp
SocialFunds.com talks with Judd Hollas of EquityNet about the implications of a change in SEC rules
that will allow small businesses to advertise to accredited investors for capital.
The funds for the production of several of my favorite music recordings of recent years—the
exquisite Winter Morning Walks, by Maria Schneider and Dawn Upshaw, comes immediately to mind—were
raised through crowdfunding, the practice of aggregating small amounts of capital from large
numbers of contributors which has become common practice thanks to the Internet.
Crowdfunding can be utilized towards
ends other than the production of works of art, of course, and since 2005 EquityNet has hosted an online platform where small
businesses can raise capital. EquityNet now has almost 10,000 members, and entrepreneurs have
raised more than $207 million through the company's platform.
Come September 23rd,
EquityNet will be well-positioned to take advantage of a change in Securities and Exchange
Commission (SEC) rules that will take place then. As part of the Jumpstart Our Business Startups
(JOBS) Act, which was signed into law by President Obama last year, a ban on advertising to
investors will end. The ban has been in place since the Securities Act of 1933.
According to the SEC,
“Cost-effective access to capital for companies of all sizes plays a critical role in our national
economy, and companies seeking access to capital should not be hindered by unnecessary or overly
The change in rules “permits an issuer to engage in general
solicitation or general advertising in offering and selling securities...provided that all
purchasers of the securities are accredited investors and the issuer takes reasonable steps to
verify that such purchasers are accredited investors,” the SEC stated. Accredited investors are
institutions and individuals who are financially sophisticated and thus less reliant on the filings
required of issuers by the Commission.
SocialFunds.com spoke recently with Judd Hollas,
founder and CEO of EquityNet, about the potential impact of the change in SEC rules relating to
“Private equity investing with accredited investors has been allowed for
decades,” Hollas noted. “Title 2 is going to open the door dramatically for there to be more
transparency and awareness in the accredited investor space.”
“Title 3, which allows for
non-accredited investors, may take up to another year to come into play,” he continued. “So for the
next year Title 2 will be the only equity crowdfunding available. It will change the way
entrepreneurs raise money and how investors will become aware of these opportunities.”
asked Hollas to describe the potential effects of the rule change for entrepreneurs and investors.
“The significance for businesses is that the primary cause for business failure in the US
is inadequate capital,” he said. “Until now, entrepreneurs have been limited to the small Rolodex
of people they know, and they couldn't advertise. Now they can market their capital like they
market their products. It will allow entrepreneurs to have increased exposure to capital and more
timely access to capital.”
“Investors are going to see advertisements for funding,” he
continued, “Which is going to educate and build awareness in the investor world of these
opportunities. Two to three million accredited investors in the US control a trillion dollars but
only ten percent of them are active in making investments in private businesses. Most of them are
probably not even aware of the opportunities.”
For a company with the business model that
EquityNet has, the impact could be dramatic.
“Probably the first place in American that
you will see a funding advertisement is going to be EquityNet,” Hollas said. “There are lots of
places where people can advertise but we've been developing this platform for six months, long
before the SEC adopted this rule.”
“On the 23rd we'll launch a new platform which is
specifically designed for entrepreneurs to advertise their need for funding to an investor-centered
population,” he continued. “There will be hundreds of profiles of companies publicly available.”
Hollas described the rule as opening the door for a “large new asset class immediately
available to investors that dwarfs the number of public companies.”
opportunities for investment in start-ups and other small private businesses should prove appealing
to many accredited investors, but does the rule change offer advantages for sustainable investors
considering environmental, social, and corporate governance (ESG) factors in their investment
"Until now, investors looking for companies with social impact have been
limited to public securities,” Hollas said. “Now they have a new universe of private companies that
they can invest in and help make a social impact.”
“Several companies already on
EquityNet have great environmental or social missions,” he continued. “In the private business
space you'll find a lot of companies that have a pure play social and environmental focus.”
The CEO of at least one company that provides infrastructure for the impact investing industry
sees the SEC rules change as “a major paradigm shift in the distribution of securities and capital
formation in the US.”
Vince Molinari is CEO of GATE Global Impact and co-founder of Crowdfund Intermediary Regulatory Advocates (CFIRA), which was
formed to help the SEC and other government entities establish industry standards and best
practices for crowdfunding.
“The ability for companies to advertise securities will enable
them to very efficiently reach broader audiences in order to secure funding for growth and job
creation, adding to economic recovery and expansion,” Molinari said. “We are now embarking on
disruption of the historic financial services system. This will be the first step of the
integration of social media and financial services which could result in a power shift or alignment
of traditional Wall Street and Silicon Valley as access to a large customer base for distribution
of securities will result in new investment practices and access to capital.”
"This is the
first step in the democratization of capital formation,” Molinari added.
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