By DAVID VERRILL
Following through on a key provision of last year’s JOBS Act, the Securities and Exchange Commission has ended the ban on the general solicitation of capital for privately offered securities. The agency’s action is being hailed as a boon that will open the door for vast stores of money that entrepreneurs can use to start up new businesses and hire workers. More likely, the SEC’s move could slam the door shut.
That is because the agency’s new rules end the decades-old practice of letting individuals self-certify that they meet the legal rules that allow them to risk their money in a new venture that was not a “public offering.” The SEC has replaced self-certification with a verification scheme that would require most individuals who want to be considered as “accredited investors” to provide detailed personal financial information to entrepreneurs.
This is a huge step backward. Today, more than 200,000 accredited “angel” investors currently put up more than $23 billion per year to fund startups—a sum that amounts to 90% of the equity these startups get from sources other than the entrepreneurs themselves. If these investors are required to give tax documents to entrepreneurs or third parties who act as a “verifying agent,” they will flee rather than agree to this invasion of their privacy.
Under the Jumpstart Our Business Startups Act, the SEC was tasked with allowing general solicitation of capital for non-publicly traded corporations, provided that the issuer takes “reasonable steps to verify” that the investors are “accredited.” Under current rules, an accredited investor is someone with an annual income exceeding $200,000 or a net worth (excluding a primary residence) above $1 million. About 8.7 million U.S. households would qualify.