Startup community speaks out against new SEC rules

SEC changes the rules, one group says it will hurt startups

The good news: On September 23rd, startups will be allowed to expand beyond only seeking investor donations privately and can officially begin publicly raising money from accredited investors.

The caveat: a new crop of Securities and Exchange Commission (SEC) fundraising rules may hurt startup companies’ chances of obtaining said investor funding regardless of if a mistake is intentional or not.

Under the new rules, in order for a startup to publicly fundraise, it must do the following:

• Notify the SEC 15 days before they publicly discuss raising money
• File documents with the SEC each time that the company updates their offering materials
• Include a legal boilerplate each time the company talks about their financing publicly

The SEC asserts this is for transparency

The SEC states that it has enacted these rules so that it can properly monitor these transactions and to ensure that companies are being truthful when representing their financials to potential investors – which is understandable. But what has many critics in an uproar is the fact that a startup that happens to slip up one these rules can face up to a one year ban during which they are restricted from fundraising.

Restricting a business from obtaining capital for an entire year is hugely detrimental to profitability and can cause numerous businesses to go under if they don’t have alternative funding sources. The rules may seem easy enough, but having to repeatedly file new documents with the SEC each time that an update is made, and give two weeks advance notice before speaking with an investor isn’t realistic in the business world.

Business owners can’t control when they will come into contact with a certain investor or happen upon an opportunity that requires a quick response, and banning businesses from having a conversation in real-time is extremely restrictive. Although the rules do serve a purpose, they can also hurt the success rate of entrepreneurs looking to expand beyond private fundraising.

SEC is seeking feedback: this is where you come in

The SEC is currently asking for feedback on its proposed rules and several groups have come together to express their concerns and suggest alternatives such as asking the SEC to permit a third party organization like Angel List to take care of any necessary filing on behalf of startups. Although the clock is winding down for feedback, there are still 10 days left to provide comments.

To comment to the SEC either in support or criticism of the new rules, you’ll find instructions here.