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October 07, 2013

New Rule Makes Finding Funding Easier for Small Business

By David Schweikert

Wouldn’t it be frustrating to have a great idea and not be allowed to talk about it? 

A regulation that was passed in 1933 put drastic limits on how small businesses and start-ups could spread the word about their need for funding.  The rules prevented them from advertising or “general solicitation,” limiting their outreach only to investors already known to them who met certain income and asset thresholds.

 In today’s world, it didn’t just prevent traditional advertising; it also meant they couldn’t tap Twitter followers, Facebook friends or other social networks for help finding investors, since they couldn’t talk about the opportunity with anyone who was not a qualified investor with whom they had a preexisting relationship.

On September 23, a landmark revision contained in the JOBS Act took effect enabling small companies to publicly announce efforts to raise capital.  Title II of the JOBS Act required the U.S. Securities & Exchange Commission to ease the restrictions in Rule 506 that prevented small businesses from conducting general advertising to find investors.  While it does not expand who businesses can allow to invest in them, it does provide more ability to attract attention to fundraising efforts.  This in turn will allow companies to find qualified investors more easily, which ultimately will enable them to grow and create jobs.

To benefit from the new rules, small businesses and start-ups will need to file or amend their Form D with the SEC, giving notice that they will advertise their search for funding. This is done by checking a box on the form for the Rule 506c exemption.  Businesses who advertise their investment opportunity under this rule will also need to show their advertisements to the SEC within 15 days of publication.

Business using this rule change will be required to verify that they are accepting funding only from investors who meet the definition of “accredited” under SEC rules.  The changes do not apply to businesses who do not conduct general advertising of a funding opportunity.

 One of my primary goals as a lawmaker is to support economic growth and remove barriers so small businesses can thrive and provide employment opportunities for the benefit of the residents of Arizona.  This change is only the first of many yet to go into effect that will help accelerate innovations in capital formation for the next generation of start-up companies. 

JOBS in the act’s name stands for “Jumpstart Our Business Startups.”  This act truly is about jobs.  The creativity we need in this economy to spur the next wave of employment opportunities comes from small businesses, which desperately need access to capital.  The recent economic woes have dramatically and negatively impacted these businesses’ ability to obtain funding through traditional sources.

Despite passage of the JOBS Act in 2012, many provisions are moving inexcusably slowly through the bureaucracy.  The next provision I hope to see emerge could further promote innovation by legalizing “crowdfunding,” allowing such investors to receive a small equity stake for their contribution, which currently is not permitted. Companies now are limited to working on a donation basis or can pre-sell products only.  I will continue to push the bureaucracy to ensure that the legislation I and my colleagues worked so hard to get enacted results in meaningful improvements for business and job growth for the residents of Arizona.

Congressman David Schweikert –Republican, Arizona District 6,  was co-sponsor of the JOBS Act.
More information about the SEC rules and changes can be found on the U.S. Securities & Exchange Commission website

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