How Congress Can Make Startup Fundraising Easier and Better

Law_Column_stepsI was excited to hear that fellow Seattle lawyer Eric Koester was going to testify in front of Congress next week on how to make startup financings easier and better. Please see the story on GeekWire. Eric, below is my bullet point list of what I would change if I could.

  1. Allow general solicitation.

Right now, startups are bound by Rule 502(c), which provides as follows:

Limitation on manner of offering. Except as provided in Rule 504(b)(1), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

  1. Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
  2. Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising;

Intelligent folks have argued these rules don’t make sense. See footnote 25 of the Letter From SEC Chairman Mary L. Schapiro to The Honorable Darrell E. Issa, Chairman, U.S. House Committee on Oversight and Government Reform.

See, e.g., Final Report of the Advisory Committee on Smaller Public Companies to the U.S. Securities and Exchange Commission (April 23, 2006), http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf; Joseph McLaughlin, How the SEC Stifles Investment – and Speech, The Wall Street Journal (February 3, 2011). Concerns about the scope of the Commission’s rules on general solicitation and advertising have been raised by the participants in the annual SEC Government-Business Forum on Small Business Capital Formation. See 2009 Annual SEC Government-Business Forum on Small Business Capital Formation Final Report (May 2010), http://www.sec.gov/info/smallbus/gbfor28.pdf.

  1. Reduce the “accredited investor” financial thresholds.

Dodd-Frank made it more difficult for folks to qualify to invest in startups. This wasn’t helpful to startups.

  1. Add to the definition of “accredited investor” sophisticated persons who make certain acknowledgments about the risks of investing in investment agreements.

If folks are willing to acknowledge that they are willing to lose their money on a highly speculative venture, let’s let them.

  1. Allow a tax write off before the stock is sold.

Right now, the tax law doesn’t allow a recovery of basis in stock until the stock is sold. This encourages people to flip companies.

  1. Allow a tax credit for investments if the funds are used to employ people.

There is a great bill out there right now in Congress that would allow a 25% tax credit for investments made in qualifying startups. This would be a good law to add to the books.

  1. Disallow states from imposing fees on companies simply because an investor is resident there.

Right now, startups can wind up paying $300 fees in numerous states.

  1. Allow offerings in which small amounts of money are raised from many people to be completely exempted from the rules.

For example, if you are raising less than $500 (for example), from 1,000 people to fund a renewable energy project in your neighborhood, allow this to happen.

Good luck and have fun Eric!

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Update

Eric Koester’s written testimony to the House Committee on Oversight & Government Reform

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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