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SEC Loosens Startup Funding Rules

Editors Note: This story has been updated from the original posted version. Startups looking to raise money will soon be able to shout it to the rooftops thanks to a new rule from the Securities and Exchange Commission. The SEC on Wednesday voted to lift the ban on general solicitation and advertising for certain private securities offerings. This means that private companies venture capital funds and hedge funds will soon be able to advertise their fundraising efforts. Under the new rule, companies can solicit funds from anyone, but only accredited investors will be allowed to purchase equity stakes. The SEC also will require companies to provide additional information about these security offerings so that the commission can better monitor the market. The solicitation ban previously required companies looking to raise money to either register with the SEC or rely on an exemption from registration. Many such exemptions prohibited companies from advertising their fundraising efforts online or in newspapers. “As we fulfill our mission to facilitate capital formation and maintain fair and efficient markets, the commission must always focus on strong investor protections,” Mary Jo White, chairwoman of the SEC, said in a statement. “We want this new market and the private markets in general to thrive in a safe and efficient manner, and these rules we adopt and propose are designed to facilitate that objective.” The new rules are the result of the Jumpstart Our Business Startups Act – called the Jobs act – that President Barack Obama signed into law in April last year. The act requires the SEC to study and establish new rules that allow startups to promote their fundraising campaigns and lowers the barrier for accredited investors in private companies. This is the first ruling on the Jobs Act that the SEC has handed down. The next, allowing most people to become accredited investors, is expected to follow. The new rules will go into effect 60 days after publication in the Federal Register. Chance Barnett, chief executive of Venice fundraising platform Crowdfunder, said lifting the ban on public solicitation will help pave the way for crowdfunding businesses like his. Crowdfunder, and several other investment websites, were able to operate during the ban because they worked with private communities of accredited investors. Once the ban is lifted, however, they will be able to advertise their deals to a wider audience. “This is the first of potentially two firing shots that will officially kick off this online market,” Barnett said. “There will be a lot of noise, as there already is in the space, that makes it more important for crowdfunding companies to be really clear about who they are and what they do.”

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