Below is an article by The Wall Street Journal entitled “Startups Advertising to Raise Funding More Than VC Firms Are, Study Says”
Startups Advertising to Raise Funding More Than VC Firms Are, Study Says
By: Lora Kolodny, The Wall Street Journal
Oct 2, 2014
A year ago, the Securities and Exchange Commission made it legal for privately held businesses in the U.S.–including tech startups and venture capital firms–to publicly advertise the fact that they’re raising capital in order to attract investors.
While few venture firms have taken advantage of the new general solicitation rules, thousands of U.S. businesses have done so, according to a new study by New York-based equity fundraising platform SeedInvest and data firm Crowdnetic.
In the past year, 4,700 companies based in the U.S. tried raising capital under the JOBS Act Title II rule, the study said. In total, these businesses raised $350 million.
At least 38.2% of those raising funds were tech companies–mostly mobile apps, social networks and e-commerce businesses.
More than 70% of companies that tried to raise funds via general solicitation sought capital for an equity stake in their businesses. The rest were raising debt financing, primarily via convertible notes.
Tech ventures had a 17.6% success rate raising the funds they sought, according to the study. That success rate could rise, as some are still fundraising or may not have yet reported the close of a deal.
Among the companies that raised funds through general solicitation is TechShop, a membership-based do-it-yourself fabrication studio in eight U.S. locations, which raised $3.4 million as a direct result of its general solicitation fundraising efforts, CEO and co-founder Mark Hatch said.
His company used its own Twitter feed, email lists, website and webinars to get the word out, Mr. Hatch told Venture Capital Dispatch. Then they vetted investors and closed the deal offline. They didn’t put up a billboard or take out ads on Facebook, YouTube or traditional media, he noted.
Other companies used seed fundraising sites such as AngelList, MicroVentures, SeedInvest, CircleUp and EquityNet to create company profiles they could link to and promote as part of their fundraising efforts.
SeedInvest raised a significant portion of its own $4.15 million in total Series A funding using its own site, and engaging in general solicitation.
The CEO of SeedInvest, Ryan Feit, predicts that in the next year, after the SEC clarifies and changes some of the rules around general solicitation, even more startups and venture firms will embrace this method.
One commission proposal that many investors and founders hope the SEC will abandon, Mr. Feit said, is for a pre-filing requirement, by which businesses would have to submit a Form D 15 days before they engage in public advertising of their offerings.
Many startups, investors and their legal teams aren’t entirely certain what comprises general solicitation today. “They’re keeping to traditional fundraising methods because they don’t want to wander into the penalty box,” Mr. Feit said.
For example, he said, it was unclear whether it is considered advertising if a blogger attends a startup demo day and reports on a company’s presentation with the implication that it is seeking funding, even if it wasn’t confirmed with the startup.
And is it “general solicitation,” he asks, if a startup’s co-founder posts a status update to a social network that references a meeting with potential investors?
Unlike companies, venture firms have mostly stayed away from publicly advertising fundraising efforts, especially larger, traditional ones. Among the very few venture firms that engaged in general solicitation in the U.S. over the past year were 500 Startups, Foundry Group, Scout Ventures and ff VC.
The SEC hasn’t set a date by which it will issue new crowdfunding rules, or revisit proposals that are not yet JOBS Act requirements. An SEC spokesperson confirmed that there have been no enforcement actions for JOBS Act violations to date.