Today's SEC Ruling on Crowdfunding Is a Mixed Bag

07/10/2013 06:13 pm ET | Updated Sep 09, 2013

What? Soliciting is okay now? Yes, at least as far as startups and angel investors with what the Securities and Exchange Commission (SEC) calls "general solicitation." 

According to reports in VentureBeat and elsewhere, today's SEC ruling doesn't open up crowdfunding as most people understand it -- normal people investing in startups. Instead, the old rules still stand, so startups can take investment money only from sophisticated investors. With regulations that date back to the great depression and stock frauds of those days, the SEC still limits startup investments to so-called "accredited" investors. And it defines accredited by annual income or net worth. The idea is that accredited investors are sophisticated about risks, and can afford to lose the money the invest. So startups must still limit their investment hopes to accredited investors and a very few friends and family. That hasn't changed. 

What has changed, according to the reports, is the rules against "general solicitation." This change will help startups. Until the new rules go into effect, in about 60 days, you can't tweet, or post, or even talk in a conference or an interview, about your startup raising investment. That was general solicitation and it was forbidden. You had to make sure you were talking to accredited investors only. With the new rule, you can talk about it now. You still can't take anybody's money, just accredited investors and a very few select friends and family; but at least you can say openly that you're looking.

This change will also help angel investors, and, presumably, make more angel investment money available. That's because it will help angel investors get together. Or at least that's my hope on reading the initial reports. The local angel investment group I'm a member of, in Oregon, has had trouble recruiting new members because our attorney has said we can't announce meetings in the newspaper or on Facebook or Twitter, or in emails to local lists. That was all called general solicitation. Apparently with the new rules that will be okay. 

However, one worrisome note in the early reports is that the SEC will require tougher checks on who is and who isn't really accredited. Under the current rules, members of our angel investment group self-certify that they have the income or net worth required. They check a box on a form, and sign. But an Angel Capital Association (ACA) news flash says:

"Angels will no longer be able to self-certify their accredited status. Instead issuers will need to verify accredited status with "safe harbor" categories such as IRS documentation or certification from an attorney, accountant, or registered investment advisor."

That looks to me like what we gain in recruiting new members through the relaxation of rules against general solicitation we lose in the new hoops our members will have to jump through.

So today's announcement includes good news, bad news, an easing up on some elements, tightening on others, and is hardly a game change.  I like the cautious conclusion to the ACA email: 

If you are following reports on these issues today and in the coming days, you may see conflicting information and interpretations. This is because of the complexity and the fact that the final details are yet to be posted by the SEC.

Amen to that. And I should add that I'm not an attorney, and I'm basing this on early reports, so if any of this affects you, stop, put down that keyboard, and see your attorney about it.