Companies intending to seek funding under the JOBS Act's crowdfunding provision gained a seeming advantage in September when the SEC removed its ban on the general solicitation or advertising of certain types of private placements. But this may be less promising than it sounds, says Palo Alto-based Morrison & Foerster corporate and securities partner Timothy J. Harris: "There is a strong undercurrent in Silicon Valley that companies showing their wares this way are openly admitting that they cannot raise capital by traditional means that involve the imprimatur of professional venture capital or private equity investors. This may suggest that the company is of questionable appeal or quality."
General solicitation can also be an uncertain and expensive means to obtain funding. "You can stick your billboard on the highway, but you still have the costly obligation of reasonably verifying that your investors are accredited, among other requirements," Harris says. And there are potential downsides to inviting strangers to the party and keeping them happy. Adds Harris, "Imagine having numerous high-maintenance investors bugging you for their returns."
Keywords: crowdfunding, JOBS Act, SEC
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