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September 17, 2013

Entrepreneurs to Advertise for Investment through Crowdfunding
    by Robert Kropp talks with Judd Hollas of EquityNet about the implications of a change in SEC rules that will allow small businesses to advertise to accredited investors for capital. -- The funds for the production of several of my favorite music recordings of recent years—the exquisite Winter Morning Walks, by Maria Schneider and Dawn Upshaw, comes immediately to mind—were raised through crowdfunding, the practice of aggregating small amounts of capital from large numbers of contributors which has become common practice thanks to the Internet.

Crowdfunding can be utilized towards ends other than the production of works of art, of course, and since 2005 EquityNet has hosted an online platform where small businesses can raise capital. EquityNet now has almost 10,000 members, and entrepreneurs have raised more than $207 million through the company's platform.

Come September 23rd, EquityNet will be well-positioned to take advantage of a change in Securities and Exchange Commission (SEC) rules that will take place then. As part of the Jumpstart Our Business Startups (JOBS) Act, which was signed into law by President Obama last year, a ban on advertising to investors will end. The ban has been in place since the Securities Act of 1933.

According to the SEC, “Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and companies seeking access to capital should not be hindered by unnecessary or overly burdensome regulations.”

The change in rules “permits an issuer to engage in general solicitation or general advertising in offering and selling securities...provided that all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors,” the SEC stated. Accredited investors are institutions and individuals who are financially sophisticated and thus less reliant on the filings required of issuers by the Commission. spoke recently with Judd Hollas, founder and CEO of EquityNet, about the potential impact of the change in SEC rules relating to advertising.

“Private equity investing with accredited investors has been allowed for decades,” Hollas noted. “Title 2 is going to open the door dramatically for there to be more transparency and awareness in the accredited investor space.”

“Title 3, which allows for non-accredited investors, may take up to another year to come into play,” he continued. “So for the next year Title 2 will be the only equity crowdfunding available. It will change the way entrepreneurs raise money and how investors will become aware of these opportunities.”

I asked Hollas to describe the potential effects of the rule change for entrepreneurs and investors.

“The significance for businesses is that the primary cause for business failure in the US is inadequate capital,” he said. “Until now, entrepreneurs have been limited to the small Rolodex of people they know, and they couldn't advertise. Now they can market their capital like they market their products. It will allow entrepreneurs to have increased exposure to capital and more timely access to capital.”

“Investors are going to see advertisements for funding,” he continued, “Which is going to educate and build awareness in the investor world of these opportunities. Two to three million accredited investors in the US control a trillion dollars but only ten percent of them are active in making investments in private businesses. Most of them are probably not even aware of the opportunities.”

For a company with the business model that EquityNet has, the impact could be dramatic.

“Probably the first place in American that you will see a funding advertisement is going to be EquityNet,” Hollas said. “There are lots of places where people can advertise but we've been developing this platform for six months, long before the SEC adopted this rule.”

“On the 23rd we'll launch a new platform which is specifically designed for entrepreneurs to advertise their need for funding to an investor-centered population,” he continued. “There will be hundreds of profiles of companies publicly available.”

Hollas described the rule as opening the door for a “large new asset class immediately available to investors that dwarfs the number of public companies.”

The expanded opportunities for investment in start-ups and other small private businesses should prove appealing to many accredited investors, but does the rule change offer advantages for sustainable investors considering environmental, social, and corporate governance (ESG) factors in their investment decision-making?

"Until now, investors looking for companies with social impact have been limited to public securities,” Hollas said. “Now they have a new universe of private companies that they can invest in and help make a social impact.”

“Several companies already on EquityNet have great environmental or social missions,” he continued. “In the private business space you'll find a lot of companies that have a pure play social and environmental focus.”

The CEO of at least one company that provides infrastructure for the impact investing industry sees the SEC rules change as “a major paradigm shift in the distribution of securities and capital formation in the US.”

Vince Molinari is CEO of GATE Global Impact and co-founder of Crowdfund Intermediary Regulatory Advocates (CFIRA), which was formed to help the SEC and other government entities establish industry standards and best practices for crowdfunding.

“The ability for companies to advertise securities will enable them to very efficiently reach broader audiences in order to secure funding for growth and job creation, adding to economic recovery and expansion,” Molinari said. “We are now embarking on disruption of the historic financial services system. This will be the first step of the integration of social media and financial services which could result in a power shift or alignment of traditional Wall Street and Silicon Valley as access to a large customer base for distribution of securities will result in new investment practices and access to capital.”

"This is the first step in the democratization of capital formation,” Molinari added.

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