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"The Wall Street Journal recently reported that the Securities and Exchange Commission (SEC) is considering easing the regulations on how private companies raise capital.\nThe areas that the SEC is going to review are general solicitation rules, the 500 share holder limit and regulations around crowdfunding. Easing these regulations will have a major impact on how startups raise capital and will help more startups raise funding.\nLet\u2019s review each of the regulations and see how startups could benefit.\n\r\nGeneral Solicitation\r\n\nThe SEC restricts the solicitation of private securities to the general public. This is done to protect investors who could be targeted in a marketing campaign and could possibly put their life savings into a risky investment. Private companies like Facebook or Twitter don\u2019t have to share financial details with the public, so if you buy their private stock there is a lot more risk involved than buying shares of a public company, like Google.\nAccredited investors are currently the only group that has access to purchase private securities. Relaxing the regulations on broadcasting that opportunity would not ultimately change the investor base. As Dan Primack points out in his Term Sheet column: \u201CI know that a Tesla Roadster base price is $109K \u2014 but that doesn't change the fact that I can't afford to buy it.\u201D  In other words, being solicited to purchase shares of Facebook and knowing the stock is trading for $37 dollars a share with a minimum purchase of $500K doesn\u2019t mean that I can or will buy. \nThe ease of restriction on solicitation would mean a startup could message out to their social networks when they are looking for capital. This type of broad communication is not available today.\nWhat if Twitter could have messaged out to their early adopters and others that they were looking for additional funding? They had a large foundation of followers who saw the potential of the service and would have possibly invested, which would have given those investors a great return based on the current valuation. There is certainly risk in soliciting funding from your user base when your startup is just beginning. Take the Vonage IPO as an example.\nIn 2006, the IPO was presented to Vonage customers as an opportunity to invest and take advantage of what was thought to be the next big thing in telecommunications.  Early investors, a lot of them Vonage customers, watched as stock dropped 30% in the first week. This caused many issues for Vonage including a lot of unhappy customers. As an investor, we have to do our homework on any potential investment opportunity, regardless of how we found out about it. Receiving a solicitation about private securities should not change investor due diligence behavior.\nI, like many, read about new startups online and often wish I could invest in them.  If the idea is good enough, I will reach out directly and pursue them on my own.  I am not alone, and startups could increase the number of funding partners if only they could promote their concepts to a broader audience. We are inundated every day with solicitations from a variety of companies to buy their products, but ultimately we decide whether to pursue or turn away.  The same allowance should be given to private securities. \n\r\n500 Shareholder Limit\r\n\nThe SEC thought process is that at a certain point, in this case 500 shareholders, a company has become large enough that it should start providing detailed insight into company operations. This number was instituted when brick-and-mortar was the main form of enterprise and your investors were within a 50 mile radius of the company. This outdated threshold must change to accommodate new ways of doing business. A private security has an ethical obligation to keep its shareholders informed, and this should not be based on an arbitrary number. Increasing the investor shareholder limit will help startups in a number of ways.\n\nA startup company will be able to stay private longer, which could give them a competitive advantage. Under current regulations, when a private company hits 500 shareholders, there are several reporting requirements that it must file with the SEC. The company must disclose information on its operations, information on officers/directors including salaries, and financial condition of the business, which is audited by an independent CPA. This information would be made public and is very valuable to a competitor.\nPreparing for and facilitating reporting can cost a startup $50,000 to $200,000 annually. Being able to delay this formal reporting and associated cost while the startup is still in its infancy will help improve probability of future success. This money could be better used during initial start up to grow profitability for shareholders.\nStartups would be able to allow more investors to participate with smaller investments. This is especially important for crowdfunding.\n\n\r\nCrowdfunding Regulations\r\n\n\n\n\n\nCrowdfunding has gained a lot of popularity in the last few years as a way to fund creative ideas. The only downside to crowdfunding is that because of the private securities laws \u2014 like the shareholder cap and solicitation rules \u2014 it can sometimes be difficult to crowdfund a startup. Because of current restrictions, some crowdfunding websites can only offer small benefits for your investment, and are finding it difficult to offer actual equity.\nAs an example, Kickstarter is a site where an investor can fund a movie idea and in return get items like a signed DVD or a producer credit. What they cannot offer is a percentage of the movie proceeds or a part of their movie company. If crowdfunding startups like Kickstarter wanted to offer equity, they would have to navigate though securities laws such as registering the securities with the SEC in every state they intend to sell into, create funding documents and potentially register as a broker/dealer. For crowdfunding to work, the SEC will have to ease restrictions on both solicitation and the 500 shareholder limit.\nThe SEC is going to review the crowdfunding strategy which will help startups in several ways:\n\nAllowing startups to crowd fund online will give the startup more visibility with more potential investors seeing the opportunity.  More potential investors means a greater probability of a startup getting funded.\nIt will make smaller investments more feasible. It is sometimes easier to get $100 from 10 investors than it is to get one person to invest $1,000. To reach 10 times as many people to be potential investors, the cap has to be raised so startups can benefit.\nIt will also create exemptions from registration requirements. This will allow a startup to get funding from many states without the need to register the securities in each state. This could cost up to $15,000 if a startup had an investor from all 50 states.\n\nWhat does it mean if all of these restrictions are eased? Startups will have access to more capital than they have ever had in the past through new, expanded investor communities. They'll have a greater chance of successful capital funding, providing return on investment back to shareholders, and stimulating innovative growth in emerging markets. \n\nInterested in more Startup resources? Check out Mashable Explore, a new way to discover information on your favorite Mashable topics. \nImages courtesy of iStockphoto, WillSelarep, and Flickr, Premshree Pillai."^^<http://www.w3.org/2001/XMLSchema#string>
<http://mashable.com/2011/04/29/startups-sec-regulations/>