Wednesday, November 02, 2011

General Solicitation Ban to be Banned?

Earlier today I mentioned to you a House bill up for consideration that would make it easier for companies to raise money through "crowdfunding" sites. I also learned today that the House is voting this week on a bill that would remove the ban on public, (i.e "general") solicitation for private offerings of securities to wealthy investors.

Whereas the bill contemplating the crowdfunding changes may not end up to be very advantageous for entrepreneurs, this one should be very nice in that regard.

Funds@Facebook.com?

Many of you may have heard of "crowdfunding," in which an entrepreneur may raise funds in small amounts through one of several Internet-based services.

There are a number of problems with this approach- one of which would be that any such solicitation would violate SEC rules regarding private placement of unregistered equitites.

Legislation currently before Congress would address this issue by allowing companies to accept from an investor up to $10,000 or 10% of the investor's income in return for equity stakes in companies. The House Financial Services committee has recently backed the proposal.

While this may initially sound like a good idea, there are very many ways for this to go wrong for the entrepreneur and the investor in the long run; far too many to address here. The biggest one for the entrepreneur, however, is that you will likely end up with dozens, hundreds, or even more investors, each of whom would then have a legal right to sue you and mess with your life! That would not be a good trade-off in my view.

If legislation ever passes making this legal, be sure to look before you leap.