April 23, 2012
As an entrepreneur, I am ecstatic that Congress has decided to remove some of the obstacles standing between people with plans and people with capital.
As you draft the rules, please keep in mind how important a tool the revised rule 506 exemption is going to be for people seeking relatively modest amounts of capital - under $200,000, for instance.
When I was seeking funds to produce a low-budget movie, I had some offers from family and friends to buy shares in the production, but it was not enough to meet my budget. Because I am not fortunate enough to have pre-existing relationships with many accredited investors, I knew I would have to look outside my existing network of prospects. My only option was to use Reg D Rule 504, which allowed me to "advertise" through a "general announcement" within certain states. While this did allow me to seek new investors, it disallowed me from accepting investments from the family and friends who believed in my project and wanted to participate.
A previous advantage to rule 506 was that it allowed investment from both accredited investors and a small pool of non-accredited investors. It is not clear to me that the new rule 506 will allow any non-accredited investors to participate if the issuer engages in advertising.
Imagine a scenario in which you have a promising business plan but you need to raise $150,000 to put that plan into action. Like most Americans, you do not qualify for a loan of that size, nor is it wise for you to try to shoulder all that risk by yourself. Your family and friends believe in your plan and they want to invest, but they are not rich so they can only put in $20,000. You simply do not have a network of rich people to draw on, so you look for an SEC exemption that allows you to advertise your offering to strangers provided you only accept funds from accredited investors. But this precludes you from accepting investments from your friends and family, so when the accredited investors ask you whether there is any first money in, you must say "no" because you were not allowed to accept that initial $20,000 from your non-accredited family and friends.
For a $150,000 business (an independent movie or a themed restaurant or an arcade, for example), entrepreneurs need to be able to accept what they can from friends and family AND seek capital outside their small network of acquaintances. That is why I urge the SEC to continue the allowance of 35 non-accredited investors regardless whether the issuer engages in advertising.
A compromise could be that the issuer must have a pre-existing relationship with the (up to) 35 non-accredited investors, and only the accredited investors may be found through advertising.
Personally, I don't see why Rule 506 shouldn't allow 35 non-accredited investors AND general advertising AND unlimited accredited investors with no requirement for a pre-existing relationship AND crowdfunding with a maximum $2,000 from non-accredited investors with whom you do not have a pre-existing relationship.