August 22, 2013
The proposed regulation represents a disincentive to raising money that will hurt job creation and startup creation in the United States, and it would create an entrepreneur-hostile environment for new startups.
In a world of fast changing market conditions, entrepreneurs create sets of information based on the current conditions of competitors, partners, customers, and others, often updating documents several times a week to provide the type of information and positioning investors are most interested in. Because the SEC filing process is still fairly complex, trying to file documents on a multiple times a week schedule would only work to depress the capital of startup companies by increasing their legal fees.
Startups raise money at different times through their lives but factors for raising money often include the availability of capital in the markets. Because startups cannot guess when capital flows, the 15 days before raise requirement is thus a difficult one to assess (for example, my company may or many not consider raising money in the next few months based on our own internal targets and external market signals. However, because both sets of informations are unclear, we may put a toe in the water to get a sense of whether we should raise money or not, only to pull it out and decide we're not going to (or inversely, are). Those types of trial balloons are not uncommon in the tech industry).
Because private offerings are drastically different from public ones, the pool of investors being reached at any given time is substantially smaller: furthermore, that pool is largely made of accredited investors, who are educated enough in the financial structure of startups to make decision based on the relatively small amount of data available at the time. As a result, the information provided to such investors is either limited, does not exist, or could be changing quickly. For example, the addition of a new customer is something that one may put on a fundraising deck when it happens or the availability of new metric data showing momentum could be updated. Per the proposed rules, each of those changes would require a separate filing with the SEC. This will result in two things: 1. large fees for lawyers and 2. a massive amount of relatively useless data provided to the SEC, resulting in a tremendous workload for all involved.
The boilerplate to add to each of those updates is also problematic as it might require a complete change of the way in which startups communicate. Would "We're considering raising financing. What do you think?" need to be followed by boilerplate if we mention it on Twitter or on a blog?
Because of all the complexities that would arise, and the attached penalties in case of mistakes (eg. inability to raise money for a year), the law is a well-meaning but badly directed on. While such rules work great for public offerings and other Wall St. related types of financing, they do create an undue burden on startup companies and could result in fewer startups getting off the ground, resulting in fewer jobs being created.