Subject: File No. S7-06-13
From: Scott L McGregor
Affiliation: CEO SoundFit, CTO Zimron, entrepreneur and business coach

September 18, 2013

I have been involved with founding several early stage high technology start-ups in Silicon Valley for more than 20 years. The biggest problem start-ups here face is that they need to raise early stage funds to get them from conception through market traction and breakeven. In these early stages, the primary problem is that there is nothing yet that can be collateralized. Thus the entrepreneur is literally selling futures to prospective angel investors.

A big problem for the new entrepreneur is that the new business ideas that will excite an angel investor tend to be highly idiosyncratic. One investor might be only interested in businesses in the 3D printing and scanning space, another in predictive analytics and social websites, yet another might like only mobile payment apps, and a fourth might be interested in renewable energy businesses. I have personally been associated with start-ups in each of these diverse businesses, and the prospective investors for each were entirely distinct. That meant that each time I went to raise money for a new start-up I had to develop an entirely different set of target investors.

This causes a big problem for entrepreneurs -- how can they find the right investors who would be interested in the particular business they are building. With public solicitations banned, the only way is to go through private networks of people who know people who you know -- but if you are creating a business in a new area, or if you are not already well connected to investors who fund that area you may find it hard to find out who prospective investors who would be interested are.

If I have a new product for sale, and I don't already know the names of potential buyers, and I want the prospective interested buyers to find me, I would advertise broadly. Then I can avoid making many fruitless calls to non-prospects and just wait for interested prospects to call me.

Because I haven't been able to publicly disclose that I am seeking money from qualified investors in the past, that has really hampered my ability to find those who would be interested in my businesses, and that makes the whole money raising effort extraordinarily inefficient, time consuming, expensive and low probability.

The provision of the jobs act that allows startups to publicly disclose that they are actively raising investment could really remove a huge barrier, Qualified investors could search for businesses in the sectors that interest them who are disclose that they are currently raising funds. The investor can find the company rather than the other way around.

I would be happy to provide each qualified investor some legal boilerplate that assures that they understand the risks involved before accepting any funds. Perhaps that is even the way In fact, it would be good if I can just put that boilerplate on my company's websites next to their web privacy statements and terms and conditions of use and other legal and regulatory documents. It might even be an easy way for investors to seek our companies like mine -- if they have such as document on file, that shows that they are openly raising money. Being on the company web site would make it easy for the prospective investor to see it, and for the SEC to verify that the document complies with regulations. Even better would be if the SEC could provide me some standard boilerplate so that the investors would be able to recognize that it is a standard form that they already understand and not something unique with loopholes they wouldn't notice. Alternatively, the SEC could provide a system like Edgar where all these small company notices are kept. Investors could search the database for companies of interest to them.

There are many incubators and accelerators (3rd parties) who provide coaching and advisory service to multiple start-ups. These 3rd parties have the ability to create and distribute such standardized boilerplate documents if the SEC is not willing to do so itself. By providing these services from hundreds of members, instead of making each company individually with a law firm the cost of creating a complying document can be reduced 100 fold. These 3rd parties serve both the entrepreneurs and the investors, so they have an interest in making documents that will appeal to all parties and facilitate trust. SEC regulations that would prevent 3rd parties from drafting and providing such documents are counter to the interest of the entrepreneurs, investors and SEC.

The need to notify the SEC 15 days in advance of each communication to investors runs counter to the point of advertising, which is to find leads for follow-up. More appropriate would be to have the start-up notify the SEC that it is advertising -- share the boilerplate that the qualified investors must acknowledge prior to accepting any funds and then keep those terms on file for a period of 1 year, and be renewable annually.

Finally, the penalty of preventing a company from raising money for 1 year if they mess up is extremely harsh. For any company that is not already at break-even that effectively puts them out of business. More appropriate would be to retroactively require that the investors be provided the appropriate documents, and if upon receipt they object to continuing the investment, have a mechanism for undoing the investment and returning funds as speedily as is possible without putting the company out of business.

My request is that you make your revisions to the regulations easy for the entrepreneur to comply with: with simple annual filings in a standardized form that can be seen by the SEC and investors alike, in a well defined format and web location. Give the entrepreneur the secure knowledge that if they provide those filings once in the appropriate standardized form that they are good for a year, and safe from any onerous penalties.

Thank you for you time and consideration,

Scott McGregor
Entrepreneur and Technology Executive