Small Business Financing Methods Set To Open Up — A Little Bit


Earlier this month, the Securities and Exchange Commission (SEC) announced new rules that provide a new option for businesses to raise capital from investors.[1]  Under the old rules, most small businesses typically raised funds from friends and family, banks, or by participating in “Angel Investor” meetings.  One of the challenges under the old rules was that a business was very limited in who it could offer the investment to.  By and large, it was simply not an option for the business to solicit investors via social media, public web sites, or by using other methods that tended to reach large audiences.  While the new rules do not replace the old rules, the new rules come with new requirements that raise the question of whether the benefits outweigh the burdens.

If a business seeks to raise capital by selling securities, such as equity, then it needs to consider the securities laws, both state and Federal.  Generally, unless at least one of a handful of exemptions applies, the business must complete a registered IPO (Initial Public Offering) if it wants to sell its equity (or other securities).  Generally, the most-used exemptions were only available if the business only offered and sold the securities to acquaintances, so publicly advertising the offering had to be avoided.

So, what are the new rules?  Under the new rules, a business may offer its security publicly, regardless of whether there is a pre-existing relationship between the business and the investor, but only Accredited Investors may purchase the security.  An Accredited Investor is someone who meets certain qualifications under the securities laws; one example is an investor who either has a net worth of at least one million dollars or has an annual income of at least $200,000.[2]

While the new rules will likely make it easier for businesses to connect with accredited investors, they also bring on new issues.  One such issue is that the business will have an increased obligation to verify that the accredited investor is actually accredited, and that verification process could be invasive, so much so that the investor may be put-off.  In addition to the rules that have already passed, a new rule was proposed that would require businesses that choose to publicly solicit their offerings to first file a notice with the SEC, whereas under the old rules the notice was filed after the first sale.

These new rules become effective on September 23, 2013.[3]  So, what does this mean for Slow Money businesses and investors? In short, the new rules open new doors for small businesses to raise capital, but a business needs to carefully consider whether the new rules are appropriate for a given offering due to the additional burdens.

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Kevin is a business and securities attorney who is based in the Seattle area.


This article is provided solely for general information purposes; it is not intended to be legal advice, and it is not intended to serve as a substitute for legal advice.  The information provided here may not apply to any specific set of factual or legal circumstances.  Also, the law tends to vary from jurisdiction to jurisdiction, and it is frequently changing.  No attorney-client relationship is form, and no such relationship should be implied.  For legal advice, please consult with an attorney licensed in your jurisdiction. 

[1] SEC Release 33-9415.  July 10, 2013.
[2] The new rule is known as “Rule 506(c)” under Regulation D.  Regulation D, which is codified in the Code of Federal Regulations, Title 17, Part 230, Sections  500-508, is also where the guidelines concerning Accredited Investors are found.   The text of the new rule has yet to be codified, but it may be found in the SEC Release cited in footnote 1.
[3] There are actually three different rule announcements at play here.  The main one is cited above in footnote 1.  Those rules become effective on September 23, 2013.  Another set of related amendments become effective on August 23, 2013.  SEC Release 33-9414.  July 10, 2013.  The third set are still in the proposal stage.  SEC Release 33-9416. July 10, 2013.

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