Relaxed JOBS Act still hinders startups to raise funds via social media

November 14
1:42 AM 2013

An article at the Wall Street Journal pointed out the challenges of startups in raising much-needed capital via social media. Despite US regulators relaxing some formerly stringent measures in the Jumpstart Our Business Startups Act (JOBS) of 2012, experts who provide advise to startups have cautioned the latter to reconsider the idea to find investors on the Web

Petaluma, Calif.-based Smári Organics Inc founder Smári Ásmundsson had high hopes to acquire as many potential investors for his Icelandic yogurt company through his own website and Facebook. However, Ásmundsson's lawyers said financial regulators in the US had yet to smooth out details that he and other entrepreneurs would need to look out for when, for instance, send marketing messafes.

"It's a little bit frustrating. What we are learning now is that there is a lot of gray area," Ásmundsson said.

The new marketing freedoms highlighted in the JOBS Act of 2012 had ended the advertising ban on general solicitation. Regulators in the US had banned the provision 80 years ago to protect potential investors from scams. Moreover, the statute had simplified the process for firms in emerging markets with less than USD1 billion in yearly revenue to launch initial public offerings.

The memo issued by the US Securities and Exchange Commission (SEC) in July had proposed around six additional requirements in order to prevent investor fraud by startups. One of the requirements is that startups would need to inform SEC 15 days prior to launching a fundraising campaign to the public. Another required startips to submit documentation regarding general solicitation on the government agency's website on or prior to the day the documentation would be used. Moreover, startups would need to provide legal disclaimers to any communication on fundraising. The Wall Street Journal said that the new amendments would provide a complex problem for startups who wishes to launch their campaigns on Facebook or Twitter, where messages on such sites could not even fit such disclosures.

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