New fundraising rules will hurt startups

https://angel.co/sec

http://www.sec.gov/rules/proposed/2013/33-9416.pdf

The SEC's proposed rules will defeat their goals in letting startups raise money publicly. Startups will be forbidden from raising money at all if they accidentally break the rules—effectively putting the startup out of business. Or startups will decide that these rules are so difficult to follow that they will raise money privately; lowering their chances of raising money and moving their conversations to forums that can't be tracked by the SEC.

Either outcome defeats the purpose of letting startups raise money publicly. And it will have the unintended consequence of putting large numbers of otherwise promising startups (and most of the job growth in the U.S.) out of business. The proposal appears to be targeted to the way startups raised money 20 years ago: with long prospectuses designed by bankers who were facilitating the deal. Today, startups raise money without bankers, through informal conversations with investors. It is unfeasible to notify the SEC in advance, file documents every time there is a new communication with investors and include boilerplate with every communication. Worse, since everything is public, startups will see other startups break the rules and assume there are no rules. So startups will either accidentally break the rules or decide to raise money privately. The stated purpose of these rules is to help the SEC track investment activity so they can adjust general solicitation regulations over time. There are ways to this without putting good startups out of business or moving investment activity underground. First, allow third parties like AngelList to do the filing on the startup's behalf, with a simple URL that is delivered via API. Second, only require boilerplate when startups are communicating financing terms. Finally, remove the 1-year ban for noncompliance—it is incommensurate with any harm.