Guest Columnist

Column: New law means startups must verify investors

Guest columnistOctober 7, 2013 

On Sept. 23, it became legal for startups to tell the general public that they’re raising money, thanks to the Jumpstart Our Business Startups Act, a 2012 law that aims to increase job creation and economic growth.

Putting the word out can now be done via social media, blogs, the press and even banner ads.

This is not crowd funding.

Investors in these startups still need to be accredited – but this new law makes it much easier to let investors know that you’re in the market for capital.

However, general solicitation can also make the fundraising process much more tricky.

New investors will come out of the woodwork, and they’ll have to be accredited, meaning they’ll have to reveal their financial information to either the entrepreneur or some third party.

The main stumbling block? Rich people don’t like letting other people know how rich they are.

“The primary challenge will be the new rules and regulations for signing up investors, angels in particular,” said Lister Delgado, managing partner at IDEA Fund Partners, a Durham-based venture capital firm. “Startups now have the burden of having to make sure their investors are accredited. This is easy to do with institutions, but much harder to do with individuals and angel groups. They will have to disclose personal financial information so the entrepreneurs can certify that they are dealing with accredited investors.”

Put simply, under the new law, entrepreneurs can’t just take investors’ word that they’re accredited.

Delgado summed up that challenge bluntly. “Wealthy individuals do not like that,” he said.

Dave Neal, who helps run Durham accelerator The Startup Factory, agrees.

“These new rules mean generally that you can talk to many more people about your deal. That seems like a good thing,” Neal said. “However, this means these investors will need to submit personal financial information to you or a third party. Many, if not most of these prospective investors, will not do that. Accordingly, the benefit of being able to do a general solicitation may be destroyed by the investor verification requirements.”

Entrepreneurs could also face another potential hurdle.

With new ways to reach investors, many more entrepreneurs will be battling for attention – and doing so publicly.

Delgado said that startups will need to distinguish themselves from other entrepreneurs for an investor’s time and money.

“Creativity, experimentation, bold new models, will be discovered, abandoned, and also refined,” he said. “The rules for how to approach investors will be rewritten, potentially in meaningful ways. It will be interesting to see what creative entrepreneurs come up with.”

Joe Procopio is a serial entrepreneur, writer and speaker. Follow him on Twitter @jproco or online at joeprocopio.com.

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