TRAVERSE CITY — About 43 percent of the $2.1 trillion of newly offered US securities sold last year were not offered to the public.
This means that $900 billion of investment went through private networks -- investments which often realize better returns than found in public markets. To jump start companies and create new jobs, Congress wants entrepreneurs to tap into this private source of funding and last year passed the JOBS Act to make this possible.
Typically, the expense of taking on a public stock offering is too great for a startup and therefore private placement of investment opportunities are generally used. SEC regulations currently restrict the offering of privately offered securities to mostly accredited investors that have some type of relationship to the entrepreneurs seeking funds. For a startup company, having access to the accredited equity investor, the 1 percent of the population that has the ability to invest privately, is often critical to sustaining a successful business launch.
What has been limiting entrepreneurs financially is the ability to create a personal network large enough to attract sufficient investment interest to launch and grow a company. For new businesses that have the potential to scale up, and therefore offer a good opportunity for investment, family-and-friends funding strategies can only take a company so far. For follow-up investment needs, entrepreneurs network into angel and venture capital groups where these investors look for, and receive, annual investment returns on their portfolios in the 30 to 40 percent range.
As of Sept. 23, startups and other early-stage companies no longer are restricted to making private offerings only to their existing network of accredited investors. Next month, per new SEC rules, general solicitation and advertising of investment opportunities to accredited investors will be allowed, under certain conditions. The rest of us less-prolific investors will need to wait until the SEC gets around to setting rules for other portions of the JOBS Act intended to legitimizing fundraising ads to non-accredited investors via crowd funding.