What if startup businesses were allowed to place advertisements on television or radio asking for investors? For a long time it was assumed by many in the financial industry that if companies pursued these tactics, they would potentially subject themselves, and their possible investors, to fraud. That’s why “general solicitation,” as the Security and Exchange Commission (SEC) calls it, has been illegal. Now the federal government wants to overturn the solicitation ban, but some concerns about it remain.
Startups are only allowed to seek out “accredited investors,” investors who meet certain financial guidelines set by SEC Rule 501a of Regulation D. Accredited investors may be banks, brokers or corporations. They may also be people with net-worths higher than $1 million and salaries above $200,000.
General solicitation was banned in part because of its potential to saddle companies with those posing as accredited investors. General solicitation was also used by conmen to draw investors to fake start-up businesses. As such, startups have had to seek out investors through other financial channels, like financial advisors and angel investor groups.
