Only a year after its launch, Anton Gelman’s young technology company secured its first round of investment in January, and he is already laying the groundwork for a second, much larger injection of capital.
His company, which provides a platform for freelance photographers and video journalists to pitch their content to major news outlets, has its sights set on a niche group of backers — those with a passion for free press and the evolution of journalism. But he is constrained by financing laws, which prevent entrepreneurs from touting their private-equity offerings to the mass market.
“It’s nearly impossible to target investors who are not already familiar with your company, especially if you’re looking for ones who have specific interests,” said Gelman, founder and chief executive of D.C.-based Cont3nt.com. “So at the moment, we’re very limited in our ability to reach out to the people we need.”
This coming week, that all changes.
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On Monday, the Securities and Exchange Commission will lift an 80-year ban on what is known as “general solicitation,” allowing entrepreneurs to start advertising investment opportunities in their businesses through various outlets, including social-media channels and new online financing portals, known as crowdfunding sites.
The change was authorized more than a year ago as part of the Jumpstart Our Business Startups Act, or JOBS Act, and approved by the SEC in July.
It was meant to help growing companies raise capital more quickly — and Gelman is eager to take advantage of the opportunity.
“In a sense, general solicitation is tailor-made for what we are doing, because it allows us to reach out to a specific group of investors, explain in detail what we’re doing and invite them to be a part of it,” he said, adding that he plans to start using Facebook, Twitter and startup database AngelList to pursue investors. “It takes off many of the shackles and allows us to be much more active in promoting our offerings.”
Some investors, though, are wary of potential drawbacks as regulators grant entrepreneurs greater access to investors, worried that it may open the door to scams and phony investment opportunities.
“One of the potential downsides is that you may have a lot of rip-off artists mixed in with the legitimate entrepreneurs,” said Frank Ball, a manager of New Dominion Angels, a group of 65 early-stage investors in Virginia, adding that most of the investors in his group want to get to know entrepreneurs before they start cutting checks.
The SEC has been mindful of some potential risks. On the same day the agency adopted rules approving general solicitation, it also proposed new rules that require companies to verify that their investors are accredited. Currently, firms are allowed to rely on assurances from investors that they are indeed accredited.
If the rules are approved, experts say entrepreneurs could be forced to ask for investor’s tax returns or income statements before approaching them with a deal — hurdles that could undermine the impact of changes like permitting general solicitation. It may even dissuade some existing early-stage investors.
“I’m not going to want to take my clothes off financially for some entrepreneur, especially not knowing for certain whether I plan to invest in the company” Ball said. “I think it could put a chill on some of our members.”
The proposals also include new penalties for companies that break certain solicitation rules, including a potential one-year ban from raising capital. Some worry that could deter entrepreneurs from advertising their offerings.
Still, Gelman is unfazed. In the next few weeks, he plans to start targeting investors through various online channels, and if he finds the right people, he says his lawyers will take the necessary steps to ensure investors are accredited before any deals are signed. “There’s still some gray area in terms of the specific rules, but ultimately, this lets us reach investors we couldn’t have reached before,” he said.
More importantly, he says the change signals a broader shift in financing policy — one he hopes will help him continue to access capital and expand his company.
“This particular change is important, but the more valuable take-away is that the government is starting to recognize that entrepreneurship must be strongly supported and that some of our financing laws must be revamped,” Gelman said.