Exciting times in private investing

by Kamal Hassan

Exciting things are happening in the US: it is now legal to publicly tell people that you are raising funds!

For those who didn’t realise it, there are laws against telling people that you are fundraising. If you want to sell shares in your company to the public, you have to register as a public company and spend $100,000+ to get all your information verified. If you don’t do this, then you may be a scammer, so you can’t sell shares to the public. Unless they have a lot of money, and then you’re allowed to sell to them, because having money apparently makes them smart. Don’t get me started. You can see why legislation is (finally) changing in this area, bit by bit.

However, there is a big catch to how things are happening in the US. You now have two choices of how to invest. 

Option A: up until now, it has been legal to individually tell ‘accredited investors’ (net worth of $1M+ without your house, or salary of $200K+ per year) about your business, so long as you didn’t advertise publicly. If the accredited investor was interested in investing, they would then fill out a waiver where they said that they are accredited, and you could take their cheque. This is still legal in the US, so long as you don’t advertise your deal publicly, and is the way things continue to operate in many countries of the world, including Canada.

Option B: you can now advertise the fact that you are looking for funding openly, e.g., on a website. You can still only take money from accredited investors, but you don’t have to approach them slowly and painfully, one by one. You can put the word out, and allow them to find you. The catch is, you can no longer rely on their word that they are accredited. If you do advertise your deal, your investors will now have to prove they are accredited, by sharing their personal financial information with you, or a trusted third party. A signed paper is no longer enough.

As you can imagine, some people are going to object to proving to you how rich they are. So your choices are: do things as always, where it is hard to find people, but when you find them their word is good enough; or advertise, but now verify the wealth of everyone. Luckily, there are likely to be many service providers who will be happy to step forward to be the trusted third party, who attests to the government’s satisfaction that the person is accredited. As time goes on this will get easier and easier. For the first few companies who do this, it will be a relatively painful process … as you explain to your investors that ‘to get into this great deal you have to show me how much money you have’.

You still have to give kudos to the US. At least they are doing something, even if the legislation is still rules being written by the rich for the benefit of the rich. I’m looking forward to the days when the rest of us working stiffs (I’m an entrepreneurial CEO, so yes, my salary is well under $200,000) will be allowed to invest in private companies. Right now all we can invest in is (i) the public markets, where we are supposed to be able to forecast the market better than teams of experts with proprietary research, (ii) funds, where we pay exorbitant fees, (iii) businesses started by our friends and family … and I suppose there are always (iv) casinos, gambling and horse races, and (v) con artists who – you may be surprised to hear – don’t really care what the law says. It’s a good thing there are rules to keep us away from scammers, right?