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Why funds have shunned general solicitation

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US regulators have lifted the ban on general solicitation by funds, but market uncertainty has stalled its use. Marianne Hudson from the Angel Capital Association addresses the leading concerns

US regulators lifted the ban on general solicitation by funds, but market uncertainty has stalled its use. Marianne Hudson from the Angel Capital Association addresses the leading concerns

In 2013, the US Securities and Exchange Commission issued rules allowing entrepreneurs to publicly advertise private investment offerings. Lifting the ban on general solicitation has altered the landscape for startups and investors and has led to inconsistent legal advice. Attorneys representing international issuers looking to raise capital in the US should ensure that their clients are aware of the general solicitation rules so that they understand their pros and cons and decide whether or not to take advantage of general solicitation before they begin contacting angel investors.

General solicitation is one of five initiatives in the Jobs Act Congress passed in 2012 to help startups access more capital for growth and job creation. The new general solicitation rules, although not discussed as much as equity crowdfunding, have significantly impacted American angel investors and entrepreneurs - and not in the way Congress intended.

Today, fewer startups are using general solicitation than predicted. Instead, many continue to seek investments privately. Why? The rules come with a catch. Startups that solicit investment publicly must take reasonable steps to verify that all purchasers are accredited investors. Before this rule, accredited investors signed a self-certification form for any private investment. Now, most startups and investors assume that reasonable steps to verify requires using safe harbours such as tax returns, W-2s, and brokerage statements for review by issuing entrepreneurs or a third party such as an attorney, accountant or broker-dealer.

Naturally, most angel investors aren't interested in sharing their...