The Securities and Exchange Commission recently decided to pass some controversial proposals to to relax restrictions on solicitation, turning back decades of laws that prohibited venture capital firms, private equity funds and hedge funds from marketing their investments to a wide audience by advertising them.
Now, these funds will now be able to publicly discuss and advertise investment opportunities, whereas they were previously prohibited from marketing their investments to a wide audience. In the past, companies were given an exemption on registering their offerings with the SEC in exchange for not advertising to the public.
So is this ruling a good thing or a bad thing? The topic was discussed at Venture Shift on Wednesday night, with a panel consisting of Rob Hayes of First Round Capital, Mike Levit of Founder's Den, Marcus Ogawa of Quest Venture Partners, Larry Marcus of Walden VC, Deborah Jackson of Plum Alley, and Alex Mittal of FundersClub.
"Does it democritize dealflow? Does it open up a danger of having deals with 80 angels and no real institutional deep pocket that can carry them through or mentor the company, and no vested interested in bringing them the whole way?" Moderator James Conlon of Bullpen, asked.
In response, the panelists did express some reversations about opening up general solicition, noting that it would make it harder for both investors and entreprenuers.
The one who seemed most positive about the change was Ogawa.
"In a fertile environment, everything grows, including weeds," he said. "So time will tell."
Mittal, for his part, did not seem to think that the proposal, the way it is written right now, would actually lead to any change at all.
"To actually general solicit, companies do a very specific type of filing," Mittal noted. "Actually no company today can generally solitic unless they shift their legal structure."
But he did seems to think that the change might be necessary, since the old ways were accidentally hurting companies that wanted to raise capital.
Before these changes, he said, it was almost like the companies were having their free speech limited.
"If you're a company raising capital and a reporter asks you 'When are you raising your round?' You're not advertising, you're just stating a fact. That you're not allowed to do that today seems a bit strange, seems bit bizarre. And if you a ask any founder who has been in that position, either because their round got stopped early because a reporter accidentally reported about an upcoming round, or whatever, they'll tell you that that was a very annoying experience."
But, if the proposal does become implementable, and companies do start soliciting, it could wind up being good for one given company but it could also wind up "creating a lot more noise" for investors, Mittal said.
Answering to Ogawa's comment about weeds, Mittal said that there would certainly be more of them and that separating the quality companies will only become harder because of general solicitation.
Jackson agreed with Mittal, saying that in her years on Wall Street she got to see "what types of information investors really need to make a proper investment decision," and that general solitication will make it more difficult to get that information across.
"I can see a scenario where there's a lot more required on the part of the entreprenuers to explain their company, and to educate potential investors."
"There's a possibility that what you present of your company is going to have be a whole lot more complete and sophisticated," she said.
In addition, it could also lead to problems with non-professional investors who think that they are investing in the next Facebook. But you can lose a lot of money that way.
"To think that inexperienced people will be making these investments is kind of scary."
Once again, Ogawa was the one who seemed most positive, noting that those kinds of scenarios would be fixed with new laws.