Last Week's Big News

No, not the election. But a revolutionary change in securities law. Last week, in a 3-2 decision, the Securities and Exchanges Commission (SEC) tweaked a bunch of regulations concerning investment crowdfunding. The headliner change increased the maximum amount a company can raise in a year from $1 million to $5 million, which means that many more mature small and medium scale businesses can now seek funding from grassroots investors. It also opens up opportunities for cities to raise capital for small projects, and for real estate developers to raise capital for downtown development and affordable housing.

I won’t bore you with the details on most of the other changes. People with higher incomes and greater wealth can invest more. “Integration” of crowdfunding raises with other fundraising efforts is now easier.

These reforms are all important, but the one change that excites me the most—and almost no one is paying attention to—concerns “testing the waters.” Put in plain terms, this change allows grassroots investors and businesses to have conversations with one another online about the possibility of deals.

Wait a minute, you’re thinking. That’s just free speech. That was illegal?

Indeed! In the distorted thinking of securities lawyers, a conversation between a business and an investor about a future investment is considered general solicitation. And it can only proceed after massive and expensive disclosure statements are prepared. You know what I’m talking about: Thick, turgid booklets written in a tiny font WITH MANY SENTENCES IN ALL CAPS. No grassroots investor that I’ve ever met has read one of these booklets. And yet without them—and the expenditure of $25,000 or more for lawyers to write them—such conversations have been forbidden.

Honestly, I cannot explain the rationale for this rule with a straight face. If you ACTUALLY are making an offering of securities—if, for example, you're borrowing money from or issuing stock to investors—then you need an investor to be fully apprised about your company. But if you aren’t at the offering stage, if you’re just having a conversation with POTENTIAL investors, if you are thinking about the possibility of making the long journey to engage in crowdfunding, if you are “testing the waters,” what’s the harm in such conversations? In fact, why aren't we encouraging and celebrating these conversations in the name of Main Street capitalism?

Securities lawyers contend you might be giving potential investors insider advantages. Armed with this special information, these investors would swoop in for a deal, long before