TechCrunch | Posted on July 10, 2013

The SEC has just voted 4 to 1 in favor of implementing section 201(a) of JOBS Act, which lifts the ban on general solicitation and permits startups, venture capitalists, and hedge funds to openly advertise that they’re raising money in private offerings. While it may pose added risk of investors being misled, it should make it significantly easier for companies to raise capital to start or continue financing a business.

The rule change washes away some limitations on advertising of fundraising that have been in place for 80 years. President Obama signed the Jumpstart Our Business Startups Act in April 2012 but now the removal of the ban on general solicitation is finally going into effect.

Previously, the idea was that companies could go public if they wanted to openly raise money. However, the intense regulation and scrutiny around IPOs has dissuaded some private companies from offering their stock to the public. Poor IPO performance for some fast-growing technology companies and well as improved secondary markets like SecondMarket have pushed startups to stay private for longer. Four times as much money was raised last year through private offerings than IPOs.

Due to the general solicitation ban, hedge funds, VCs, and startups had to quietly raise that money, soliciting by word of mouth and other forms of private communication. Now they could buy ads or openly announce that they’re seeking investors alongside using the traditional quiet method.

Investment is still limited to accredited investors worth more than $1 million liquid net worth, and fundraisers must take reasonable steps to ensure investors are in fact accredited. To help the SEC collect data on how investment will change, fundraisers have to file a Form D with the SEC at least 15 days before they begin general solicitation, and amend that Form D to state that they’re done soliciting within 30 days of finishing.

“Today, with the ban in place, only the most well-known investors get access to the best deal flow, making it more difficult for accredited investors across the country to invest in top deals,” writes Ryan Caldbeck of crowdfunding website, Circleup, to us in an email. Many sites businesses, like FundersClub, Circleup, Angelist, and Wefunder, help investors find startups to invest in, but have been severely restricted in how they could promote opportunities.

“With General Solicitation it will be much easier for investors to find companies they are passionate about supporting,” writes Mike Norman of crowdfunding website, WeFunder, to us in an email. The new rule will hopefully open up the capital-starved startup market to the majority of investors. According to WeFunder’s website, only 3% of the US’s 8 million accredited investors are active in the tech startup space.

“This is creating a large void in the investment community whereby dissatisfied sophisticated investors are clearly looking to alternative investment options for lower fees, more options, etc. Crowdfunding portals will create a way for accredited investors to find additional deal flow,” writes David Loucks of the healthcare investment bank, Healthios.

The SEC is still to rule on the most significant of all provisions: crowdfunding. The Jumpstart Our Business Act (JOBS) of 2013 was supposed to permit everyone from Bill Gates to soccer moms to take an equal stake in hot new startups, not just accredited investors. But the implementation of unaccredited crowdfunding has been delayed by SEC politics and mini-scandals. If crowdfunding is allowed, it could pump even more capital into the startup ecosystem.