Yahoo Finance ‘Mini IPOs’ now open to the public
Starting today, startups can more easily raise money from the public through “mini IPOs.”
New Securities and Exchange Commission rules allow small investors to engage in equity funding for companies seeking to raise up to $50 million dollars. Until now, funding opportunities were mostly available to accredited investors-- those who earn more than $200,000 per year or have a net worth greater than $1 million. Before the new rules, firms could raise $5 million from nonaccredited investors, but they would have to file extensive and costly offering documents.
“These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” said SEC Chair Mary Jo White in a statement. “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”
The final rules implement provisions of the 2012 JOBS Act, which set out to ease securities laws on fundraising for new ventures. Yahoo Finance Senior Columnist Michael Santoli notes that corporate financiers have long pushed for these revisions.
“This provision is coming from the corporate side more than a real groundswell of interest among small investors,” he says. “There's been this open vacuum in the market for smaller IPOs, which used to be pretty routine…now because of the hassle of being a public company and also just a diminishing number of smaller [brokerage] firms means there's really not a lot of public investment for [smaller] sized companies. I do think it's a little bit of a supply driven move.”
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Yahoo Columnist Rick Newman adds that there are significant risks to investing in smaller startups.
“You're going to have day traders who are going to pretend they're venture capitalists,” he says. “The VCs will tell you their hit rate may be 1 in 15, 1 in 20. A lot of them go bust. I'm pretty sure we're going to hear some stories about small investors who…lost $50,000 or $100,000. So grandma, just stick to your index funds.”
Santoli cautions that the market for early stage companies may be in bubble territory.
"There's a cyclical issue here, which is the market for angel investing, is very overheated," he says. "What I do think going to happen is some relatively mature companies might actually take advantage of this just to avoid the hassle of the very formal IPO process. It could just be backdoor way to go public."
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