How Social Media is Changing How You Raise Capital in Public Private Placements

By:  Jim Verdonik

I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs. You can reach me at JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccessor or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

[This post is a longer version of an article I wrote that was published in Triangle Business Journal in October 2013l]

What happens when the irresistible force collides with the immovable object?

In this corner, sits defending champ and immovable object, the Securities and Exchange Commission – guardian since 1933 of the holy rule that you can't mix public offerings and private placements.

In the opposing corner, stands the challenger Social Media – the irresistible force that is mixing our public and private lives every day.

It used to be illegal to sell securities in private placements using social media tools like Twitter, Face Book and LinkedIn that most people use every day.

But the "Public Private Placement" was born on September 23, 2013.  Advertising of all kinds is now allowed in private placements under certain conditions.

What does the "Public Private Placement" mean for how you raise capital to grow your business?

Many "experts" predict the SEC will lock up public-private placements in a dungeon and throw away the key.  Mixing public and private upsets securities law fundamentalists.  For many in the securities industry, the SEC is the immovable object that can resist any force.

But I disagree.  What makes me think the SEC won't prevail in fighting public private offerings?

In April 2012 Congress and the President agreed to create public private placements in the JOBs Act.  WOW!  Isn't that astounding?  What power forged the bonds of rare bi-partisan agreement?  Simple agreement that:

·         Capitalism doesn't work without capital.

·         Keeping your securities offering a secret isn't a good way to raise capital.

·         Modern communications tools level the playing field to give everyone greater access to capital.

So, Congress and the President decided people can use technology to raise capital, even though that means mixing public communications with private placements.

In response, our immovable SEC has proposed new unworkable rules to fight Social Media's irresistible force, which gives everyone a direct inexpensive link to a world-wide audience. 

• Waiting periods after you notify the SEC you intend to advertise.
• Filing every communication with the SEC the same day you make them when Social Media campaigns by nature involve a conversation with many points of contact.
• Requiring warning legends that are longer that all Tweets and many other forms of Social Media communications.

But Social Media isn't helpless.  It demonstrated the power to attract investors to take action, when two individuals used Twitter and Face Book to obtain $300 million of investor commitments to finance buying a business without paying brokers' commissions.  Of course, the SEC killed the deal before it closed, because this happened before public-private offerings were legal.

But that squashed deal speaks volumes about the power of social media to raise capital. 

• Is it logical to assume that people struggling to raise capital will ignore that power?
• Will America forego the opportunity to replace Goldman Sachs with Twitter?
• Or will Wall Street remain a high priced gatekeeper to capital?

SEC rules can't squash Social Media, because humans are social beings.  It's our nature to want to know what other people are doing and how it affects us.  Businesses prosper and regulators make good rules when they channel the power of human nature rather than fight it.  

The SEC's wall between registered public offerings and private placements became outdated when Social Media combined private communications with a mass audience.  The Internet and Social Media broke down the old dividing lines between telephone calls and postal service that facilitated private communications on the one hand and television, radio and the press on the other hand that transmitted advertisements.

When the expectation of privacy died in our daily lives, the SEC's wall between public and private started falling down.  It makes no sense to insist on private business communications in a time when we all live our lives on a massive party-line conference call.

The power of individuals to find common interests with people across the planet and to exchange ideas freely at low cost in real time redefined your community.  Your new neighbors might be people you never met in person.  Your community might have members in three hundred cities around the world.  You might be a member of a hundred such communities or networks.  Each member of each community freely forwards your communications to others.  No one is shocked when this sharing occurs.

Traditional SEC rules allowed you to communicate with your old neighbors.  New SEC rules won’t work unless they allow you to communicate with your new neighbors.

Beyond that, it's silly to fight Social Media Public Private Placements, because Social Media brings private placements out of the shadows and into the light where everyone can see them.  Light deters fraud.  Attention makes it easier to detect and punish fraud.  High pressure sales draw criticism from a big audience that talks among themselves.  The more deals investors see; the more sophisticated they become and they share that sophistication with other community members.

Social media and the Internet have empowered consumers who buy cars, books and countless other items by facilitating comparison shopping.  The result is that people pay less for more and the overall quality of products has improved as sellers compete with one another for the business of for informed buyers.  Why would anyone assume the same thing won't happen with investors?

That's why I'm predicting a one-sided Social Media victory like high tide overwhelms children's sandcastles.  Eventually, the SEC will conclude that since it can't stop people from using ordinary tools to do things they think are important it should issue reasonable rules to channel that activity in positive directions.

So, why wait until the SEC surrenders?  Start thinking about how to conduct successful public private offerings by balancing:

• Advertising effectiveness.
• Budget
• Avoiding fraud 

Big rewards await those who develop the best combination of these three factors.

Sending your business plan to sit in an unread pile at a venture capital fund's office  just doesn't make much sense anymore.  (Did it ever?)

Do you have the team it takes to succeed in this new capital raising environment?

Or are your advisers stuck in the past?

The race has begun.

What are you waiting for?

If you would like to learn more about learning how to grow your business or other issues important to your success, you can reach me at JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccess or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

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