New Equity Rules Risky For Investors

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riskIN 1980, Massachusetts banned a new technology company from selling shares to the public there, worried that gullible residents would get swept up by the hype surrounding the venture. In retrospect, that proved a regrettable decision for Bay Staters: the firm in question, Apple, is now the single most valuable public company in the world. Future generations of startups seeking to raise money by selling equity should be given a smoother ride under new rules soon to come into force.

For all of America’s perceived openness to innovation and finance, regulators have energetically restricted the ways corporate tiddlers can raise money. The general public has been banned from risky, early-stage investment opportunities, all in the name of consumer protection. That will largely be reversed from May when rules approved by the Securities and Exchange Commission (SEC) on March 25th come into force. These will overhaul the process of raising equity in ways that will make it far easier for firms to finance themselves, even if consumers will have to keep their wits about them.

Under one of the (long-delayed) provisions of the JOBS Act, a compendium of enterprise-boosting laws passed in 2012, companies will be able to raise up to $50m in what is commonly referred to as a “Mini IPO”, or initial public offering. Although SEC agreement will still be required, many of the intrusive constraints found in garden-variety IPOs will be waived.

Read more at THE ECONOMIST