By Dennis Ford, CEO, LSN
Hold the phone! We’re not there yet! Yes, the 80-year ban preventing companies from advertising and soliciting capital has now gone the way of the dinosaur. The September 23rd lifting of the ban heralded that change is afoot and will usher in a new set of rules and regulations. However, the devil is in the details, and until the SEC makes the new rules and regulations public at the end of this year (or next year), we are still in mostly in the dark.
What does this mean for life science entrepreneurs? One thing for sure is that now more than ever, make sure you act in concert with your lawyer regarding fundraising. For life science entrepreneurs, being able to freely let all aspects of your personal and professional networks know you are actively raising capital can’t hurt – especially now that it is OK to solicit using the bevy of online apps and tools that you now already manage. However, understanding that your future investors must be certified, accredited investors (once again, check with your lawyer) needs to be understood.
In a past life, I was part of a team that started a broker dealer, and the rules, regulations, compliance aspects, administrative tracking, logging and filing of all communications was extremely costly. It took a few in-house staff – as well as several outside, highly paid consultants to keep everything kosher. I bring this up because depending on how the SEC comes down on the aforementioned will largely determine how viable the new fundraising mechanism will be.
Cash flow is the enemy of most entrepreneurs, and if there is now a bevy of must have’s and must do’s to be compliant, then most cash strapped startups will be in a real pickle. The minimum, so far, though not yet cast in stone is that the entrepreneur will have to file a Regulation D form 15 days prior to a general solicitation for investment capital and explain in detail how they intend to go about it.
My last observation and personal opinion is to ask: where does this fit in for life science entrepreneurs? There is a well-known map that dictates that the path for startups is friends, family and angels for seed money, followed by government grants, and then institutional and PE/VC capital for growth. If all goes well, I see this as an awesome mechanism for startups that need that first 250-500k to get started. So far, it appears that this could be done via a crowd funding portal or an outbound campaign to accredited investors that have declared an interest in your particular indication, sector or service. Stay tuned.