By Danielle Silva, Director of Research, LSN
As you may have already heard, the SEC voted 4 to 1 on Wednesday July 10, 2013 in favor of implementing section 201(a) of the Jumpstart Our Business Startups (JOBS) Act. The act lifts the ban on solicitation, as well as on certain restrictions regarding the advertising of private offerings that have been in place for around eight decades.
In the past, in order to openly raise money, a company would have to go public, a difficult milestone for many early stage life science firms to attain – especially if the company does not have a product on the market.
In my research, I’ve encountered a large number of firms in the biotech and medtech space that have chosen to pursue this route (with no products on the market), which ultimately leaves them with a penny stock on an obscure or over-the-counter exchange, providing little legitimacy to investors, and forcing the company to raise all subsequent rounds through PIPES (private investments in public equity). Therefore, the approval of this section of the JOBS Act is great news for firms in the life sciences space – especially early stage firms that are struggling to bridge the valley of death – who will now be able to adopt a more aggressive outbound marketing campaign.
Outside the realm of marketers for alternative investments, many individuals and firms are not familiar with the legality that in the past was associated with private placement offerings. Before the approval of 201(a) of the JOBS Act, companies had to establish a “relationship” with an investor before they could attempt to obtain funds. To illustrate, imagine this scenario: a life science firm seeking capital e-mails a family office that they believe would be interested in their technology. In order to be in compliance with the regulations surrounding private placements in the past, the firm could not reach out to the investor again (even if they seemed interested in investing) for 30 days. The section of the JOBS Act that was recently approved, however, completely eliminates this so called “cooling off period,” which was originally implemented because companies soliciting investments were required to have established a prior relationship with an investor.
What doesn’t change, at least, with the passage of the most recently approved section of the JOBS Act, is whom firms can market their private offerings to. This means that firms will still only be able to raise capital from accredited investors, or those investors that have at least $1 million in liquid assets (for example, $1 million, not including their house, cars, etc.) or investors that have attained at least $200,000 in household income consistently over the past two years. Companies raising capital must take reasonable steps in order to ensure that the investors that they target are in fact accredited.
As one of the most controversial components of the JOBS Act still waiting to be ruled on by the SEC, this section covers the issue of crowd funding, which we covered in a previous article. If this section of the JOBS Act were passed, it would mean that startups could receive funding from the general public, i.e., unaccredited investors. As it stands, currently soliciting investments from unaccredited investors in exchange for an equity stake in a startup is still illegal.
Even if the crowdfunding piece of the JOBS Act is passed, it is questionable whether or not these platforms will be a valuable fundraising tool for life science startups. By fundraising through crowdsourcing, an entrepreneur may be forced to give up a great deal of equity, which in the end would obviously hurt the entrepreneur if the company gets bought out. Equity dilution is also of course a huge red flag to institutional investors, so after a firm raises capital through crowdsourcing it may be very difficult to get additional funding from larger more sophisticated investors. Furthermore, crowdfunding may lead to additional headaches for startups, like having to answer to hundreds of LPs instead of just a handful.
What further complicates the JOBS Act issue is the fact that the definition of an accredited investor may be subject to revision in 2014 as a part of the Dodd-Frank Act. What this means is that if the crowdfunding portion of the JOBS Act is not approved, companies may have to start raising funds from a new tier of investors next year.
So what are the overall implications for companies in the life sciences space? Basically, life science firms that are looking to raise capital will be able to implement an aggressive outbound marketing campaign, and be able to follow up & meet with interested investors as soon as possible instead of waiting the required 30 days to follow up with a potential investor. Although the definition of an accredited investor may change next year, the approval of section 201(a) of the JOBS act will certainly make the fundraising environment in life science arena a little bit easier.
Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital
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