The Importance of Communications to the New JOBS Act SEC Rules

Posted by on July 19th, 2013

The Securities and Exchange Commission has again opened up the discussion of 21st Century communications.  First it was in response to Netflix and the regulatory body’s blanket statement that social media can be used by public companies to disclose material information.  Now, in response to the JOBS Act, the SEC has opened the door for social media and other tools to be used as a means for companies to communicate with potential investors to raise equity capital.  Kudos to the SEC for embracing modern technology and what is quickly becoming the future for communications.

To summarize as simply as possible what recently took place: on July 10, 2013, the SEC issued rules that essentially allow companies to raise equity capital and sell shares in their company without having to file with the SEC.  One condition – the investor must be an “accredited” investor; meaning that he or she must have a net worth of at least $1 million (not including primary residence) and income of $200,000 for the past two years.  And it is up to the company/issuer to determine whether the investor is accredited.

Let me say straight out — the new rule is a good thing.   It allows companies to reach potential investors that they previously couldn’t access.  It allows individuals who are of means to invest in new and exciting opportunities that they previously couldn’t invest in given their lack of investment banking contacts.  At the same time, it opens up a Pandora’s Box of issues regarding what a company needs to do to do it right.  As with its Netflix statement endorsing social media in investor communications, with respect to the JOBS Act ruling, the SEC didn’t offer any guidance on what a company should or shouldn’t do.  So here are some thoughts, especially for the smaller company that never before considered raising capital, and for the novice investor who qualifies as accredited but doesn’t understand what a private investment in a small-cap company necessarily means and what he or she should expect:

  • To convince individuals to invest, a case must be made as to how a company should be valued.  A company’s financials are a great starting point but there is much more to achieving the highest possible valuation.  How a company communicates its growth strategy and business plan is critical to achieving an appropriate valuation.  So too is being transparent with regard to what is going on in a company’s business and abiding by best practices in communications.
  • The corporate website is the gateway to a company’s business.  This is where investors initially come to learn about a company and to determine, based on the information provided, whether or not to invest.  Post as much information as possible to an “investor” section of your website to justify an investment without giving away trade secrets or other information that could be used by the competition.
  • Establish a policy on how you intend to disclose important information regarding your business and post this policy to the website.  If you intend to communicate via social media (i.e. Facebook, Twitter), indicate which channels you intend to use and then make sure to use them every time you disseminate material information.  Investors considering an investment in your company will want to understand how you intend to report back to them on your execution and success.
  • Raising capital is one thing.  Keeping your new investors informed and content that their investment isn’t being squandered is another.  Remember that investors are looking for a return on their investment and will want to know how your business is progressing.  Think about how your investors will want you to communicate with them.  Given the proliferation of mobile devices and the ability to push information directly to an individual, consider a mobile communications strategy.  An app on the App Store and Google Play can provide a cost effective way to update investors on your business in real time and further demonstrate your desire to be transparent.

The key to being successful in raising equity capital and generating investor interest under the new SEC ruling is to first make the case as to why a company should be valued a certain way, and then how it intends to grow.  Your financials will always speak for themselves.  However, it’s the post-investment communications that will demonstrate success and ensure that your new investors not only remain committed but also assured that their equity investment was the right decision.