Recently, Craig Lewis, the Chief Economist and Director of the SEC’s Division of Economic and Risk Analysis, commented (see speech at: http://www.sec.gov/News/Speech/Detail/Speech/1370541497283#.U08MNVTD_zY ) on the economic impact of various JOBS Act reforms, or the effects on “efficiency, competition, and capital formation” (ECCF).
In his remarks, Lewis notes that smaller companies may face informational frictions that may affect negatively their ability to raise capital. Of course, smaller companies now reach investors beyond those with whom they have a pre-existing relationship through use of general solicitation in certain Rule 506 offerings or by using matchmaking services that may rely on general solicitation to reach investors. In the future, smaller companies might be able to rely on Regulation A+ offerings to cast a wider net and conduct offerings that use general solicitation. Presumably, these approaches lessen the informational frictions. However, in practice, at conferences, presenters frequently note that companies that “need” to use general solicitation may be companies that are not appealing to venture or private equity funds. This would make it sound like using general solicitation is a last resort rather than a desired approach and suggests that there is some stigma, at least within certain communities, associated with communicating more broadly. It would be an unfortunate result to assume that companies are relegated to using general solicitation when they have run out of options or are unable to attract experienced investors. These perceptions in fact may counter all the rational conclusions that may be reached regarding lower search costs and lessened informational frictions.
Many companies may engage a placement agent or financial intermediary that has close relationships with institutional investors, but the companies may still find it appealing to engage in communications that may be construed as “general solicitation” in order to raise awareness about their businesses. Funds may choose to engage in a broader range of communications even if they continue to seek investments principally from high net worth individuals, family offices and institutional investors.