It’s been almost five months since the U.S. Securities and Exchange Commission told startups they could publicly announce they were raising money.
The move was trumpeted as a boon for young companies in need of capital to reach investors they didn’t already have a relationship with. But conversations with entrepreneurs and lawyers suggest the change hasn’t had a big impact on how health startups are raising money – at least not yet.
“I think people are still cautious about this; I don’t think that mood has changed (since September),” said Joe Wallin, a startup and corporate attorney who runs the Startup Law Blog.
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In exchange for the ability to announce their fundraising, the new SEC guidelines require companies to take reasonable steps to ensure that their investors are accredited — that they have a net worth of more than $1 million (excluding their homes) or have a salary higher than $200,000. “Reasonable steps” could mean reviewing IRS forms showing an investor’s income, or verifying the value of his assets by looking at bank or brokerage statements.
“I think there’s still a general concern that that will turn investors off,” Wallin said.
The most noticeable change under the new rules is the listing of companies on the front pages of crowd equity platforms like Poliwogg and AngelList.
Yishai Knobel took to the AngelList to raise money for his company, HelpAround, which makes an app that crowdsources help for people with chronic conditions from around their communities.
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“AngelList thrives on Silicon Valley types of businesses, and we are kind of coming at healthcare from a very consumerized approach,” he said.
Despite an overall good experience raising money on the site, he said most of the money his company raised in the round it’s about to close came from investors he knew offline, through relationships he developed while heading up mobile health at AgaMatrix.
Medical device company EntraTympanic is taking a similar approach, but is listed on Poliwogg rather than AngelList. “The exposure has given us access to other investors that we wouldn’t have had access to,” CEO George “Buzz” Kenney said.
But it hasn’t been the cure-all, as the company is still out trying to raise money the traditional way.
“Crowdfunding with accredited investors has not yet had its Pebble watch moment,” Kenney said. “When it does, it will go through the roof.”
It might be a while before that happens, according to Wallin. “The SEC has other proposed rules out there which are sort of hovering over everything, and (if they’re implemented) it’s going to make general solicitation really hard,” Wallin explained. “The rules might change mid-raise for some of these guys.”
Those proposed rules still on the table would require startups to file Form Ds with the SEC 15 days before any general solicitation occurs, as well as submit the materials they plan to use to the SEC. Under the proposed rules, missing a deadline would trigger a one-year penalty on raising money under Regulation D.
The comment period for those proposals closed in November, but what’s coming next still isn’t clear.
For now, it seems that general solicitation is having the biggest impact on a niche groups of companies. David Teten, an investor with ff Venture Capital, wrote in a Forbes column earlier this month that his firm has sourced only one deal from AngelList, and it was a deal where it led a seed round.
“It might appear that (deal) origination is becoming much easier because of new tools like AngelList and the SEC moving toward adoption of rules that will allow equity based crowdfunding. Just do a search online and the VC’s job is done! But in practice, these phenomena create a tremendous volume of startups, which investors then have to filter. The easier it is to source, the more you have to work to screen.”
Knobel echoed that sentiment from the entrepreneur’s perspective. “I think that you’ve got to come with a very clear vision and a very clear pitch,” he said, “because there is a lot of noise out there.”
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