The legislation makes private offerings more democratic, said Greg Brogger, president and founder of SharesPost Inc., which facilitates transactions in private-company stock such as shares of Facebook Inc. and Twitter Inc. for accredited investors. Facebook has filed to sell shares in the largest initial public offering of an Internet company.
"Instead of a private, closed club of who you know, now we have the opportunity to much more broadly disseminate offerings of private securities," Brogger said. The new law means SharesPost, based in San Bruno, California, will be able to market its offerings to an additional 70,000 members who haven't yet submitted the documentation to show they're accredited, Brogger said.
SharesPost and its president settled with the SEC in March, agreeing to pay $100,000 to resolve claims that the firm acted as an unregistered broker in 2010. The SEC scrutinized trades before the firm became a broker-dealer and used a third party to act as its agent. SharesPost was granted broker-dealer status by the Financial Industry Regulatory Authority in December.
Matching Investors
Eric Tolbert, 44, is an accredited investor and former chief financial officer for Massey Energy Co., who said he's using a website run by WealthForge Holdings Inc. to find out about up-and-coming companies. WealthForge matches investors with entrepreneurs raising money through private offerings of stock, debt or convertible notes, said Gregory Gulling, vice president of marketing for the Richmond, Virginia-based firm.
"This provides a different way to match up investors and companies that we haven't had before," Tolbert said, who decided to invest in the website itself after joining. "You're not looking all over the place or having to know a friend of a friend."
Investors should still do their own due diligence because of the risks with startups, said Tolbert. They should look at the potential for future cash flow, the company's leadership and what progress it's made so far, he said.
When startups or small businesses eventually go public, many of them won't have to provide as much information to investors at the outset because of the law. Businesses with less than $1 billion in revenue that make a public offering will have up to five years under the new legislation to comply with certain accounting rules and disclosures of executive compensation, said James Cox, a professor of corporate and securities law at Duke University.
Some IPOs may voluntarily provide the information that "grown-up" businesses do because investors may demand a risk premium from those that don't, Kathy Smith, principal at the IPO investment adviser and research firm Renaissance Capital LLC in Greenwich, Connecticut. People should look for those companies that are more forthcoming because if they're capable of going public they should be able to provide the financial statements and disclosures that have been required in the past, she said.
Investors should be aware that newly public companies are the most volatile category of equities because they're the least well known, said Smith. Stocks of companies that went public in the U.S. this year returned about 21 percent on average from their offerings through April 18, compared with 10 percent for the Standard & Poor's 500 Index, according to data compiled by Bloomberg.