Sept. 22--When Austin startup Grandma Lu's Spice Cabinet wanted to raise cash to expand its snack line of crunchy dried peas this summer, company founder Anish Sheth couldn't advertise or try other marketing techniques to look for investors. Federal securities rules wouldn't allow it.
But starting Monday, that all changes. Grandma Lu's and other companies will be able to expand their search for investors to a much wider field, as regulators end a decades-old ban that made it illegal for companies to publicly advertise as they seek investors.
Companies will now be able to use print ads, television and the Internet -- even highway billboards or banners flown over University of Texas football games -- to pitch themselves to investors who meet certain income or wealth criteria and can better afford the financial risk of new business ventures. Companies can even use Twitter, Facebook or blogs to promote an offering.
The rule change could have a significant impact in Austin, with its strong culture of startups and crop of young companies in search of funding to fuel growth.
"Now we can go out and find investors in the consumer product space, show what we're doing and hopefully get them interested," said Sheth, Grandma Lu's founder and CEO. "It's a new way to reach people who might want to back our company."
The change is part of the Jumpstart Our Business Startups Act. The so-called JOBS Act, passed in 2012, relaxes regulations that were put in place with the Securities Act of 1933 and makes it easier for startups to raise money and go public.
While some experts say the new freedoms will open key doors for startups, others say the changes go too far in removing regulatory oversight and could put inexperienced investors at risk by luring them into highly risky -- or entirely fraudulent -- investments.
"Unfortunately, there are just people in this world who are determined to steal money from the public, and securities offerings can be a very quick way to get that done," said John Morgan, chairman of the Texas State Securities Board.
"They don't care at all about the niceties of a (Securities and Exchange Commission) rule or taking steps to make sure purchasers are accredited," Morgan said. "They're going to see a green light to advertise to the public, and they're going to take off as soon as they can, as quickly as they can."
Under the new rules, securities advertised to the public don't have to undergo any federal or state review to ensure the documents are accurate and include the necessary disclosures to fully inform potential investors. That binds state securities regulators from providing many proactive investor protections outside of educational efforts.
"Investors will be on their own for this," Morgan said.
Casting a wider net
For Austin's startup community, there are hopes that the ability to promote a share offering could open new avenues to financial backing. It could also draw new investment here from other parts of the country and world.
"Austin has built a reputation as an up-and- coming startup center, but it can be hard for outside investors to find deals here," said Bill Clark, founder of Austin-based MicroVentures, which runs an equity crowdfunding website. "Now that very early-stage startups can tell the world that they're raising money, it will be easier for investors to connect with them."
That's especially helpful at a time when venture capitalists are continuing to pull back on investing in young, not yet established companies. As venture investors seek less risky deals, venture funding for "seed stage" companies is continuing to drop to historic lows, according to a recent MoneyTree Report released by the National Venture Capital Association.
Still, local securities attorneys say they don't expect to see a mad rush of quality investment opportunities showing up in public ads. The better investments, they said, will almost certainly go through traditional, private channels.