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The Deal: SEC Rule on Advertising May Be Too Tough for Startups

"These businesses and their related parties, including owners and employees, may be very good at operating their companies but are certainly not steeped in securities laws," Purcell wrote.

Requiring them to prefile "every Facebook like, every Tweet, every Pinterest, every mention in a post or comment on a LinkedIn forum, or every handwritten sign they may place in the reception area of their businesses is simply not practical," he stated. "Even with the best of intentions, it is not reasonable to expect that the rule will be complied with by these small issuers.

And even if it were, the millions of postings would likely overwhelm any database that the SEC creates for such a purpose." Purcell said that the SEC should provide an exemption from the rule for offerings by business issuers raising less than $5 million, or it should create a separate standard for funds, differentiated from businesses capital raising directly to grow and create jobs.

"There's no way a startup can digest all this," said Jason Crawford, the 33-year-old co-founder of tech startup Kima Labs. It raised $770,000 from angel and seed investors including his parents in 2010 before selling itself to Groupon Inc. in 2012 for an undisclosed amount. Kima Labs made iPhone apps, including one called Barcode Hero, which allowed users to scan the barcodes of products, comment on them and view other users' comments.

"The securities laws are so complex," Crawford said. "No one understands them except the experts. I'm lucky because I work with good lawyers," he continued. "It's probably going to lead to extra legal expenses, but I'll be able to avoid penalties and major problems. I worry about the guys who can't afford a good lawyer. Good luck trying to do it yourself."

Crawford said he supports an exemption for the smallest tech startups to allow them to avoid the filing requirements. "There are a lot of areas where the filing requirements could be lessened," he said. Mitchell Littman, a partner with the law firm of Littman Krooks LLP in New York, said he was surprised people are so concerned about the new filing requirements because it is premature to say for sure how the new rules will affect raising capital.

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