On September 23, 2013, the SEC passed new laws allowing for general solicitation, part of an overarching goal to eventually lead to true crowdfunding.
Here’s a high-level summary of the changes, and what they mean for a startup looking to raise capital.
- General solicitation, while not strictly defined by the SEC, typically consists of advertising the fact that you are actively raising money for your startup in return for equity.
- Wait… don’t we all do this? Well, it hasn’t been technically legal. But as multiple demo days and pitch events (and social media, email blasts, and even presence on AngelList) can attest to, enforcement has been nonexistent.
- If you don’t want to generally solicit while fundraising, the new laws don’t change anything.
- If you do want to generally solicit, you’ll have to have to make reasonable efforts to ensure that anyone that invests in you is an accredited investor. Before this was a rubberstamp measure. Now, a reasonable believe consists of obtaining the investors’ tax returns, or having an accountant or lawyer verify their status as an accredited investor. You also won’t be able to take money from an unaccredited investor.
The SEC also put forth a set of proposed rules which do not go into effect for at least a year. Unfortunately, what the September 23 rules open up, the proposed rules effectively handicap.
- Startups will have to file an Advance Form D 15 days before generally soliciting.
- Startups will have to file all general solicitation materials with the SEC before using it, and any time it changes.
- Startups will have to file a terminating amendment to the Form D after the investment is done.
- The penalties are harsh – if a startup does not comply, with the startup and the investors can be banned from fundraising for one year. This can be a death sentence for many companies.
Guidelines to follow
- Make a firm decision on whether or not to utilize general solicitation. Half-measures will just lead to headaches for you and your investor.
- If you aren’t going to generally solicit, remove all investment information from your pitch materials, and be mindful of what you say to media.
- If you do generally solicit, enlist an accountant or lawyer to run due diligence and verify your investors’ status. The compliance is in the verification itself, not whether the investor is actually accredited.
- If you generally solicit, forget about attempting a friends and family round (unless of course, your circle of acquaintances has done extremely well for itself).
- Remember that even if you are generally soliciting, it’s still a business decision on how much information to disclose about your startup.