The world changes for startups on September 23.
On that date, thanks to the JOBS Act, it will become legal for startups to “generally solicit” and “generally advertise” their securities offerings. Startups haven’t been able to actively promote their private fundraising efforts, well, since before we were all born.
This is big deal.
What do these terms actually mean.
The SEC doesn’t define the terms but gives the following examples:
(1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
(2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.
The SEC has interpreted general solicitation to include posting anything on the Internet. “The placing of the offering materials on the Internet would not be consistent with the prohibition against general solicitation or advertising in Rule 502(c) of Regulation D.”.
The SEC has also said that a general solicitation is not present when there is a “pre-existing, substantive relationship between” a startup and the persons whom it is talking to about selling its shares.
For eighty years, companies have not been able to advertise that they were raising money.
They couldn’t run ads on TV. Put up billboards on the side of the road. Respond to a GeekWire inquiry: “Are you raising money?” Or, even worse, mention that they were raising money on Internet.
In other words, when raising money startups had to work relationship to relationship.
While VCs or other funding sources could announce to the world that they had money to invest, companies had to be quiet, and not say anything in the media. I called this the “Rule Against Entrepreneurs.”
Startups had to work their networks, sticking to “pre-existing substantive relationships,” as the SEC puts it.
Now, on September 23rd, a startup will be able to put on its web site that it is raising money. It will be able to respond to reporter inquiries that, yes, it is raising money. It will be able to stand up at trade shows or other industry events and say, yes, it is raising money. All without fear that it is blowing itself up for violating the securities laws.
If a startup generally advertises or generally solicits its offering, then:
1. The startup will only be able to take money from “accredited investors.” There is no allowance for up to 35 non-accredited investors (although that allowance in non-generally soliciting offerings isn’t really very helpful in any event.) “Accredited investor” means someone with income at least $200,000 a year for the last two years, with the expectation of the same in the year of investment, or $300,000 with spouse; or $1 million net worth excluding primary residence.
2. The startup will have to take additional steps to verify the accredited investor status of its investors, and keep records that it did so. This means reviewing Forms W-2, 1099s, etc. This is potentially a touchy issue for your angels. Angel investors may balk at giving this information to startups in a garage somewhere, regardless of the fact that so many great companies have begun there.
3. The startup will have to make a note on its Form D that it generally solicited. The Form D is the form startups have to file with the SEC and state securities regulators announcing that they have raised money.
Should You Rush In?
Never rush when it comes to a securities offering. Be careful. The drawbacks are real. If you can raise money without generally soliciting, it will be easier because you won’t have to review investor W-2s, or other investor financial data. So, if you can raise money without generally soliciting you should. (See my earlier post: Weekend Read: Time to Advertise Your Private Offering? Not So Fast.”
But, Congress did us a big favor in the JOBS Act, and you just might want to take advantage of it.
What else should you do?
Comment to the SEC on its proposed rules. You may or not be aware, but the SEC’s proposed rules on general solicitation are really bad. An all-star cast of none other than Brad Feld, Naval Ravikant, Fred Wilson and Steve Blank — who Tweeted recently that the “SEC screws the JOBS Act by not understanding startups”— have come out heavily against them. You can read all of the comments submitted to the SEC here.
You have until September 23rd to comment. I encourage you to do so!
Conclusion: Have fun, but be careful out there.
Joe Wallin is an attorney at Davis Wright Tremaine. He’s the editor of the Startup Law Blog. Related posts: Crowdfunding: Current Legalities & Proposals… The President Favors Crowdfunding, But Is It Good Enough?…The Troubles With The New Crowdfunding Law